Indonesia Sanitation Market Assessment

Prepared for: International Finance Corporation (IFC) Jakarta, Indonesia

Prepared by: Cowater International Inc. (Canada) in association with: Swisscontact Indonesia (Jakarta)

June 16, 2010

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Sanitation in Indonesia:  A Market Assessment      Draft Final Report  Created by:      ACKNOWLEGEMENTS
Many people generously gave their time and knowledge to the study team that produced this report. The authors particularly wish to thank the staff of IFC for assistance with arrangements and the staff and consultants of the Water and Sanitation Program East Asia Program (WSP-EAP) for close cooperation and support. In East Java, Pak Saputra and Pak Lantip of WSP worked closely with the IFC consultant team and accompanied the field work; our particular thanks for their guidance and information. Mr. Edy Soedjono of L3PM-ITS was a fountain of experience and wisdom. Members of the trade association LPB MitraBersama, including Chairman Jhon Hardy and Pak Bambang and Rochim, served as an SME focus group and a window to metals manufacturing in Surabaya. Pak Irianto provided insight into the operations and thinking of an businessman/entrepreneur who could be a leader in market transformation.We also wish to thank Holcim cement for an informal and lively exchange of ideas in Jakarta. Our particular thanks to government staff in East Java Province and in Jombang, Nganjuk, Lumajang, Jember, and Pamekasan. In each of these districts, the health department staff (including cooperatives) and sanitarian entrepreneurs shared information and ideas freely and accompanied the team on visits. The hospitality offered everywhere in Indonesia made work a great pleasure.

Sandra Giltner  Aldi Surianingrat 

 

 

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Sanitation Marketing Assessment Draft Final Report

EXECUTIVE SUMMARY
There is substantial existing potential market demand for sanitation (latrine construction and use) in Indonesia in the wake of a number of programs that seek to help the country achieve its Millenium Development Goal for access to sanitation. Some 27 million households in Indonesia and 8 million households in East Java Province lack access to improved sanitation. The potential market size is about USD 1.5 billion throughout Indonesia, and about USD 323 million in East Java. Demand creation (especially by district government in East Java) is proceeding at a rapid pace. A major challenge in transforming the supply side of the market will be changing the delivery model (suppliers) in order to get to scale quickly and to meet current and near-term demand. A second major barrier is the lack of access to finance. Consumers demand credit for latrine construction. That finance could be offered directly to consumers (which could be difficult) or via facilitating investment and working capital for businesses that can then offer terms to customers. IFC is uniquely positioned to collaborate with the Water and Sanitation Program of the World Bank to help transform the market using supply side tools that include: 1. 2. 3. Fostering new distribution mechanisms; Facilitating incentives for producers/suppliers; Encouraging voluntary agreements by the private sector;

4. Offering Technical Assistance/Transfer of know-how, especially in business management; and 5. Facilitating development of standards & regulatory mechanisms.

The existing suppliers are mostly small artisans (such as masons) and households. WSP has piloted a social franchising model that seeks to transform health officials into entrepreneurs. A more effective model may be to encourage small and medium enterprises to enter the market by offering incentives including exclusivity in operations for a period, access to market information and potential sales networks, access to technical assistance and training, and most importantly, access to finance for investment and working capital, possibly via product development with financial institutions or others that could include partial guarantees or revolving fund facilities. Developing standards and regulatory mechanisms is less of an issue, perhaps, given the relatively simple technology, but training and certifying potential suppliers in standards and quality may be an additional incentive to enter the market. This market assessment explores sanitation in Indonesia, from access to technologies and consumer preferences, demand potential, supply chain issues (there are not many), and ways to transform the market to operate at scale. It suggests elements of project design should IFC choose to facilitate market transformation.

