Small water enterprises need strong government

Photo: Courtesy of Safe Water Network​

World Water Day is always a good time to take stock of where we are in achieving the water-related Sustainable Development Goals (SDGs). Most PPPs relate to relatively large investments in major infrastructure run by utilities. But in the developing world’s rapidly growing small towns and urban peripheries, we need something else.
 
Enter safe (also called small) water enterprises, an exciting group of dedicated social entrepreneurs who are beginning to gain traction providing high quality water to communities not served by utilities. For example, our friends at Safe Water Network recently announced they are now serving more than a million people in India and Ghana (more about that in this blog.) A 2017 report by Dalberg suggested a potential market of 3.9 billion people for safe water enterprises. 

A commonality among these enterprises is a dedication to professional management and focus on the twin bottom lines of providing high-quality service while covering costs. On this latter point, although aspiring to attract private funding and, eventually, achieve profitability (itself a necessary precursor for attracting funding) the reality is that most are heavily subsidized through philanthropic or other sources, especially for capital investments.

Clearly this is limiting and means they are struggling to scale-up despite often running fairly exemplary businesses. Why is this so? I keep coming back to the systems-level challenge they face. At risk of oversimplifying, I think that, in focusing on getting the business side right  at the enterprise level, most of these enterprises are putting insufficient effort into engaging with the broader system in which the enterprises function. This broader system goes under many names: the market, the enabling environment, the regulatory environment.

In essence, most small water (and sanitation) enterprises operate in a legal and regulatory gray zone, outside of the regulated and utility-provided mainstream. This, contradictorily, permits the flexibility to experiment with a wide range of tariff and business models, yet provides an almost insurmountable barrier to growth. Why? Primarily because, operating in a public and social sector means that their ability to charge is strongly limited. As a result, getting close to recovering capital costs typically requires a timeframe of 15 to 20 years—or longer. Yet few (if any) countries provide the legal and regulatory frameworks for small private operators to run secure concessions for this length of time.

This means that small water enterprises rely on a range of cobbled together, legally dubious, local agreements (typically with local governments). The result, as for so many other models for rural and informal WASH (water, sanitation, and hygiene) services, is that there is no viable model for crowding-in the private capital that we are so often told is the only solution to meeting the WASH SDGs. After all, what private investor would provide a company with a 20-year loan where ownership of assets is unclear?

I came away from a recent meeting with a group of committed safe water enterprise pioneers at Stanford University thinking they have much to offer the sector, not least in their focus on professionalization and delivery of a quality service. But, also feeling they are not immune from the hard systems-level challenges of our sector: providing a service that is also a human right in a politicized and weakly developed regulatory and legal environment.

It’s not that there isn’t room for the private sector to provide WASH services in the semi-formal landscape of secondary towns and urban peripheries. Rather, the private sector faces the same systems-level challenges as the public, municipal, or community-managed sector.

Addressing those challenges is, above all, the responsibility of governments (supported by their development partners). If small water and sanitation enterprises are trying to understand one part of the service provision challenge, only government can provide the other: an enabling environment that allows service providers to thrive, while holding them accountable.  External agencies, international financial institutions such as the World Bank Group, and others who wish to support and convince the private sector to move into such spaces, need to also engage to help to build that enabling environment.

We just partnered with Water.org and the World Bank on a paper about mobilizing finance for WASH that unpacks what is meant by the enabling environment and presents real examples of how innovators are overcoming these bottlenecks in the sector.

It’s this need to think across the different elements of service delivery that, to me, is at the heart of bringing a systems approach to WASH. And it was at the heart of what we explored, with a rich mix of governments, development partners, service providers and other actors within the  WASH system, including safe water enterprises at our symposium last week. You can learn more about our work and the symposium here.

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

We look forward to hearing from you: The draft updated Guidance on PPP Contractual Provisions is open for public consultation to capture inputs and recommendations by all relevant stakeholders to feed into the new edition.  Submit your feedback here by April 30, 2019.

 
 
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