By 2030, the number of slum dwellers in the developing world will double to 2 billion people. This signifies an enormous opportunity. The unmet needs in these rapidly growing slums are staggering, including basic services like housing, along with clean drinking water, sanitation, roads, drainage, electricity, solid waste collection, and health and education services.

This major development challenge presents a significant market opportunity for private entrepreneurs. The poor, who comprise the base of the economic pyramid, have substantial purchasing power based on numbers alone. There is also increasing recognition of the considerable resources generated through remittances that are often channeled into housing and education.

Much of the poor’s purchasing power fuels the informal economy. If organized and leveraged effectively, the poor’s purchasing power can represent a significant market for the formal private sector as well.

Is Business Prepared?

Yet private sector investments in slum areas do not come easily. Businesses are often ill-prepared to service low-income markets, or wary of the market. Informality of land property rights is an enormous barrier, particularly in areas where the risk of eviction is high. Many of the needs in low-income urban neighborhoods are also public goods that create minimal private demand. Streets, drainage, and sanitation are often considered the responsibility of the state.

PPPs have tremendous potential for reaching the urban poor. Such partnerships can take many forms. The experience in urban slums to date has mainly been through components of larger projects that may include an entire utility (water, sewerage, electricity, transport) within a certain city or region. Municipal governments may hire a private company to extend the water and sanitation network to new parts of the city, including slum communities (a service contract), or they may include in a concession the commitment to extend service to certain slum communities. This latter option obliges the private company to recover the costs of service provision and initial investment from its customers, including slum dwellers.

Pilot projects to extend service to poor communities as part of water concessions have had success in some cities, although moving beyond the pilot phase has been difficult. In Port Vila, Vanuatu, a concession contract successfully extended free potable water service to poor areas through cross subsidies from wealthier areas. In Manila, the concessionaires Mayniland Water Services and Manila Water Company use a variety of internal programs and partnerships with nongovernmental organizations (NGOs), community organizations, and small entrepreneurs to increase water distribution to slums.

Output-Based Aid

Output-based aid is also a growing trend in structuring subsidies to the private sector to ensure that performance targets are met—particularly those related to service provision for the poor. Examples include extending water connections to slums through a one-time network extension, and connection fee subsidies in Manaus (Brazil), Ethiopia, Jakarta and Surabaya (Indonesia), Mozambique, and Manila (Philippines).

Government’s Role

The private sector can be encouraged and assisted by partnerships with government agencies and NGOs. Government can fulfill the dual role of liberalizing the markets that affect the urban poor—for example, by adjusting building and land use regulations for affordable housing, and by ensuring a regulatory framework that permits the delivery of services by small-scale providers.

Government can also support the private sector’s interest in the urban poor with assistance that helps to subsidize and/or mitigate the commercial risk of entering the low-income sector. Where the government is the holder of property rights, it has discretion over stabilizing and legalizing land tenure to slum dwellers. In most cases the existence of urban slums is directly correlated to the government’s inability to provide infrastructure, basic services, and planning capacity to urban residents. But governments can still obstruct the private sector’s involvement in service provision and development by claiming exclusive rights to service provision, or by using free public housing or services to gain political favor.

Involving the private sector in public utilities and works does bring challenges. But as cities continue to consider PPPs to improve public services, service expansion to slums can be integrated into PPP contracts. The private sector has much to gain from PPPs, given the rapidly expanding market opportunities. This is a significant incentive to work toward sustainable solutions for reaching the urban poor.