84348 OCTOBER 2013 ABOUT THE AUTHORS DANIELLE PEDI Transforming Markets, Increasing Access: is a consultant with the Sanitation and Safe Water for All Program within IFC’s Sustainable Early Lessons on Base-of-the-Pyramid Business Advisory Africa. She has been responsible for designing and coordinating the Selling Market Development in Sanitation Sanitation initiative, and conducting initial consumer The four billion global consumers at the base of the pyramid (BOP) – that is, research and product-design activities. those earning less than two dollars a day – are increasingly recognized by the WILL DAVIES private sector as a major untapped market segment. The sanitation industry is an Operations Officer in the Sustainable Business Advisory is no exception. Across sub-Saharan Africa, more than half of the population Africa Resource Efficiency team, based in Nairobi, Kenya. He lives without access to minimum levels of improved sanitation. Beyond the currently manages various regional programs, including the reach of urban sewerage networks, most BOP families require self-funded, pilot Sanitation and Safe Water for All program. household-level sanitation solutions. While the needs of this vast market are often pigeonholed as a development issue to be dealt with by the public sector APPROVING MANAGER Sara Ann Clancy, Regional Business and nongovernmental organizations (NGOs), it represents a sizable market Line Manager, Sustainability Business Advisory for Africa. opportunity for the private sector. This SmartLesson captures early experiences from the Selling Sanitation initiative, a partnership between IFC and the World Bank’s Water & Sanitation Program (WSP). Using a market transformation approach, Selling Sanitation is demonstrating strong potential to unlock new market opportunities and dramatically increase access to sanitation for low-income consumers. Background and sanitation sector have focused on capital- intensive urban infrastructure projects which, About 600 million people across Africa, 70 while often commercially attractive, largely percent of the continent’s population, do not fail to benefit low-income consumers living have access to adequate sanitation. In Kenya outside formal urban centers. Poor consumers alone, there are 6.6 million households (29.5 have long been considered the responsibility million people) in need of upgraded or new of the public sector, a perception sharpened by sanitation facilities. Households spend an the existence of donor and charity initiatives average of $85 to build on-site sanitation providing free or heavily subsidized sanitation facilities, typically basic pit latrines that do facilities directly to households. However, not meet minimum hygienic standards. it is clear that public or donor financing for Few affordable products and services are subsidized facilities will be unable to meet available for those looking to upgrade from the scale of sanitation needs. Subsidized a basic latrine or to build a new facility. facilities can also cause market distortions Despite interest, private firms have been and dampen overall consumer demand, while unable to penetrate this market segment, offering no guarantee that facilities will be partly because they have not understood used sustainably. BOP consumer needs, preferences, and profit potential. In 2011, IFC’s Sanitation and Safe Water for All (SSAWA) Program began assessing how to IFC’s traditional engagements in the water harness private sector innovation, technical SMARTLESSONS — OCTOBER 2013 1 skills, and financing to reach Africa’s BOP consumer market Step 1: ASSESS THE MARKET POTENTIAL. Is there a sizable to water and sanitation. Early discussions revealed a clear commercial market opportunity and evidence of sufficient interest from private firms to explore opportunities in the demand? sanitation sector. To understand how to structure support for these firms, SSAWA learned from the Lighting Africa To determine whether market demand represented a Program, which was already demonstrating how IFC could viable commercial opportunity, the team carried out substantially expand access to services and unlock commercial initial assessments, including in-depth industry interviews opportunities in challenging but high-impact BOP markets. and extensive consumer research. Conservative estimates suggested a potential market of over three million rural To translate Lighting Africa’s success in off-grid lighting to Kenyan households in need of latrine slab improvements or the sanitation sector, SSAWA partnered with WSP to design new facilities in the near term. Selling Sanitation, an initiative that aims to remove market barriers and catalyze the market for on-site sanitation. About 47 percent of all Kenyan households own basic, Selling Sanitation provides the industry with market unimproved sanitation facilities, and an additional 16 intelligence, consumer research, product-design support, percent have no latrine at all. Unimproved latrines typically business development, and other advisory services to help comprise deep unlined pits, packed mud or timber floor firms understand the market opportunity and develop slabs, and simple natural shelters. Households spend viable market-entry strategies. The program also works with an average of $85 on materials and labor to build their the government to support demand-creation strategies latrines, including about $25 for the slab. While market and a consumer awareness campaign that can help drive research indicated that 50 percent of households intended consumer uptake of improved sanitation (see Box 1). to improve their sanitation situation, most were unaware of options between the traditional dry pit and the much more expensive poured concrete dry pit slab and shelter. Box 1: Key Activities of Selling Sanitation Both options generally offer poor value for the money, provide little guarantee of durability or quality, and involve 1. Business Development Services: Removing barriers to a complex purchase process for the consumer. market entry by supporting development of affordable sanitation products and BOP distribution and business models. Industry assessments revealed that plastics