60194 NOVEMBER 2010 Promoting Sanitation Markets at the Bottom of the Pyramid in Peru: A Win-Win Scenario ABOUT THE AUTHOR for Government, the Private Sector, and MALVA ROSA BASKOVICH is Coordinator of the CSM Communities initiative, Water and Sanitation Program in Latin America and Caribbean (LAC). A social Launched in 2007, the Creating Sanitation Markets (CSM) initiative is a marketing specialist and an multistakeholder effort led by the World Bank's Water and Sanitation Program to MBA, with significant experience in entrepreneur- explore new alternatives for increasing access to quality household sanitation in ship, health and sanitation Peru. The approach is premised on a market-based system for sanitation at the programs, her expertise includes design, management bottom of the pyramid, introducing a new paradigm for local sustainable and evaluation of projects, development with the participation of private enterprise. The model seeks to build building partnerships that involve the public, private, and an equitable and harmonious relationship between supply and demand, through social sectors, developing development of products and services that meet the expectations and needs of advocacy and policy initiatives, as well as leading the populations, encouraging the state to assume a promotional role for the development development of markets and social marketing strategies to of local entrepreneurship and the education of citizens, and development of financial reach populations at the options that allow the matching of supply and demand. The SmartLesson below bottom of the pyramid. shows what we have learned from four pilot projects in peri-urban and rural areas APPROVING MANAGER that have contributed to innovation in the sanitation sector by adding new players Glenn Pearce Oroz, Regional Director of the Water and and resources and opening new opportunities for improving access to sanitation Sanitation Program-LAC. while moving the agenda beyond coverage and poverty. Background The CSM's objective is to increase access by the poor to safe, sustainable, and low-priced sanitation services in order to improve their health and decrease the environmental impact of inadequate sanitation practices. The initiative's working strategy has four components: demand stimulation, product development, strengthening of the supply, and demand access to micro-credit options. The CSM pays special attention to the active involvement of the private sector in sanitation Source: Baseline studies (June 2009) and Endline supply, promoting sanitation as a business studies of the CSM initiative (March 2010) and opportunity to benefit local development as INEI (2009). well. The model relies on key alliances and interactions among public and private actors. These alliances operate at local, national, and Peruvian geographic and cultural diversity, regional levels and are meant to provide characterized by high levels of poverty, platforms for sustainability and scalability of integrated by 47,813 households with an sanitation markets. estimated population of 180,000 people. As a result of 24 months of promotion in these The CSM initiative has been tested since the pilot areas, the households without access to end of 2007 in four pilot areas that represent sanitation decreased from 32 percent in 2007 SMARTLESSONS -- NOVEMBER 2010 1 to 21 percent in 2010. Around 9,000 households invested in the perception of sanitation. First, there is the private aspect new sanitation facilities or in the improvement of their that must be faced by families. Then, there is a public current one. The households' investment amount reached dimension that relates more to a vision of development of $1.2 million, while the private sector has contributed about the community and that takes shape in subjects like the $570,000 for training, promotion, and lending. final disposition of sludge and solid waste, the sanitation base infrastructure development (networks, systems, Lessons Learned treatment plants), and operation and maintenance. 1) Important paradigm shift: from beneficiary to Evaluation studies conducted by the CSM found that consumer. discretionary criteria for segmentation are related to at least five categories: the household's income and ability to One of the most important lessons for starting the market save, housing ownership, access to credit, the urban process is the promotion of new thinking among market experience of family members, and their family preferences actors, moving their vision of target groups from regarding their conception of a bathroom and the methods beneficiaries to consumers. This involves having market of installation and purchase. actors take responsibility for finding solutions, rather than merely standing aside awaiting outside solutions. Taking into account the sanitation dual perception as well as the discretionary criteria just mentioned, it is possible to The nongovernment organizations (NGOs) leading the pilot define six preliminary segments: Four are household programs invested significant efforts in this paradigm segments based on a mix of income and saving capacity change. They succeeded in convincing local actors, as well with bathroom preferences. One segment focuses on as their own NGO staff, that this new sanitation approach sanitation as a community investment, and the other was not providing subsidized sanitation solutions to the segment involves entrepreneurs, looking at sanitation as a poor. mechanism to increase business profits. In facing this great challenge, their first step was to The payment capacity of poor segments is diverse and understand consumers' expectations, needs, and desires. responds to a wide range of economic activities, income This led to the development of behavioral studies focused levels, expectations, and demands for social inclusion and on finding