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Table of Contents
ACKNOWLEGEMENTS .......................................................................................................................... I EXECUTIVE SUMMARY ........................................................................................................................ II ABBREVIATIONS, ACRONYMS, AND INDONESIAN LANGUAGE TERMS ......................................V 1. ASSESSMENT GOALS AND PERSPECTIVE .............................................................................. 1 1.1 1.2 2. OBJECTIVES AND TASKS OF THE MARKET ASSESSMENT .............................................................. 1 A MARKET TRANSFORMATION PERSPECTIVE............................................................................... 1

BASIC SANITATION IN INDONESIA ............................................................................................ 2 2.1 2.2 2.3 2.4 ACCESS TO BASIC SANITATION IN INDONESIA .............................................................................. 2 CURRENT APPROACHES TO SANITATION ..................................................................................... 4 THE TOTAL SANITATION AND SANITATION MARKETING (TSSM) PROJECT ..................................... 4 TECHNOLOGIES AND CONSUMER PREFERENCES ......................................................................... 6

3.

DEMAND POTENTIAL ................................................................................................................... 8 3.1 3.2 3.3 INDONESIA ................................................................................................................................ 8 EAST JAVA ................................................................................................................................ 9 RURAL, URBAN, AND PERI-URBAN DEMAND .............................................................................. 10

4. 5.

SUPPLY CHAIN ........................................................................................................................... 11 SUPPORTING MARKET TRANSFORMATION AT SCALE ....................................................... 14 5.1 OVERVIEW OF MARKET ACTORS ............................................................................................... 14 5.2 BUSINESS MODELS .................................................................................................................. 14 5.2.1 Sanitarian as Entrepreneur ............................................................................................... 14 5.2.2 Local Small Business: Construction Materials Retailers (Hardware Stores) ................... 17 5.2.3 District-Level Small or Medium Enterprise........................................................................ 18 5.2.4 Large Business.................................................................................................................. 19 5.3 FACILITATING DEVELOPMENT OF STANDARDS AND REGULATORY MECHANISMS .......................... 20

6.

FINANCING .................................................................................................................................. 21 6.1 6.2 6.3 6.4 DEMAND FOR FINANCING ......................................................................................................... 21 SOURCES OF CREDIT FOR EXISTING ENTREPRENEURS .............................................................. 21 ALTERNATIVES TO SUPPLIER CREDIT FOR CONSUMER FINANCING ............................................. 22 IMPLICATIONS FOR MARKET TRANSFORMATION AND PROJECT/PROGRAM DESIGN ...................... 23

7.

TOWARD PROJECT DESIGN ..................................................................................................... 23 7.1 7.2 7.3 GO/NO GO DECISION: IFC INDONESIA OBJECTIVES AND PROGRAMS ......................................... 23 WSP-EAP COLLABORATION .................................................................................................... 24 POSSIBLE PROJECT COMPONENTS ........................................................................................... 24

8. 9.

REFERENCES.............................................................................................................................. 27 PERSONS MET ............................................................................................................................ 28

ANNEX 1: POTENTIAL DEMAND FOR SANITATION ..................................................................... A-1 ANNEX 2: MILLENIUM DEVELOPMENT GOALS FOR SANITATION IN INDONESIA ................. B-1 ANNEX 3: MODEL CASH FLOW ANALYSIS ................................................................................... C-1 ANNEX 4: TERMS OF REFERENCE ................................................................................................ D-1 ANNEX 5: LITERATURE REVIEW .................................................................................................... E-1

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List of Tables
Table 2.1: UN Sanitation Coverage Estimates for Indonesia 1990-2006 (2009 Government of Indonesia Estimate) and UN Population Projections for 2015................................................................ 3 Table 2.2: Pour-Flush Pit Latrine Models and Costs in East Java.......................................................... 7 Table 4.1: Major Latrine Installation Inputs. Major Producers, Distribution Routes and Penultimate customers in Indonesia ......................................................................................................................... 12 Table 5.1: SWOT Analysis of Sanitarian as Entrepreneur Business Model ......................................... 17 Table 5.2: SWOT .................................................................................................................................. 18 Table 5.3: SWOT Analysis of District-Level Small and Medium Enterprises as Sanitation Entrepreneurs ....................................................................................................................................... 19 Table 5.4: SWOT Analysis of Large Business as Sanitation Entrepreneur Business Model ............... 20 Table 7.1: Possible Components of IFC Sanitation Market Transformation Project ........................... 24

