WATER AND SANITATION PROGRAM: LEARNING NOTE 72148 Domestic Private Sector Participation in Peru Sanitation Markets at the Bottom of the Pyramid A Win-Win Scenario for Government, the Private Sector, and Communities June 2011 INTRODUCTION KEY FINDINGS Peru has benefitted from macroeconomic stability and growth in the last few years. At the same time, it also presents important contradictions in terms of unresolved access to • Public infrastructure investments in water basic sanitation. This is characterized by a) an on-going and sanitation need complementary gap that reflects the high levels of inequity between rural strategies for assuring families access to and urban coverage, b) unused services and low levels affordable products and services, healthy of customer satisfaction with current sanitation solutions, behaviors, and adequate maintenance and c) unsustainable and inefficient public investments. of new sanitary infrastructure. The link of infrastructure programs with sanitation During the 1990s, the Peruvian Government allocated markets has the potential to contribute to US$ 833 million to the water and sanitation sector, representing improved policies aimed at achieving real an important increase over previous decades. Only 15 percent impacts on poor people’s lives. (US$ 123 million), though, was allocated to rural areas and • The paradigm shift from “beneficiary� small towns. to “consumer� can produce significant changes that have yet to be fully explored. Likewise, in the last four years (2006 to 2010) the government allocated the highest amount of budget • Both market segmentation tools and client in Peruvian history for water and sanitation, roughly satisfaction assessments represent great US$ 2 billion for improving access in urban areas, and again opportunities to improve public policy by without explicitly prioritizing the poor. Despite this historic incorporating new elements in a demand- investment, only 54 percent was executed1. driven perspective. • Domestic private participation at the Despite of the important infrastructure investments of the bottom of the pyramid is viable. Key last 20 years, significant gaps remain, as well as the need to factors to harness this potential include: (i) address quality and sustainable sanitation service. Moreover, it shared investments within public-private- has not impacted the improvement of health and environment- community partnerships, (ii) new business related indicators. According to the National Statistics Institute, models, (iii) community resources while national sanitation coverage has increased by 20 percent and networks, (iv) support of local (1993-2007), in the same period the percentage of prevalence entrepreneurship, and (v) clear definition of chronic malnutrition in children under five years old has of a long-term investment return. decreased by 9 percent and that of diarrhea by only 5 percent. PROBLEM STATEMENT New ways to increase access to sustainable sanitation bottom of the pyramid; it pays special attention to the active are required in countries like Peru. The Creating Sanitation involvement of the domestic private sector (large-scale Markets initiative is a multi-stakeholder approach, aimed providers, microfinance institutions, and community based at the market promotion of sanitation for population at the microenterprises) in sanitation supply, and enhances public 1. Ministry of Economy and Finance of Peru, 2010. 2 Promoting Sanitation Markets at the Bottom of the Pyramid in Peru awareness of sanitation as a business opportunity that also (La Encañada & Namora, Chinchero, Independencia, and benefits local opportunities for development. The model relies Pachacutec). These four pilot areas are representative of the on key alliances and interactions among public, private and country’s geographic and cultural diversity and are characterized community actors. These alliances operate at national and by high levels of poverty (4 of 5 are poor, and 3 of 5 do not have sub-national levels, and are meant to allow sustainability and access to proper sanitation), with an estimated population of scalability for sanitation markets. 174,000 people living in around 47,813 households. Illustration 1: Location of Pilot Areas Four components were designed and tested in order to build a responsive linkage between supply and demand: a. Demand motivation. Motivating demand targeted sanitation-related attitudes, practices, and knowledge of the population by marketing behavioral change tools. Promotional campaigns, door-to-door messages, and post-sale educational activities were tested. Local leaders, community sales promoters, school teachers, and health workers were all trained to deliver sanitation information La Encañada and counseling. Namora b. Local supply. To improve the local supply of goods and services (suppliers, hardware stores, sales promoters, and PERU foremen), articulation mechanisms were designed requiring Independencia the capacity-building of masons, plumbers, artisans, and hardware store owners. Large-scale suppliers have been Pachacutec involved in this training session’s offerings, as well as local educational