the drivers of change, going beyond progress in life. Eighty-seven percent of CSM clients1 are socioeconomic research. The studies found that health is below the Peruvian Poverty Line. Eighty-six percent of these not a top family motivator for investing in sanitation. In families have purchased sanitation facilities, using exclusively fact, there is a weak link between health conditions and their own resources; 8 percent have made the purchase sanitation in people's perceptions. The studies demonstrated through credit; and 6 percent used a mixture of both. The that the main motivator to investing in sanitation is median household investment was $57, and the median improving the house, thereby enhancing social status as a credit amount was $536 (with an average of twelve monthly symbol of progress. Water and sanitation systems are payments). Toilets (43 percent) and sinks (21 percent) were considered part of the urban culture and part of modernity. the most purchased products. That is why, in the minds of many poor Peruvians, latrines are perceived as a factor of social "differentiation." . 3) Creating affordable household sanitation solutions involves more than simply finding the cheapest The pilot phase showed that families who invest in sanitation technology. help to improve the use, maintenance, and sustainability of sanitation facilities. Thirty-nine percent of families in the The objective of providing an affordable sanitation option four pilot areas are definitely willing to invest in a new does not mean that the quality of products and facilities must sanitation facility, while 31 percent are willing to invest in be of lower quality. By using a mix of cost-saving measures, the improvement of an existing facility. Sixty-two percent addressing the financing needs, and spreading costs out over think this investment will allow them to feel that they are time, the CSM experience has shown that almost any progressing; 55 percent think that their house will look household can have a high-quality sanitation facility in the more modern; and 50 percent think this investment will home. An affordability strategy should provide options to make them feel proud of themselves. the consumer with respect to financing, product, construction, installation, and timing of all of these components to ensure The interesting findings of the pilot phase have prompted that all consumers, regardless of economic status, can install the CSM initiative to open the discussion into core questions the toilet or bathroom they desire and not be obligated to such as these: Are we ready to respond demand expectations? accept a product they do not want. What is the border between the "right" solution for people and the "desired" solution? Who decides? The CSM initiative worked to develop an attractive and accessible "sanitation package" based on a technology 2) Better segmentation of population: Identify the catalogue, installation and maintenance services, financing diverse segments of those at the bottom of the services, and information and orientation for customers. It pyramid. also worked to create an accessible point of sale for communities, building a good quality local sanitation supply, Poor households have different expectations of sanitation using local materials and resources, and supporting local facilities. Pilot intervention has shown the dual nature of 1 Households that invested in new sanitation facilities or in the improvement of their current one in the last 24 months. 2 SMARTLESSONS -- NOVEMBER 2010 Target financial solutions tested by the CSM initiative Source: Endline studies of the CSM initiative (March 2010) and Source: Documentation studies of the CSM initiative (2009) and INEI (2009). INEI 2009 PL: Peruvian Poverty Line PL: Peruvian Poverty Line providers through validation of diverse certification programs. poor, people in extreme poverty who receive government These programs were run in alliance with educational subsidies. institutions, private suppliers' enterprises, and local governments. The first segment has sustainable income and/or limited saving capacity ($215 to $358/month household income The promotion of market mechanisms at the local level scale). Progressive home improvement financial products helped to enhance the social and economic dynamic. Local are a great opportunity for this group. The CSM initiative employment in pilot areas was increased. Forty-one percent has not had enough success in involving banks and MFIs of the baths/latrines installed were made using local service for launching ad-hoc sanitation loans, but there are providers, who were trained by the CSM initiative. At the promising signs, such as dissemination activities to increase same time, local hardware stores have been increasing their sanitation awareness and the benefits of their sales, with 48 percent of families preferring to acquire toilets, prioritization in home upgrading, implementation of a sinks, showers, and baths locally. system to pay commissions to promoters or retailers that provide loan clients, and establishment of alliances for Despite these results, questions remain. The sustainability sharing sanitation promotion investments. of the actors' interaction continues to be an unreached goal, along with how to develop a sustainable accreditation For those in the middle poor ($90 to $215/month mechanism for service providers that can assure quality household income scale), the challenges are bigger. The standards in an informal country such as Peru. Another CSM initiative has validated diverse financial alternatives question involves how to link people's desires (a bathroom to figure out how to reach that segment with a viable with shower, sink, and toilet) and their willingness to pay cost-effective financial product. These include the village for it with the country's water-saving