List of Figures
Figure 1.1: Main Features of the M4P and Market Transformation Supply Side Tools Applicable to Sanitation in Indonesia............................................................................................................................ 2 Figure 3.1: Potential Demand for Latrines in Indonesia (21 Million households) ................................... 8 Figure 3.2: Potential Demand for Latrines in East Java (4.2 million Households).................................. 9 Figure 5.1: Roles of Major Market Actors in Sanitation in Indonesia ................................................... 14

List of Boxes
Box 6.1: Credit Solutions by a Sanitation Entrepreneur in Sidoarjo District, East Java ...................... 22

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ABBREVIATIONS, ACRONYMS, AND INDONESIAN LANGUAGE TERMS
BRI Desa Bank Rakyat Indonesia, a commercial state-owned bank with presence in many communities Fourth-level administrative area in Indonesia (after a province, district, and subdistrict). While a desa is often translated as village, it usually comprises many sub-villages or hamlets (ente). Indonesian: Mrs., Madam Joint Monitoring Program (a WHO and UNICEF program to monitor progress toward the Millennium Development Goals) Second-level administrative district in Indonesia (after a province). Sometimes translated as “regency.” Third-level administrative sub-district in Indonesia (after a province and a district). Millennium Development Goal Indonesian national program for water and sanitation aiming to cover 5,000 villages in 21 provinces with access to safe water and improved sanitation. PAMSIMAS is the third of three World Bank-funded projects, valued at USD 195.5 million with approximately USD 15 million for sanitation and hygiene (USD 160 million is for water supply). It is administered by the Ministry of Public Works. Indonesian: Mr., Sir Indonesian national inter-ministerial working group for water supply and sanitation, chaired by the national planning agency, Bappenas Sanitasi oleh Masyarakat Indonesian community-based urban sanitation (including drainage) program administered by the Ministry of Public Works and funded by the national budget. Indonesian periodic national socioeconomic survey Sanitasi Total Berbasis Masyarakat, Community-based Total Sanitation, the national Ministry of Health strategy Total Sanitation and Sanitation Marketing Project Water Supply and Sanitation Policy Formulation and Action Project. There have been two WASPOLA projects; the second finished in 2008, and there is currently a WASPOLA Facility 2009-2013 that is funded by AusAID via WSP-EAP and implemented by Bappenas. World Heath Organization (United Nations) Water and Sanitation in Low Income Communities; three World Bank funded Projects focusing on rural water supply and sanitation. The third project is known by its Indonesian acronym PAMSIMAS. Water and Sanitation Program of the World Bank-East Asia Program

Ibu JMP Kabupaten Kecamatan MDG PAMSIMAS

Pak Pokja AMPL SANIMAS

SUSENAS STBM TSSM WASPOLA

WHO WSLIC

WSP-EAP

Note: Exchange rates applied throughout this document varied slightly between IDR 9,000 = USD 1 and IRD 9,235 = USD 1 (this historical over the last 12 month period).

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1.
1.1

ASSESSMENT GOALS AND PERSPECTIVE
Objectives and Tasks of the Market Assessment

1. The objective of this market assessment as described in the Terms of Reference (Annex 4) is to support IFC in a market assessment leading to 1) a go/no go assessment of whether an IFC intervention could significantly scale up the commercial finance market in the sanitation sector and 2) if “go,” the design of a program to promote private sector delivery of sanitation products and services to Base of the Pyramid (BOP) consumers in Indonesia with a focus on the development of appropriate financial instruments. 2. A go/no go decision is clearly IFC’s perogative, and detailed program design is likely to follow this initial assessment, which suggests some program elements. 3. The main tasks outlined for the assignment are 1) a literature review, 2) a market assessment identifying and characterizing supply chain segments, identifying potential financial players, defining the actual and potential market size, exploring barriers and opportunities created by the enabling environment, and identifying any remaining gaps in the market (such as a certification system), 3) early-stage design of potential financial instruments, and 4) recommendations for next steps. 4. The Literature Review is included in Annex 5 of this report. The remainder of this report covers tasks 2—4, although with some change of emphasis. The supply chain for sanitation is neither lengthy, nor complicated, nor fraught with barriers difficult to overcome, and until the end of the chain, offers few new opportunities that could benefit from IFC interventions. The supply chain is thus addressed in a somewhat superficial fashion, with focus on the end of the chain: the “business aggregator” or actual supplier of latrines. 5. In the wake of a project that has generated substantial demand, the assessment focuses on rural areas of East Java.