centers and municipalities. Chinchero c Product design. Market research tools and partnership Legend building were applied in order to ensure that the sanitation catalogue of products and related service delivery was Peri urban area Rural area responsive to people’s expectations. This has implied Small town domestic private sector involvement in research and development, as well as the design of a new business model for sanitation micro-enterprises (hardware stores, District Population Households % without % of service providers, and artisans). access poverty to proper sanitation* d. Household financing options. The demand studies of La Encañada 22,397 8,430 65.5% pilot areas showed that low-income families have been Namora 8,552 4,493 71.0% 92.0% paying for sanitation facilities, and are willing to pay for improved sanitation; but they need proper information Chinchero 9,958 2,948 68.7% 84.0% and financial solutions to strengthen their demand. The Independencia** 15,595 6,229 73.1% 99.0% Creating Sanitation Markets initiative tested diverse Pachacutec ** 118,280 25,713 51.2% 70.0% financing alternatives tailored to households, working with Total 174,782 47,813 59.5% 80.6% banks, micro-financial institutions, government subsidy programs, and NGOs. PILOT PHASE RESULTS * includes unimproved latrines ** In these districts the pilot did not cover the whole population. Source: Baseline Studies of Creating Sanitation Markets, 2007; and National Following 24 months of sustained promotional activities, and Institute of Statistics and Informatics (INEI), 2009. almost a full additional year of sanitation market development, the following results were achieved: Around nine thousand households have improved their ACTION sanitation services. In the 2007-2010 period, the Water and Sanitation Program, 18 percent of households (roughly nine thousand) in the in conjunction with national and local authorities, the domestic pilot areas made improvements in their sanitation facilities private sector, NGOs, and communities, began testing the (11 percent improved their current household sanitary Creating Sanitation Markets initiative in four pilot areas in Peru infrastructure, and 7 percent purchased a new facility). Total Water and Sanitation Program Promoting Sanitation Markets at the Bottom of the Pyramid in Peru 3 household investment reached US$ 1.2 million, while the The sanitation loan portfolio has been estimated at private sector has contributed about US$ 570,000 for training, around US$ 500,000. promotion, and lending. US$ 536 thousand were granted to households by eight financial institutions and through three non-regulated financial Figure 1: Households that purchased or improved their mechanisms, which designed products adequate for the bathroom/latrine, and amount invested granting of loans to families living in the intervention areas (village banks, community saving groups, individual credits). Percentage Ammount of Households invested (US$) Although 48 percent of loans have been granted by the 25% public micro-financial institution in Cusco (CMAC Cusco), an US$ 714 US$ 800 interesting 23 percent have been granted through community financial mechanisms (village banks and saving groups) US$ 700 20% reaching low-income populations. US$ 600 US$ 616 15% Figure 3: Sanitation loan portfolio by kind of financial { US$ 500 institution US$ 357 US$ 400 10% US$ 300 Other US$ 114 US$ 370 5% US$ 200 Bank 5% 10% US$ 100 Private microfinance US$ 103 US$ 54 US$ 66 US$ 0 institution 0% Namora & Independencia Chinchero Pachacutec Total of 14% Public microfinance La Encañada loans granted institution Pilot areas 48% Community Improved their current bath/latrine saving group/NGO Median invested in credit by family 23% Purchased a new bath/latrine Median invested in cash by family Source: Creating Sanitation Markets - Endline Studies. March-April, 2010. The number of households without access to sanitation Source: End Line Studies of Creating Sanitation Markets. March-April, 2010. decreased by 35 percent. Deficient access to basic sanitation was reduced from 32 There is a high level of client satisfaction with the local percent in 2007 to 21 percent in 2010. This result can be supply of sanitation goods and services. explained by the impact of the communication campaigns, The sales monitoring system tracked the progress of client which have successfully mobilized people to effective action. 85 satisfaction regarding local actors. According to the latest percent of people who remembered the promotional campaign measurement, 90 percent of clients are satisfied with hardware also remembered the key messages, 25 percent looked for store goods and services, 86 percent with provider services, information, and 32 percent invested in sanitation facilities. 80 percent with the micro-financial institutions’ services, and 76 percent with communal promoter performance. Global Figure 2: Evolution in the access to sanitation as a result satisfaction regarding local sanitation supply is around 83 of the pilot phase (baseline-endline) percent, a highlight of market sustainability. 