The power of decentralised water networks in scaling up access to water

Adapted from the book “Scaling Up Business Solutions to Social Problems”, Olivier Kayser and Valeria Budinich, 2015. The book has recently been published in English and is available here.

Today, more than one in three people do not have access to safe water. This partly explains why diarrhea remains so widespread, and kills over 760,000 children every year. It could also cost over 73 million working days per year to the Indian economy, and 20 percent of Nigeria’s GDP. But lack of safe water also has many other implications: in Africa and Asia, women walk an average of 6 km per day to fetch water for their family. Tens of millions of children skip school to help with the water chores.

It is estimated that water-borne diseases, which account for 20 per cent of the global disease burden, receive less than 1 per cent of total public and private funds devoted to health research. Even when significant financial resources are mobilised, traditional philanthropic approaches (based on grants or subsidies) fall short of fixing the problem for good.

The result of this situation is that the “have-nots” pay a lot more money to get safe water. In the slums of Jakarta, for instance, families spend over $7 per cubic meter for water sold by the local water vendors who serve their neighbourhoods, while the official utility tariff is about $0.1 per cubic meter. This situation will become even worse with the explosion of the urban population in Africa and Asia.

Fortunately, in recent years, innovative entrepreneurs have found approaches to provide safe water to the poor – reliably, sustainably and at an affordable price. These cover the full spectrum of situations facing the poor including sustainably functioning water pumps for small, remote villages; home water treatment solutions for rural families or families with unsafe tap water; and independent water networks in suburbs and small towns that are not connected to the main utility. In this post we focus on a successful example of such decentralised water utilities.

Balibago Waterworks System Inc. (BWSI) is a privately owned Philippine water company, specialising in setting up and operating small, decentralised water networks providing safe water at the home tap to communities of a few hundred to a few thousand families.

In the Philippines, the responsibility for public water infrastructure lies with the local municipalities. Balibago has become a medium-sized operator by obtaining from municipalities the right to operate (and sometimes build) a water network, ideally for a long period of time (35 years on average), after which the ownership and operation of the network will revert to the municipality.

Balibago’s cost structure and organization allows it to finance its own growth. As it now operates 42 water networks, it achieves profitability by combining economies of scale (for instance in sourcing equipment) with lean, local management operations. In 2013, Balibago served about 90,000 households, generating more than $15 million in revenues and $3 million in profit, while investing in new infrastructure and improved operations. It is able to offer a whole set of services, ranging from refurbishing an existing network, to installing a new one, or simply taking on the operations in an area where public authorities haven’t reached.

Still, Balibago keeps a “pulse” on the communities it serves; the locally hired teams have a lot of independence to run day-to-day operations and the door- to-door payment collection allows the team to know all the users personally. These local teams are the ones to call the shots when it comes to better responding to the customers’ needs and ability to pay.

The Balibago model relies very little on cross-subsidies in order to grow. The logic of cross-subsidies lies at the heart of the functioning of most water operators – public and private. While they have been very effective at enabling cash-constrained authorities to serve the poor, they tend to “freeze” the situation. The more a utility expands into peripheral or poorer areas, the more difficult it is to maintain a sound economic balance. The premium paid by richer segments cannot be increased sufficiently to finance new infrastructure and compensate for the discounts offered to an ever-increasing poor population. As a result the poorest have to buy bottled water from resellers at a much higher price.

In contrast, Balibago is allowed, thanks to a progressive regulatory framework, to negotiate the price it charges for water with each municipality, based on two criteria: the level of investment required, and the duration of the contract. Such arrangements allow Balibago to make each of its water networks profit- able, incentivising Balibago to grow as much as it can.

Balibago customers pay on average $.050 per cubic meter (while bottled water is about 1000 times as expensive).

How to scale up a Balibago

According to our estimates, the Balibago model could provide safe water to 70–90 million people living in semi-urban areas, and to 390 million people in urban areas who will not be covered by the main utility in the mid-term. In fact, the strength of the Balibago model is that it functions in a decentralized manner and can start where needs are greatest. Its networks are sufficiently modular to be directly connected to the main water supply once it reaches the area.

We still need three essential ingredients to replicate Balibago at scale:

Capital: each new decentralised network (of about 1000 family connections) costs at least $250,000, while pay-back takes from five to ten years. Social impact investors might be willing to provide such patient capital.

Legitimacy: it is crucial to position “Balibago-like” operators not as competition for the main utility operators, but rather as “complementary solutions” for remote areas. “Balibago-like” operators would also be different in the sense that they would adopt a “hybrid” governance model, to reflect the dual social and commercial purpose of the company.

Political support at many levels: it is needed to lift the regulatory hurdles associated with connecting families living in informal neighbourhoods; to support each municipality in negotiating a contract and tariff tailored to local conditions; to channel subsidies where needed; and finally to facilitate the work of operators in difficult areas, where the local mafia may operate.

This blog is part of the November 2016 series on Scaling and replicating inclusive business models, in partnership with DFID and SEED. Explore with us the key ingredients of a pathway to scale, debates and new ideas on replication, and look at what small companies, large companies and ecosystem actors can do.