1.2

A Market Transformation Perspective

6. This assessment looks at the market for sanitation in East Java (and Indonesia) from the perspective of market transformation—that is, what is necessary to develop a sustainable, healthy private sector market for sanitation. 7. Market transformation incorporates elements of the current “markets for the poor” approach (M4P) outlined in recent literature on the subject (DFID and SDC 2009). There is a substantial history of market transformation literature (cited in Birner and Martinot 2002) and application of the approach through Global Environment Facility efficient-product projects (mostly in lighting) and recent IFC experience and review with safe water projects, notably in Kenya (IFC 2009). See the Literature Review in Annex 5 for further information on these documents. 8. The main features of the M4P approach and market transformation applicable to sanitation in Indonesia are outlined below. that are

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Figure 1.1: Main Features of the M4P and Market Transformation Supply Side Tools Applicable to Sanitation in Indonesia M4P • Focus on market systems • Priority on developing capacity in market system rather than delivering benefits • Plan for sustainability at entry rather than exit • Organizations play facilitating role Market Transformation Supply Side Tools 1. Foster new distribution mechanisms 2. Provide incentives for producers/suppliers 3. Foster voluntary agreements by private sector 4. Technical Assistance/Transfer of know-how 5. Facilitate development of standards and regulatory mechanisms

Source: Adapted from DFID and SDC 2009 and Brirner and Martinot 2002.

9. As discussed in following sections, the demand side of the sanitation market in Indonesia is being promoted by the government as well as by supporting and funding organizations such as the World Bank, the Water and Sanitation Program (WSP), AusAID, UNICEF, the Asian Development Bank, and other major development partners. Most of the current focus has been in rural areas, where the lack of sanitation remains lowest (and a majority of the population lives) but there are also efforts to develop peri-urban and urban demand, notably by the government’s SANIMAS program and a small innovative pilot by Mercy Corps. The focus of this assessment is therefore on supply side transformation. 10. All of the M4P and market transformation tools listed above guide the analysis and recommendations of this assessment.

2.
2.1

BASIC SANITATION IN INDONESIA
Access to Basic Sanitation in Indonesia

11. There are several estimates of sanitation coverage (or access to basic sanitation) in Indonesia. Until recently, they varied widely due to unclear definitions of “improved sanitation”. All estimates are based on national censuses and socioeconomic surveys (SUSENAS), which periodically survey a representative sample of Indonesians, typically about 200,000 persons. 12. In the past, national data were adjusted by the United Nations World Health Organization (WHO) and UNICEF, in line with UN population growth estimates to arrive at a Joint Monitoring Program (JMP) estimate of sanitation coverage. Quite recently, however, the national estimates of sanitation coverage have adopted UN definitions and are more in line with previous JMP estimates. 13. According to the latest JMP estimates, 48% of Indonesia’s population in 2006 lacked access to an improved sanitation facility—that is, some 109 million persons, or about 27 million households (at four persons per household, the figure usually used in Indonesian statistics). Table 1 below presents this estimate. This is close to a government of Indonesia estimate based on a 2009 Susenas.

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Table 2.1: UN Sanitation Coverage Estimates for Indonesia 1990-2006 (2009 Government of Indonesia Estimate) and UN Population Projections for 2015 Population (thousands) Population lacking access to improved sanitation facility Urban 27% 31% 33% 30% n.a. Rural Tot 58% 61% 63% 66% n.a. 49% 48% 48% 9,309 -104,370 231,386* 251,567 49% 24%** -n.a. 18,274 -n.a. 27,464 28,344* 15,094 Number of households lacking access to an improved sanitation facility (thousands) Urban 3,775 6,969 Rural 18,404 18,723 Tot 22,399 25,403

Urban 1990 2000 2006 2009 2015 55,922 89,919 112, 837 -147,197

Rural 126,925 122,774 116,027

Tot 182,847 211,693 228,864

n.a. not applicable-- = not estimated * author’s estimate based on straight-line growth between UN population estimates ** MDG Goal Note: The figures for urban and rural households lacking access to improved sanitation does not add precisely to the total Source: JMP 2009. These estimates are based on adjusted data from national census and nationally representative household sample surveys. The 2009 access percentages is an unpublished estimate by the national planning agency, Bappenas, based on a 2009 SUSENAS.