70% 62.8% Figure 4: Customer satisfaction with service delivered by 60% domestic local providers 55.2% } 50% 90% Percentage 90% 40% 86% 31.7% 85% 80% Percentage 30% 21.1% 23.7% 80% 76% 83% 75% General 20% Satisfaction 70% 10% 5.5% Baseline Endline Baseline Endline Baseline Endline 65% 2007 2010 2007 2010 2007 2010 0% Communal Hardware Service Financial Wihout access Bathrooms or similar Latrines Promoter Store Provider Institution Evolution in the access to sanitation Type of provider Source: Creating Sanitation Markets [Baseline Studies. June, 2007]; Sample: 100 people. [Endline Studies. September, 2010]. Source: Monitoring System of Creating Sanitation Markets. September, 2010. www.wsp.org 4 Promoting Sanitation Markets at the Bottom of the Pyramid in Peru In facing this great challenge, their first step was to understand consumers’ expectations, needs, and desires. This led to the development of behavioral studies focused on finding the drivers of change, going beyond socioeconomic research. The studies found that health is not a top family motivator for investing in sanitation; in fact, there is a weak link between health conditions and sanitation in people’s perceptions. The studies demonstrated that the main motivator to invest in sanitation is actually improving the home, thereby enhancing social status. A symbol of progress, water and sanitation systems are considered part of the urban culture and part of modernity. That is why, in the minds of many poor Peruvians, latrines are perceived as a factor of social differentiation. The pilot phase showed that families who invest in sanitation help to improve the use, maintenance, and sustainability of sanitation facilities. Although 39 percent of families in the four pilot areas are definitely willing to invest in a new sanitation facility, while 31 percent are willing to invest in the improvement of an existing facility. Sixty-two percent think this investment will allow them to feel that they are progressing; 55 percent believe that their house will look more modern; and 50 percent think this investment will make them feel proud of themselves. The interesting findings of the pilot phase have prompted the Creating Sanitation Markets initiative to open the discussion into core questions, such as: Are we ready to respond to demand expectations? What is the border between the “right� solution for people and the “desired� solution? Who decides? �It is so good to have a bathroom for our family, we feel well, happy at home. My daughter feels safer; she says that the bathroom is good for our health. With a bathroom there is more 2. Better segmentation of the population: identify the hygiene, especially for the children so they are not walking around ... diverse segments at the bottom of the pyramid. and we can take a relaxed bath�. Poor households have different expectations regarding Ms. Juana Ramirez sanitation facilities, and the pilot interventions have shown Chontayoc Community, Huaraz the dual nature of these perceptions. First, there is the private Figure 5: Clients of Creating Sanitation Markets grouped by household income > US$ 358 US$ 358 MAIN FINDINGS Poverty Line Monthy HH Income US$ US$ 305 - US$ 357 1. Important paradigm shift: from beneficiary to consumer US$ 240 - US$ 304 One of the most important lessons in starting the market process is the promotion of new thinking among market actors, US$ 186 - US$ 239 moving their vision of target groups from that of beneficiaries to that of consumers. This involves having market actors take US$ 130 - US$ 185 responsibility for finding solutions, rather than merely awaiting for solutions. < US$129 The NGOs leading the pilot programs invested significant 0% 10% 20% 30% 40% effort in this paradigm change. They succeeded in convincing Percentage of Population local actors, as well as their own staff, that this new sanitation approach was providing subsidized sanitation solutions to Source: Creating Sanitation Markets - Endline Studies, 2010; the poor. National Institute of Statistics and Informatics (INEI), 2009. Water and Sanitation Program Promoting Sanitation Markets at the Bottom of the Pyramid in Peru 5 aspect to be considered by families. Then, there is a public segment focuses on sanitation as a community investment; dimension that relates more to a vision of development and and the other involves entrepreneurs, looking at sanitation as community, and that takes shape in subjects such as the a mechanism to increase business profits. final disposal of sludge and solid waste, sanitation base infrastructure development (networks, systems, treatment The payment capacity of poor segments is diverse, and plants), and operation and maintenance. responds to a wide range of economic activities, income levels, expectations, and demands for social inclusion and progress in life. Some 87 percent of Creating Sanitation Markets clients are below the poverty line in Peru; 86 percent of these families have purchased sanitation facilities, using exclusively their own resources; 8 percent have made the purchase through credit; and 6 percent used a mixture of both. The median household investment was US$ 57, and the median credit amount was US$ 536 (in an average of 12 monthly payments). Toilets (43 percent) and sinks (21 percent) were the most frequently purchased products. 