manufacturers 2. Consumer Awareness: Providing support to the active in the water-storage tank market were eager to tap government to deliver a national behavior change and the commercial sanitation market. Appropriately priced consumer-education campaign. plastic slabs seemed a good potential fit for the market niche between traditional and high-end, and offered the 3. Market Intelligence: Demonstrating market viability and possibility to easily upgrade an existing facility and thereby market-entry opportunities by assessing market size, consumer eliminate the costs of rebuilding that recur when pits fill up. preferences, key target segments, and current trends. Step 2: ASSESS THE LOCAL BUSINESS ENVIRONMENT. Is 4. Public-sector Engagement: Fostering an enabling there sufficient investment incentive for the industry to be environment for sanitation by supporting government efforts confident of the market opportunity? to increase uptake of improved sanitation and regulate the consumer market for sanitation. Although private sector interest was evident, most firms 5. Pro-poor Financing: Addressing financial constraints and had little experience serving BOP markets. Before investing bottlenecks for both consumers and businesses. in affordable sanitation products, private firms needed to be confident they could achieve sufficient sales volume and profitably distribute products to harder-to-reach consumers. Lesson 1: A market transformation approach can be applied to multiple sectors, provided there is a sizable Selling Sanitation was able to point to the existence of near-term market opportunity, competitive product functioning distribution networks for other fast-moving solutions that meet market needs, and evidence of and durable BOP products in rural Kenya. The experience industry-wide market barriers. of some firms with rural distribution of water-storage tanks made it easier to win industry buy-in. Lighting Africa’s track During the concept-development stage, the Selling record and WSP’s sanitation marketing efforts in other Sanitation team worked with colleagues in Lighting Africa countries likewise served as powerful examples of success. to learn what was needed to transform a market. The Lighting Africa team set out four key prerequisites for an The Selling Sanitation team was also able to demonstrate effective market transformation, and four corresponding the government’s substantial commitment to private sector steps to assess the suitability of this approach. 1 participation in sanitation. Selling Sanitation is supporting the government to deliver a national communications 1 For further discussion of IFC’s market transformation steps and their application in the Lighting Africa program, see Designing Market campaign that aims to improve household sanitation Transformation Project for the Base of the Pyramid: The Lighting Africa behavior and raise awareness of affordable improved Program 2 SMARTLESSONS — OCTOBER 2013 sanitation options. The campaign was seen by many firms networks, created the perception that reaching the rural as the critical ingredient to drive demand from the rural BOP market would be too difficult and costly. Although market. some firms had experience with rural distribution, their existing channels rarely covered the “last mile” to rural Step 3: EVALUATE THE PRODUCT OR TECHNOLOGY households. SOLUTION. Is there sufficient demand for technology solutions that meet market needs? Among private manufacturing firms, latrines were mainly seen as charity products, for sale to NGOs rather than to BOP Industry confidence was necessary but, by itself, insufficient. households themselves. No firm had attempted commercial The next step was to evaluate existing plastic product distribution of sanitation products, and consequently offerings to understand whether these would meet BOP distributors, retailers, masons, and households were almost consumer needs, while offering better value and more completely unaware of these options. Developing workable competitive prices than other available options. Market business models for rural distribution and understanding distortions created by a long history of subsidies in the on- how to simplify the consumer purchase and installation site sanitation industry soon became apparent. process were essential steps. For any single firm, these market barriers would have been insurmountable, but with Many manufacturers had historically relied on bulk sales to IFC providing support to the entire industry, they are being subsidy or emergency programs for their sanitation sales. overcome. With donor agencies and NGOs as their primary customers, manufacturers had developed products that met the Understanding market barriers and designing the right needs of program managers and engineers rather than advisory services to address them required substantial lead consumers. Industry players had little understanding of the time and flexibility on the part of the Selling Sanitation rationale for particular design features, and received little team. Industry consultations, market research, product- or no feedback on consumer satisfaction. Existing designs design support, and extensive government engagement needed to be tested with BOP consumers directly, but no required about two years before program launch. The team single manufacturing firm was willing to shoulder all the found it useful to adopt a learning-by-doing approach, as associated research and development (R&D) costs, in part it was impossible to predict at the outset precisely which because the sector is vulnerable to imitations. advisory services and program strategies would be required to respond to evolving market and client needs. The Selling Sanitation team brought in design expertise to assist a pool of plastics manufacturers as they tested and Lesson 2: Strategic partnerships with the World Bank refined a small range of hygienic latrine slab options that can provide IFC with the local presence and government addressed consumer needs and preferences. The design relations needed to effect a market transformation. support helped manufacturers improve aesthetic and functional product features, reduce retail