14. Indonesia’s Millennium Development Goal (MDG) target is to for 76% of the population to have access to an improved sanitation facility. Prior to recent revision of national definitions of coverage, there was some controversy over whether this figure has actually been met. Annex 2 gives the definition of the Millennium Development Goal for sanitation and explains the controversy, which centered on different definitions of “improved sanitation.” 15. Even if the MDG for sanitation has already been met, some 24% of the estimated 2015 population—around 60 million persons or about 15 million households—still would lack access to sanitation. The actual number of households nationwide without sanitation is probably somewhere between 15 and 27 million. It could be up to 28 million based on the most recent government (Bappenas) estimates applied to a current population estimate. 16. It may be possible to be more accurate on a provincial and local level based on (provincial) standard of living surveys and the latest reporting by district (kapubaten) health departments. Access to sanitation (or lack thereof) in East Java province is discussed in the section on market demand below. (The consulting team was able to gather some recent information from four of the five districts visited and from the provincial statistics bureau). 17. About half of Indonesia’s population lives in areas considered rural, although population density on Java means that rural does not often indicate remote. About two-thirds of the total population of the country lives on Java. The 2009 Government of Indonesia estimates above indicate that the need for access is far higher in rural areas, although this balance could change by 2015. The UN estimates that by that year, close to 60% of the population will live in urban areas—the majority of them probably in peri-urban areas. 18. Lack of access to sanitation (as well as lack of hygiene practices) underlies Indonesia’s under-five child mortality rate in 2004 that was some 31.8 per 1,000 live births, placing the country 110 out of 195 in UN Statistics. Diarrheal diseases are the second largest killer of children under five, are second only to neonatal causes, which include neonatal diarrheal diseases. (WHO 2006).

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19. In addition, WSP has estimated that poor sanitation and hygiene costs the Indonesian economy some IDR 56 trillion (USD 6.3 billion) per year or about 2.3 percent of GDP. These economic losses correspond to about IDR 10.7 trillion (USD 1.1 billion) in actual financial losses, principally through disease episodes and the cost of safe water for households. (WSP 2008 p.5).

2.2

Current Approaches to Sanitation

20. In 2008, Indonesia’s Ministry of Health adopted a Community-based Total Sanitation (CBTS) Strategy that is based on community-led total sanitation (CLTS) methodology. It is frequently referred to by its Indonesian language acronym Sanitasi Total Berbasis Masyarakat (STBM). The CLTS methodology, uses a “triggering” technique to motivate entire communities to cease open defecation and to become “open defecation free” (ODF). The strategy emphasizes a non-subsidy approach to latrine construction. 21. A number of projects, programs, and institutions have been important to furthering this approach.1 Indonesia has an effective national-level inter-ministerial working group for water supply and sanitation known as the Pokja AMPL, chaired by the national planning agency (Bappenas). The working group has been supported in part by two WASPOLA projects funded by AusAID and executed by the Government of Indonesia and the East Asia Pacific Regional office of the Water and Sanitation Program of the World Bank (WSP-EAP). The Pokja AMPL has been instrumental in spreading the CLTS methodology and in establishing district-level working groups in water supply and sanitation. Other projects include PAMSIMAS, which was launched in 2008 (succeeding two World Bank-financed WSLIC projects), and SANIMAS, a program for urban sanitation. UNICEF has a rural water supply and sanitation project in some 30 districts. The WSP-EAP Total Sanitation and Sanitation Marketing (TSSM) project in East Java is discussed in the following section. 22. There has been ample policy and capacity-building support nationally for CLTS, which both changes behavior in communities and creates demand for infrastructure in the form of latrines. A key focus of current efforts is to engage district government in these processes. 23. It is important to recognize that decentralization in Indonesia, begun in 2001, has resulted in the devolution of political, fiscal, and service delivery to district level. With the exception of Jakarta, all districts now directly elect a representative assembly and a district head, the bupati. In general, funding for district operations flows directly from the central government, but is allocated by the district assemblies. Districts are responsible for service delivery, including health services (subject, of course, to national regulations and guidelines). 24. Supply of latrines has significantly lagged behind the demand creation. Programs have, to date, relied mostly on community or household initiatives and training, which appears to have yielded small-scale results rather than the scaled-up efforts necessary if Indonesia’s economy is to benefit from improved health and if the country is to reach the Millennium Development Goals (MDGs).