3. Affordable household sanitation involves more than simply finding the cheapest technology. The objective of providing an affordable sanitation option does not mean that the quality of products and facilities must be lower. By using a mix of cost-saving measures, addressing financing needs, and spreading costs out over time, the Creating Sanitation Markets experience has shown that almost any household can have a high-quality sanitation facility on site. An affordability strategy should provide options to the consumer with respect to financing, product, construction, and installation; the timing of all of these components should ensure that all consumers, regardless of economic status, can install the toilet or bathroom they desire and not be obligated to accept products they do not want. The Creating Sanitation Markets initiative worked to develop an attractive and accessible “sanitation package,� based on a technology catalogue, installation and maintenance �In the past, we didn’t worry much about cleaning or keeping the bathroom neat. We didn’t pour water down the toilet bowl. We Figure 6: Financial solution tested according to income left everything dirty. Now I always check that everything is clean, because, can you imagine having a nice but dirty bathroom?� Monthly income Peruvian population Financial solution tested by by household by income Creating Sanitation Markets Mrs. Jovita Gutiérrez Briones Namora, Cajamarca High & Middle class US$ 535 Evaluation studies conducted by the Creating Sanitation Markets initiative found that discretionary criteria for US$ 358 Poverty Line Poverty } Microfinance institutions' loans US$ 215 segmentation are related to at least five categories: the } Credits through: NGOs, household’s income and ability to save, housing ownership, Hardware Stores, and Poverty: Lower level access to credit, the urban experience of family members, Community Water Councils and family preferences regarding bathroom conception and US$ 90 methods of installation and purchase. Taking into account the dual perceptions as well as the Extreme poverty } Market-based subsidies US$ 50 discretionary criteria, it is possible to define six preliminary segments. Four are household segments based on a mix of Source: Creating Sanitation Markets - Endline Studies, 2010; income and saving capacity with bathroom preferences; one National Institute of Statistics and Informatics (INEI), 2009. www.wsp.org 6 Promoting Sanitation Markets at the Bottom of the Pyramid in Peru Despite these results, questions remain. The sustainability of the actors’ interaction continues to be a desirable goal, along with the development of a sustainable accreditation mechanism for service providers in order to assure quality standards in an “informal� country such as Peru. Another question involves how to link people’s desires (a bathroom with shower, sink, and toilet), and their willingness to pay, with the need to use water more efficiently and ensure that domestic wastewater is eventually treated. One promising effort is headed by six private enterprises (four suppliers, one international commercial bank, and one private foundation), and involves scaling up a sanitation package under a unique umbrella brand tentatively called “Mi Baño� (My Bath). The package includes goods, construction and installation services, financing options, information, and orientation through community promoters and points of sale, as well as guaranty and maintenance mechanisms. 4. Target financial solutions according to income level. Reaching all income levels of the population requires innovative financing alternatives, such as group lending, retail direct credit, or market-based subsidies. The Creating Sanitation Markets results have shown that there are clearly three segments: the upper poor, who can be easily reached by the traditional financial sector (banks and microfinance institutions, or MFIs); the middle poor, a key target segment of the population that does not usually have access to formal �(The bathrooms) are… a good system; it prevents contamination, financial supply; and the bottom poor, people in extreme while silos usually brought bad odor. poverty who receive government subsidies. In the past, I was damaging my house by making a lot of holes for silos in my yard, I built up to 3 silos. Now everything is nice and The first segment has sustainable incomes and/or limited saving clean, the flies have already gone away�. capacity (US$ 215 to US$ 358 per month household income Ms. René Cruzado Moreno scale). Progressive home improvement financial products are Pachacutec, Callao a great opportunity for this group. The Creating Sanitation Markets has not had enough success in involving banks and micro-finance institutions in launching ad-hoc sanitation loans, but there are promising signs, such as dissemination activities to increase sanitation awareness and the benefits of their prioritization in home upgrading; implementation of a system services, financing services, and information and orientation to pay