challenges. banking model through NGOs and credits directly from hardware stores and from community water committees. One promising effort is headed by six private enterprises Although first CSM monitoring reports show clients' (four suppliers, one international bank, and one private satisfaction, very low delinquency rates, and increasing foundation) for scaling up a sanitation package under a access, there remain critical barriers to replicating these unique umbrella brand tentatively called "Mi Baņo" (My community financing approaches in a sustainable manner. Bath). The package includes goods, construction and These obstacles are related to inadequate population installation services, financing options, information, and profile evaluation tools and to limited credit terms. The orientation through community promoters and points of low education level of this segment requires significant sale, as well as guaranty and maintenance mechanisms. investments in training to operate those financial mechanisms. The NGOs' successful management of village 4) Target financial solutions according to income level. banks indicates that an intermediary is required to promote the formation of the group and to provide Reaching all income levels of the population requires continuous training and monitoring, which requires innovative financing alternatives, such as group lending, resources and expertise. retail direct credit, or market-based subsidies. The CSM results have shown that there are clearly three segments: Finally, the still unanswered question is whether subsidies the upper poor, who can be easily reached by the are the only alternative for the extremely poor (less than traditional financial sector (banks and multilateral $90/month household income scale). The initiative has financial institutions, or MFIs); the middle poor, a key tried to prove the viability of market-based subsidies by target segment of the population that does not usually offering households an opportunity to choose the toilet have access to formal financial supply; and the bottom or bathroom they would like to have. In the Cajamarca SMARTLESSONS -- NOVEMBER 2010 3 "Indeed, it costs money and a lot of sacrifice to build a bathroom, but it is for our own good. A good life requires a lot of effort. Nobody will give it to you for free. We should to progress little by little and be an example; that is, if I build my own bathroom, others will do it, too". Agripina Liy Carbajal, CSM client in peri-urban area pilot zone, the initiative has formed self-help savings and The private sector has proved a number of things: that it is lending group with women members of the direct transfer able to deliver households loans for sanitation; to enhance cash program Juntos, a government antipoverty social the knowledge of retailers, improving the supply chain program that provides a bimonthly subsidy of $70 per and the service quality at the point of sale; that it can household. The lending model has a cross-guarantee support research and innovation to discover new materials system that allows households to improve sanitation and processes in accordance with environmental policies, access through buying materials or paying for labor. resulting in better products in terms of quality, price, and environmental impact; that it can create quality information 5) Do not underestimate the private sector's role. systems for consumers and invest in educational campaigns; and that it can improve the quality of health and sanitation The CSM initiative results show an enormous potential for conditions of its workers, creating a better physical and the private sector to contribute to improving sanitation emotional business environment, which in turn can lead to services for the poor. Peruvian economic growth rates enhanced productivity and well-being. suggest opportunities to identify new actors interested in improving people's living conditions. Today, more than in Conclusion the past, the private sector enterprises understand that they need consumers' satisfaction to survive. When people The CSM initiative faces different challenges to open feel comfortable with their own well-being (feelings, sanitation markets at the bottom of the pyramid in Peru. access to basic services, education, etc.), they have more This new approach to sanitation implies a change of expectations and needs. paradigm and renewed roles for different actors, especially Peri-urban and rural households that invested in new sanitation facilities or in the improvement of their current one. (Photos by Monica Tijero Trelles). 4 SMARTLESSONS -- NOVEMBER 2010 the customers (households and communities) who prioritize sanitation investments, demand information, and use and maintain sanitation services. Also needed is an articulated local supply offering an integrated solution to customers that includes goods, services, financing, and information. Private-sector enterprises should develop sanitation businesses at the bottom of the pyramid or include sanitation as part of their business model, and governments should promote sanitation markets as a matter of policy. This is not a spontaneous process, nor is there a unique model. Sanitation market development requires an actor who plays a catalyzing role in identifying potential public and private partners at the national and local levels but also assumes a technical assistance role to build partnership platforms that address different institutional incentives for promoting the sanitation markets, as well as supports the implementation partners, and an advisory role through policy dialogue with government to identify entry points for mainstreaming and scaling up this concept in national-level programs. Probably the most important lesson is that there is not one way to reach the goal. 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