Why are there more people in Africa who own a mobile phone than a toilet when the economic and social value of improved sanitation is so clear? Improved sanitation (in contrast to basic sanitation) provides access to a facility that hygienically separates human excreta from human contact. Six hundred and ten million Africans do not have this access. Just as critically, over 40 percent of Africans also lack access to safe water. This isn’t just about restoring dignity to those who go without: it’s an economic imperative.

Poor sanitation and limited access to water generate massive healthcare costs for developing countries. In Tanzania, the total economic losses due to lack of on-site sanitation have been estimated to be over $200 million a year—an astonishing 1 percent of the country’s gross domestic product.

As country governments and the international development community strive to tackle these issues, there has been a shift in the way governments perceive the delivery of basic services. This is largely because governments in developing countries with large numbers of people living in poverty do not have the capacity to meet the need for improved water supplies and sanitation services from public resources alone; they recognize an opportunity for domestic enterprises in these growing markets.

Once viewed as “opportunists” and “gap fillers,” the domestic private sector is now seen as a central part of the solution as millions of poor (and non-poor) households already rely on it to meet their needs. In water, private sector enterprises provide water through independent systems or the resale of water. In sanitation, businesses are involved in the installation of latrines and toilets, the manufacture of components, the importation and sale of materials, the provision of emptying services, and the growing business of waste re-use.

Market Potential

The scale of the market for piped water supply and on-site sanitation services is large and the nascent demand is far greater than originally thought. In Benin, annual sales of water from privately or community-managed networks in small settlements could reach $22 million by 2025. In sanitation, the current market for improved on-site sanitation services is vast, and untapped households in Tanzania alone represent a huge market of about $240 million.

But this demand belies the fact that poor households are highly discriminating clients: because money is tight and incomes seasonal, they engage in price-value tradeoffs in water and sanitation. Meeting a standard level of water consumption from networks involves cash outlays that are a significant percentage of poor households’ income. In Benin, for example, the cost of a household water connection comprises more than 100 percent of the household’s monthly income. Most households have access to inexpensive alternative sources of water (if only for parts of the year), including wells, springs, and boreholes. Poor people’s purchases are thus limited by cost and by their assessment of the value of network water with respect to alternatives.

Although poor households seem to prefer cheaper water to good-quality water, they also value convenience. If operators can ensure good-quality service, the availability and opportunity cost of alternatives will likely shift incentives in favor of networks.

In Benin, the cost of a household water connection comprises more than 100 percent of the household’s monthly income.

However, sanitation is a relatively low-priority expenditure for poor households, and cost is an important factor in their decision making. But cost is not necessarily an insurmountable barrier—as the widespread use of other consumer products, such as cellphones, suggests. Poor households are willing to bear a cost to attain improved sanitation that they find attractive and providing value.

The other barrier to safer sanitation practices is that products are literally out of reach. More than three-quarters of sanitation businesses in Tanzania indicate that the poor live in areas that are expensive to service because of transport and infrastructure problems. This increases the cost of products due to transport, and also frustrates the ability of households to build facilities—because too many inputs need to be coordinated.

Poor households are highly discriminating clients: because money is tight and incomes seasonal, they engage in price-value tradeoffs in water and sanitation.

Scalability is key

The base of the pyramid in the water and sanitation sectors is dominated by micro- and small enterprises (72 percent for water and 80 percent for sanitation). An overwhelming number of these enterprises are profit-making, but they face many constraints. For water supply entrepreneurs, expanding is an issue because they are dependent on public funding for capital development. In sanitation, the risk of unsteady demand and the inability of small enterprises to invest in research and development and marketing limit their ability to realize the sizable market potential. Supply is not matching demand.

In addition to market-related risks, water firms face a variety of policy and institutional obstacles, including the bureaucratic hassle of applying for permits and participating in public tenders, the insecurity of licenses, and the lack of effective dispute-resolution mechanisms. In contrast, the impact of policies in the sanitation sector is limited. Enterprises working in the sector would like governments to concentrate on removing risks to entry by providing market intelligence and promoting the entry of enterprises that are able to undertake transformative research and development on new technologies and materials.

Transforming the water and sanitation markets will not happen overnight. Systematic change is required if the potential of this market is to be unlocked. Policy makers have a key role to play to improve affordability and sustain water services by creating a conducive investment climate, right sizing public investment, targeting subsidies, and being more flexible in pricing to the poor and wealthy alike.

Statistics from: “Tapping the Markets: Opportunities for Domestic Investments in Water and Sanitation for the Poor.” from the World Bank Direction in Development series due for publication January 2014.