2.3

The Total Sanitation and Sanitation Marketing (TSSM) Project

25. The TSSM Project in Indonesia is a four-year collaboration between the Government of Indonesia, the Bill and Melinda Gates Foundation, and WSP-EAP.2 It focuses on East

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See Mukherjee and Shatifan 2008 for a reasonably comprehensive account of the introduction of CLTS in Indonesia. 2 TSSM is also operating in Tanzania and the States of Himachal Pradesh and Madhya Pradesh, India. The total project funding is about USD 15.1 million, with about USD 5.1 million allocated to Indonesia.

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Java, which has a population of about 37 million people and is home to about 17% of Indonesia’s poor according to the East Java Statistics Office. Based on SUSENAS 2007 data, 51% of households in East Java are reliant upon unimproved latrines. 26. The project aims to support the first two (of four) “total sanitation” behaviors in the national CBTM strategy: 1. All households have access to and use improved sanitation facilities for human excreta disposal, and 2. All households habitually wash their hands with soap after defecation, after cleaning up infant feces, and before eating, feeding, and handling food. TSSM has worked to “generate an enabling environment for demand and supply to grow freely and sustain each other.” (WSP 2009 p. 4). TSSM will finish in November 2010, but a proposal has been made for TSSM II that will continue to concentrate on East Java as well as other provinces. 27. The project invited district governments, which had to be ready with resources, and interested communities to participate in CLTS triggering. Some was done by TSSMcontracted facilitators, who also provided training to local facilitators. The project also supported the governments with sanitation marketing materials (which they could purchase) as well as training in order to strengthen the supply chain for latrines. 28. As of December 2009, the program had reached over 2,300 communities and helped motivate government activities in over 2,600 additional communities, leveraging over USD 650,000 in support from local governments. 29. The project is applying commercial marketing and communications techniques to increase demand. It sponsored research and focus groups regarding what messages are most effective in reaching potential consumers. Contrary to many communications strategies in sanitation, the TSSM research confirmed that consumers are not motivated by health concerns as much as by status and convenience. Status includes having a latrine for visitors (including children’s friends), and convenience includes avoiding going to the river or outside at night (where scary animals or peeping toms might appear). People contacted by this sanitation market study also cited wanting to provide convenience for aging parents as a strong motivation. These messages were incorporated into marketing materials. 30. TSSM has also sought to improve latrine supply by training over 1,533 masons and also seeking to promote a “social franchising” model where community members could go to one person who would have a business as a “one stop shop” for a latrine, coordinating masons, supplies, and construction. This supplier was identified as the sanitarian. A sanitarian is a government health worker attached to a sub-district health post or central office, who is responsible for promoting a variety of healthy behaviors as well as using a latrine and washing hands. (Not all sub-districts have sanitarians, however; in many cases their role is assumed by midwives or other health officials). It appears that few masons have taken up the challenge of marketing themselves as a “one stop shop,” and are either contracted directly by households to build latrines or by sanitarians promoting their small business. 31. Seeking to train sanitarians to market latrines was logical—they are indispensible in triggering communities and encouraging and monitoring hygiene behavior. For a variety of reasons discussed in following sections, the “social franchising” or “sanitarian as entrepreneur” model is unlikely to be able to respond to demand as quickly or at the scale required. A new mechanism must be found to respond to substantial existing and potential demand.

