In response to the growing prevalence of market-based approaches to sanitation, the Bill & Melinda Gates Foundation convened a meeting between three leading sanitation development practitioners—iDE, PSI, and Water for People—to discuss their experiences in building supply capacity and demand for sanitation products and services, and possibly develop a joint understanding of the process. The result of those discussions are presented in this four-part blog series.
PART 4 of 4: For the Future: Making Markets Work for Everybody
Read Part 1 of 4: The Basics: Terminology, Organization, and Process
Read Part 2 of 4: Selling Sanitation: Who Does What?
Read Part 3 of 4: Achieving Sustainability and Measuring Results
When Do Markets Work?
Markets are not the silver bullet solution to all aspects of the sanitation crisis, and there is a limit to what markets can and cannot do. A market-based approach will only work under promising market conditions, which are determined by:
- The market opportunity and consumer demand.
- The level of consumer dissatisfaction with existing practices, designs, and/or pricing.
- Sufficient market size for business owners to consider investing.
- Sufficient market density to make it cost effective to promote and deliver the products / services.
- Existing physical infrastructure for production and transportation.
- Familiarity with market-based transactions within the community.
- If the society is organized more around bartering or gifting, then a system based on buying and selling may pose challenges for adoption.
- The priority given to spending on latrines within the household and whether there is sufficient disposable income. Households who are focused on covering basic needs, such as shelter, school fees, and food will likely not make latrine purchases a high priority.
- The regulatory environment, including the government’s ability to enforce existing rules and improve regulations based on changing market conditions.
Even under ideal market conditions, market actors are driven to maximize profit, which provides little incentive to target the poorest of the poor. With this in mind, the group (and the sector as a whole) discussed two solutions—sanitation financing and smart subsidies—for ensuring that sanitation markets expand their reach to whole populations.
Photo by iDE / 2016
Finance Options
Research and experience (for example, the iDE-commissioned Willingness-To-Pay study) show that access to financing can significantly increase demand for sanitation at market price. Bottom of the pyramid customers may not be able to pay the full retail price of a latrine in one large single transaction, but they may be willing and able to pay in installments by taking out a loan to finance the purchase of a latrine. Financing can be an accelerator of demand. Repayment rates in iDE’s experience have been 100%, indicating the low-risk nature of sanitation loans in the Cambodian context.
PSI and Water for People are also experimenting with consumer financing for sanitation. The main results show that there is strong demand for consumer financing, but the sector is still working to develop a model that allows for financial sustainability and operational compatibility for the financial institution partners.
PSI has also demonstrated that there is demand for supply side financing, which can serve as a “carrot” of sorts to motivate businesses to cooperate with the NGO on matters such as record keeping.
Photo by Water For People
Smart Subsidies
A market-based approach does not mean the total absence of subsidies. In fact, everything we do as market-based NGOs is a form of subsidy, including R&D, capacity building, and demand creation activities. But practitioners should think about how subsidies can be used in a more strategic and targeted manner. In doing so, it is useful to think about subsidies in two categories. The first comprises subsidies for “behind the scenes” market development activities, while the second category is more closely aligned with traditional “direct” subsidies to consumers and businesses.
The group agreed that subsidies should be focused primarily on the first category, “behind the scenes,” which often include functions such as those listed above: R&D, capacity building, and demand creation. Product design is often a critical component of developing a healthy market, especially in cases where no affordable, desirable products or services exist. From the group members’ experiences, demand creation is also an area that often needs to be subsidized, particularly in the initial stages when trying to introduce a new form of service that users are not strongly “pulling” for on their own. In no instances have we seen businesses investing sufficient resources in actively generating demand to rapidly increase uptake. In fact, it is a common business practice in these markets to passively wait for customers to show up and sell only when a product is requested. As such, practitioners should be prepared to invest heavily in demand generation activities as a means of building the market. With that in mind, any demand creation program should be aware of customer acquisition costs and make an intentional decision about who should bear that cost and for what period: the NGO or the business.
Group members also agreed in their skepticism of the second category of subsidies, which comprises traditional, direct subsidies to consumers and businesses. This type of subsidy has the potential to create demand, crowd in other investments, and provide a one-time incentive for adopting a particular behavior (buying a toilet, in this case). However, direct subsidies to the customer-business transaction also have the potential to distort incentives on both the consumer and supply chain side, and to erode market health over the long term. Given the potential for these subsidies to undercut market development, the group agreed that they should be limited to those customers who genuinely cannot afford to pay at market price. In these cases, value-added services like loan financing can play a crucial role. The group members encourage other organizations to consider developing “smart” subsidies that precisely target poor customers through existing channels and market mechanisms, minimizing distortions in the rest of the market.
Photo by Kiran Thejaswi / PSI
Main Ideas for Building Markets
- A market-based approach implies scale – we don’t do things one village at a time; you can’t tell a business where to sell and where not to sell. They will sell wherever they identify a profitable business opportunity, and this allows the impact to be district and country-wide.
- Developing sanitation markets is not an add-on accessory effort to your existing sanitation approach. You need competent staff and you need to invest in quality. You need to have a team dedicated to sanitation, not someone who’s doing sanitation AND water supply AND business development, etc.
- The market-based approach is also not a silver bullet. It does not work in EVERY circumstance, just like any other approach.
- Market facilitation does not mean a lack of subsidies or incentives. Everything we do is subsidy. It’s just a matter of where you inject the subsidy. Use subsidy in a way that minimizes market distortion while maximizing impact.
- You need to be nimble, iterative, and responsive to what you’re learning real-time from the market.
- In order to do market development effectively, your organizational culture needs to be business-minded. It needs to be a part of your DNA. A handful of trainings and a set of guidelines will not be sufficient to respond to real-time problems. Product innovation alone is not enough. You need to get the product right, but the innovation really happens in the business model.
Read Part 1 of 4: The Basics: Terminology, Organization, and Process
Read Part 2 of 4: Selling Sanitation: Who Does What?
Read Part 3 of 4: Achieving Sustainability and Measuring Results
iDE creates income and livelihood opportunities for poor rural households. In the WASH sector, we design and build markets for products that have the potential to transform people’s health by preventing diarrheal-related disease. Yi Wei ywei@ideglobal.org
Population Services International (PSI) is a global nonprofit organization focused on the encouragement of healthy behavior and affordability of health products. PSI uses a market development approach to deliver sanitation and fecal sludge management products and services in a sustainable manner. Genevieve Kelly gkelly@psi.org
Water For People exists to promote the development of high-quality drinking water and sanitation services, accessible to all, and sustained by strong communities, businesses, and governments. Steve Sugden ssugden@waterforpeople.org
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