commissions to promoters or retailers who provide loan for customers. It also worked to create an accessible point of clients; and establishment of alliances for sharing sanitation sale for communities, building a good-quality local sanitation promotion investments. supply, using local materials and resources, and supporting local providers through validation of diverse certification For those in the middle poor category (US$ 90 to $ 215 per programs. These programs were run in conjunction with month household income scale), the challenges are greater. educational institutions, private suppliers’ enterprises, and The Creating Sanitation Markets initiative has validated diverse local governments. financial alternatives to figure out how to reach that segment with a viable, cost-effective financial product. These include The promotion of market mechanisms at the local level helped to the village banking model through NGOs, and credits directly enhance the social and economic dynamic. Local employment from hardware stores and community water councils. Although in pilot areas was increased, and 41 percent of the bath/latrine the first Creating Sanitation Markets monitoring reports show installations were done using local service providers, who client satisfaction, very low delinquency rates, and increasing were trained by the Creating Sanitation Market initiative. At the access, critical barriers remain in replicating these community same time local hardware stores have increased their sales, financing approaches in a sustainable manner. The obstacles with 48 percent of families now preferring to acquire toilets, are related to inadequate population profile evaluation tools, sinks, showers, and baths locally. and to limited credit terms. The low education level of this Water and Sanitation Program Promoting Sanitation Markets at the Bottom of the Pyramid in Peru 7 Before and After The domestic private sector has proved a number of things, namely that it is able to deliver household loans for sanitation; that it is able to enhance the knowledge of retailers, improving the supply chain and service quality at the point of sale; that it can support research and innovation to discover new materials and processes in accordance with environmental policies, resulting in better products in terms of quality, price, and environmental impact; that it can create quality information systems for consumers and invest in educational campaigns; and that it can improve the quality of health and sanitation- related conditions for its workers, creating a better physical and emotional business environment—which in turn can lead to enhanced productivity and well-being. INSIGHTS FOR FUTURE PROGRAMMING The Creating Sanitation Markets pilot projects have shown the “I am very happy with my bathroom. It is close, at hand. Now I do not existence of sanitation demand among poor segments at the have to walk so far, as I did when I had a latrine. My son, who has bottom of the pyramid. It is a heterogeneous demand which, arrived from Lima, is happy with the bathroom�. despite the restrictions generated by limited payment capacity, is investing in sanitation services. Mrs. Ida Reyes Cochac Community, Huaraz Why invest in demand development, if it already exists? For two main reasons: (i) because poor households do not necessarily make the best investment they could make with their tight resources; and (ii) because there is a latent segment also requires significant investments in training, sanitation demand that requires activation of behavior regarding how to operate those financial mechanisms. The drivers to be transformed into real demand. Some of the key NGOs’ successful management of village banks indicates behavioral determinants identified during the intervention that an intermediary is required to promote the formation of process are access to financing and information, sanitation the group and to provide continuous training and monitoring, value perceptions, and skills development. which need resources and expertise. There is promising evidence that private investments by Finally, the as yet unanswered question is whether subsidies families generate ownership, use, and maintenance of are the only alternative for the extremely poor (less than US$ the services, contributing to sustainability. That investment 90 per month household income scale). The initiative has tried practice is related to the capacity to choose among diverse to prove the viability of market-based subsidies by offering sanitation facilities; the possibility to fit the selected facility households opportunities to choose the toilet or bathroom they to their preferences; the right to appeal against goods and would like to have. In the Cajamarca pilot zone, for example, services that do not meet their expectations; and the sense the initiative has formed self-help savings and lending groups of social inclusion in the chance to afford modern, high- with women members of the direct transfer cash program quality sanitation access. Therefore, partial or complete “Juntos�, a government antipoverty social program that subsidy schemes could be incorporated in the