costs, improve Strategic collaboration across World Bank Group production efficiency, and meet minimum quality standards. agencies enables the Selling Sanitation team to take a The range of plastic designs tested very well, compared comprehensive approach to market transformation that to traditional and concrete pit slab models. Product leverages the capacity of both private and public sectors. testing suggested that the newly designed slabs offered IFC has been able to focus on its comparative strengths in the features consumers were looking for: durability, market and business development, whereas WSP brings cleanliness, ease of use, and affordability. The light-weight technical expertise, a wide local presence, and strong plastic products could be easily transported to the home relationships with governments and sanitation-sector and transferred from filled pits to new pits, eliminating the networks. Particularly in sanitation, which is a public good, need for on-going slab construction costs. Once superior government leadership is essential. WSP not only secured market offerings had been developed, manufacturing firms government buy-in for private-sector participation in the invested in further R&D and capital costs for new molds and sanitation market, but it has also helped government take equipment to bring them to market. the lead in ensuring that new products meet minimum health and quality standards. Step 4: IDENTIFY MARKET BARRIERS IN THE CONTEXT OF THE EMERGING MARKETPLACE. Why can’t the private WSP also leads in providing support to the Ministry sector develop new markets without assistance? of Health’s national behavior change communications campaign. Embedding communications and consumer The Selling Sanitation team discovered several significant awareness activities within the network of trusted local barriers to private sector market entry. The near absence health officials and volunteers enables the government to of market data on BOP consumers resulted in the lack of build on its existing community demand-creation activities attractive, affordable sanitation options. Most firms were while ensuring the sustainability and reach of the campaign. wary of shouldering first-mover costs and risks associated Since the government-led campaign benefits the entire with entering a poorly understood market. Weak linkages sanitation industry, it is also boosting the private sector’s between government-led demand promotion and product incentive and willingness to invest in branded marketing availability, as well as fragmented rural distribution and sales activities. SMARTLESSONS — OCTOBER 2013 3 Lesson 3: Market transformation programs Conclusion have the potential to achieve significant development results by expanding Early experience with market transformation access to services for the poor. Creative in the Selling Sanitation initiative underscores approaches may be needed to realize the importance of strong market research these results, because such programs to assess the viability of a commercial may not have straightforward ways to opportunity, help the industry develop generate client fees. marketable product solutions, and design advisory services that address market-wide The success of Selling Sanitation will be barriers to entry. Selling Sanitation has measured in terms of increased access to so far demonstrated the business case to improved sanitation among low-income successfully generate substantial up-front households. As with Lighting Africa, which private investment in the new market, while has thus far increased access to modern building strong public-sector support for lighting for seven million people, Selling a national campaign to drive demand. As Sanitation is gearing up to achieve very the program moves into the next phase, we high access targets. These types of results expect to see industry players reaching low- demonstrate a substantial role for the private income consumers with new products and sector in addressing the development needs services as the commercial market for on-site of the poor, and also contribute significantly sanitation emerges. Selling Sanitation will to achievement of IFC’s Fourth Development keep learning about what works, but one Goal: Access to Infrastructure Services. thing is clear: Doing business at the base of the pyramid will not be business as usual. Market transformation initiatives are inherently different from IFC’s typical advisory services projects. Market transformations deploy strategic finance to catalyze or accelerate commercial markets to reach development goals. Such initiatives require far-sighted private sector partners that are willing to make investments in untested markets, and rely on the subsequent demonstration effect to impact markets at scale. The provision of advisory services is structured in a way that benefits the entire industry rather than a single firm or client. In this context, IFC’s standard fee-for-service approach may present a challenge. How can IFC develop pricing strategies that are fit-for-purpose while moving toward full- cost recovery where practicable? In the case of market transformations, this may require thinking broadly about longer-term benefits, DISCLAIMER such as the development of new investment SmartLessons is an awards opportunities as firms and industries mature. program to share lessons learned in development-oriented More flexible and innovative pricing strategies advisory services and investment could create a win-win situation. For example, operations. The findings, client agreements might include success fees interpretations, and conclusions based on the level of market penetration expressed in this paper are those of the author(s) and do not achieved. As IFC deepens its experience with necessarily reflect the views of market transformations, it is worth exploring IFC or its partner organizations, creative pricing structures, as programs that the Executive Directors of The tap BOP markets hold the greatest promise World Bank or the governments they represent. IFC does not for expanding access to basic services. assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 4 SMARTLESSONS — OCTOBER 2013