Water: Part 5 of 5 – The Business Opportunity

Finally, getting to the part that I can pitch in on! If you only read one post in my entire blog up until this point, read this one (but you may need to read the 4 previous posts for context). I have come to investigate and learn for myself what types of products and services can be offered to the poor to provide value, and I’m trying to put a lot of it together in this post.

One of my favorite economics thinkers, Tyler Cowen, professor at George Mason University and author of the Marginal Revolution blog (http://www.marginalrevolution.com/), wrote an op-ed article last month on Forbes.com entitled “Pay for it” (http://www.forbes.com/technology/2008/06/19/deregulate-water-thirdworld-tech-water08-cx_tc_0619monopoly.html). In it, he argues that there is good understanding across the less developed world that clean water is an economic good that has a price. As such, since governments in these countries have done a mostly terrible job of providing clean water to their citizens, his solution is to completely deregulate water to let private companies build their own systems and charge whatever they think is appropriate.

I think there are problems with this proposal, but as he notes, “Currently, dirty water is killing more people than AIDS. Water policy is not a sexy topic, and it doesn’t receive a lot of attention, but bad water is one of the world’s biggest problems.” He argues for “No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy–to an economist, water supply is a classic ‘natural’ monopoly–but on closer inspection the other alternatives might be worse.”

Whatever you may think about this, it’s clear that there are many ideas being offered in the “clean water for the poor” space, and that many of them involve putting a price on it.

In that vein, Fred and I are exploring the possibility of launching a small business to provide high-quality Biosand filters to local businesses, schools, and eventually households. We are investigating whether he can put a price on the BSFs that provides a great enough margin for him while maintaining affordability for the people in his community. Fred would like to hire a couple of associates that he could train in and work with, gain the support of local health and community workers, and conduct a marketing campaign through radio (a very popular media here in Uganda).

There are a number of things working against us:

• First, Patrick is somewhat skeptical of the business because he says people here are used to getting things for free and may not be willing to pay anything at all. He used the example of electricity – rather than pay a monthly fee, people consistently patch in illegally, and it is very difficult to monitor.
• Second, Fred may have already sabotaged himself out of the business opportunity by providing 30 BSFs for free and contributing to the sentiment Patrick articulated. Fred could conceivably consider them “beta-testers”, but the problem is that Mityanans don’t have a concept of beta testing like we do in the United States. We generally understand that if we get something for free from a company, it’s either because they want us to 1) tell them what’s good and bad about it so that they can improve it and make more money, or 2) like it so much that we will buy more of it (or something else) from them in the future.
• Third, not only is Fred competing with the memory of his own free filters, there are other NGOs that are providing other technologies for free. Not only is self-sabotage possible, but outside sabotage is possible too! Of course it is a good thing that NGOs are out there providing these things, but subsidizing something always has an impact on competing businesses!
• Fourth, Fred’s costs are much higher than indicated by CAWST’s information. CAWST claims that each BSF costs between $15-30 to produce. We calculated about $32 dollars for the necessary materials, which is what CAWST must be using to come up with that number. But when Fred and I included costs of labor and equipment necessary to advertise, deliver materials, construct the filters, deliver the filters, install them, provide end-user training, and provide ongoing servicing and maintenance as necessary, our total costs came to slightly over 100,000 UGX (about $65). Fred was surprised when he saw this. He was thinking he would sell the filters for around 80,000 UGX. I have recommended that he at least double that price to receive a margin that he could reinvest in his business.

So, why would we pursue this?

• 36% of people in the district own bikes, which are about the same price I recommended that Fred charge for a BSF. In other words, there is evidence that if people here think something will provide value, no matter how poor they are, they find a way to save and pay for it. In other words, I think people here have a different approach to savings. They choose to save when they know what they are saving for, rather than “saving for a rainy day.”
• It is an entirely local solution, implemented by local individuals who can carry this forward without any aid from the West. Local construction and operation minimizes transport, energy, training, and servicing costs and maximizes value creation in the local community.
• There is the possibility of setting up a payment plan schedule so that people could pay as little as 60 cents (900 UGX) per day for up to a year. At the end of a year (or shorter, depending on the plan that is chosen), the individual would own the BSF. This seems to fit into the value system here in Mityana – people are much more willing to pay small amounts over a long period of time rather than a relatively large lump sum. (I could write at great length about how the way people act in Mityana corresponds to an enormously high discount rate – that is, that money now is immensely more valuable to them than money a year from now. I think this is generally true about low-income populations but don’t have anything to back me up.)
• Fred is a part of the local community. My professor of strategy, Aks Zaheer, would tell me this is critical in establishing TRUST with business associates and customers.
• This technology is best suited when access to water is not a problem, and when the access is not necessarily clean. With untreated piped water, this is now true in Mityana.
• Payment plans fit into the competitive advantage of having a local person with established relationships – since Fred will be selling and installing them, he will personally meet and train every single buyer. As Fred comes back on a weekly or monthly basis to collect from each buyer, they are not only paying for the product, but also the related services Fred can perform by answering any questions they have while he is there with them. He can also collect valuable data for himself and for CAWST.
• There is already “downstream” economic activity. One woman who received a free BSF from Fred is selling her filtered water in the main market in Mityana! (Would you call that trickle-down economics?)

Another thing that I’ve noticed is that consumers in Mityana are extremely price sensitive. Maybe that’s obvious, because they’re poor. At any rate, it is the single biggest factor in purchasing decisions. Here is a price comparison on some other drinking water alternatives:

• A PUR water purifing pouch that disinfects 10 liters costs 200 UGX at any shop in Mityana. Quality differences aside, to get the same amount of improved water as you’d get from the BSF in one day, you’d need to purchase 8, for a total of 1600 UGX (about $1).
• A single 500 ml bottle of water at any store in Mityana costs 500 UGX, or about 30 cents. A box of 24 costs 6500, or about $4 for 12 liters of purified water.
• A 20-liter container of drinking water (think of the style seen in office breakrooms) in Kampala costs 5000 UGX ($3).
• Fred says that some people pay more than 60 cents per day for enough wood or charcoal to boil their water.

With all of the above methods, the outflow of money is continuous. It never stops. If individuals purchased a BSF, these expenses would cease. We’ll see if this value proposition sticks!

(For more info on “Base Of the Pyramid,” or BOP, water markets, there is a document available through the World Resources Institute on that topic. Uganda is one of 4 studied countries where over 50% of all recorded national water spending comes from those making less than $1000 per year, and it is the prime example of the few countries with a viable rural water market.)