Creating provides a bimonthly subsidy of US$ 70 per household. The Sanitation Markets approach, if the practice continues lending model has a cross-guarantee system that allows in all its aspects. This is not necessarily about income households to improve sanitation access through the purchase capacity; it is more about citizenship-building. An inclusive of materials or by paying for labor. market approach opens new ways to face social development challenges, because customer behavior is finally based on 5. Do not underestimate the private sector’s role. rights and responsibilities, in the correct use of information for The Creating Sanitation Markets results show enormous decision-making, and in building capacity for empowerment potential for the domestic private sector to contribute to and ownership. improved sanitation services for the poor. Peruvian economic growth rates highlight opportunities to identify new actors, The nurturing of markets for sanitation generates local particularly those interested in improving people’s living development, improved business opportunities, local conditions. Today, more than in the past, private sector employment and income, and interest in other home enterprises understand that they need consumer satisfaction improvement investments. Creating Sanitation Markets to survive. When people feel comfortable with their own well- efforts at the local level have demonstrated that sanitation can being (self-perception, access to basic services, education, add value to small businesses, promote the launch of new etc.), they have greater expectations and needs. enterprises, stimulate providers’ organizations and orient youth www.wsp.org WATER AND SANITATION PROGRAM: LEARNING NOTE to new technical education opportunities. Local entrepreneurs are not only looking for profits, they also have a commitment to Acknowledgements their community: they seek the progress of their surroundings, This Research Brief was prepared by and they want to live in a place they feel proud of. In short, there Malva Baskovich, Task Team Leader of the is a new social process going on. It is supported by economic Initiative Creating Sanitation Markets in Peru. stability and tranquility, and is generating genuine Peruvian Baseline and Endline Studies of the pilot ownership, where families seek progress and welfare inside phase were developed by the consultants their communities, and not outside as in the past. Ricardo Rojas and Pedro Sandoval; and by the research firms IMASEN, Directo Peru In addition, the Creating Sanitation Markets experience has and Macroconsult/IEP. proven that the promotion of sanitation markets adds value The information presented in this Research to different sectors: private, public, and communities. Brief was submitted in November 2010 to Moreover, it is not possible to get those benefits without the IFC SmartLessons on Private Sector synergy within a shared results framework. The diverse, multi- Participation in Water, obtaining the second stakeholder platforms at national and sub-national levels prize. have allowed the Creating Sanitation Markets experience to go forward and indeed “outside the box.� Most likely such IFC SmartLessons is a contest promoted by a nationwide alliance is the most promising opportunity to the International Finance Corporation of the scale up sanitation access at the bottom of the pyramid, and World Bank Group. This competition seeks with genuine quality and sustainability criteria including the to share lessons learned in development- environmental sustainability. Was the great effort made at oriented advisory services and investment this level an efficient investment, even if there is not enough operations. evidence of its contribution to the results? Yes it was, because any partnership building is based on trust, a long-term process which probably represents the most valuable acquisition of the whole Creating Sanitation Markets inversion. Contact us For more information please visit Therefore, this new approach to sanitation implies a www.wsp.org or email Malva Baskovich at change of paradigm and renewed roles for different actors, wsplac@worldbank.org. especially the customers (households and communities) who prioritize sanitation investments, demand information, and use and maintain their sanitation services. An articulated local supply offering, and an integrated solution to customers that includes goods, services, financing, and information, are also needed. WSP is a multi-donor partnership created in 1978 and administrated by the World Bank to support poor people in obtaining affordable, safe, and sustaina- ble access to water and sanitation services. WSP’s donors include Australia, Austria, Canada, Denmark, Finland, France, the Bill & Melinda Gates Founda- tion, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. The findings, interpretations, and conclusions expressed herein are entirely tho- se of the author and should not attributed to the World Bank or its affiliated or- ganizations, or to the members of the Board of Executive Directors of the World Bank or the governments they represent. © 2011 Water and Sanitation Program