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2.4

Technologies and Consumer Preferences

32. The most simple pit latrine in Indonesia costs some IDR 15,000 or about USD 1.50, with a concrete platform resting on wooden supports over an unlined pit, a cement bowl, and some PVC pipe. There is however a strong consumer preference for more expensive pour-flush waterseal latrines, a structure with a ceramic bowl leading via PVC pipe to one or several unlined, partlined or fully lined pits. It is possible to build unlined tanks in conditions with appropriate soil and population density. However, there seems to be a strong preference for fully lined (concrete) pits, which are in fact tanks-- the technology on which this study focuses. Even with concrete tanks, the simplest system can be built with the ceramic bowl resting on a structure built with bamboo or other wood as a support, but the strong preference for simple structures is for a concrete support for the bowl. A simple one-tank system is pictured below, along with the “premium” three tank system with an over flow tank that soaks away liquids (usually urine). Indonesia has health standards regarding placement of unlined portions of latrines, which must be 5 m from a well or water source. The assessment team notes, however, that the latrine tank designs appear not to have an easily removable lid for slugged removal and the team did not view one tank or pit that had a visible lid. Most tanks were covered with earth, or marked only with a ventilation pipe. When queried about a lid, one mason stated that when the time came, they would simply punch a hole in the concrete. A design method for ease of sludge removal would be useful. 33. Fiberglass molded and plastic models of latrine tanks and septic tanks exist, but these are said to be prohibitively expensive and perhaps not as durable as concrete tanks. 34. The consumer prices for latrine models vary from around IDR 180,000 (USD 19) for a simple, unlined one-pit system to IDR 900,000 (USD 97) for a two or three-tank system. The average household income is IDR 14,667,700 per year (SUSENAS, 2007), therefore the cost of these latrines represents 1% to 6% of the annual salary or 15% to 74% of the monthly salary. Rural households, and particularly BOP consumers, earn the lower end of this range, making the investment in a latrine a significant portion of their household income. The most active “one stop shop” entrepreneurs that the assessment team met reported that 80% of their sales came from premium latrines costing IDR 800,000 (USD 86) to IDR 900,000 (USD 97). Consumers appear to want to invest in the best technology they can afford rather than building a simple system and improving it later.

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Table 2.2: Pour-Flush Pit Latrine Models and Costs in East Java Type Unlined shallow pit Partially or fully lined deep pit Lined two-pit (one soak away) Lined three-pit one soak away Source: WSP, Authors Consumer Price (IDR) 180,000–200,000 250,000–275,000 450,000–625,000 850,000–900,000 Consumer Price (USD) 19-22 27–30 49–67 92–97

35. The pour-flush system to a lined concrete tank may not be suitable for all locations in Indonesia, and other types of latrines do exist, from simple pit-dug to western-style tankflush. Moreover, there are a number of alternative technologies that are arguably more beneficial (they recycle human waste directly), notably compost latrines, aerobic latrines and those that produce biogas. However, introducing alternative technology on any scale would take a large and sustained commitment by government, development partners, and the private sector to overcome existing consumer preferences. This would be a worthwhile project in some areas, particularly because some technologies would eliminate the need for sludge removal and disposal. 36. Sludge removal and disposal of waste from latrines are separate issues and are two of the most difficult to tackle. The simple latrine pictured above will require pumping out every 3-5 years. Other models are likely to need pump out in 6-8 years. All sludge removal efforts will need safe disposal to ensure sludge removal operators do not dispose of waste into waterways. It appears that, with some exceptions, efforts by government and development partners have focused on a disaggregated model--changing household behavior to use latrines or developing local disposal sites rather than taking, for example, a geographically concentrated “chain” approach from changing behavior → supply of latrines →sludge removal → disposal. 37. Sludge removal is a directly related business line to latrine construction and several entrepreneurs contacted by the market study team were considering it. The business requires significant capital investment (for trucks) but that investment may be possible with

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secured lending. There may be some demand now but significant demand would lag any scale building of latrines by 3-5 years. 38. Similarly, waste disposal can be considered a complimentary business. A simple survey of those kecamaten (sub-districts) with waste disposal sites—public or private or privately-managed--would be useful research.

39.

It may be, that if latrine construction can go to scale, significant public demand will be generated for sludge removal and safe disposal of waste. Despite the essential nature of these services in the medium-term, the market assessment team does not view lack of the services as a significant impediment to transforming the market for sanitation via latrine construction.

3.
3.1

DEMAND POTENTIAL
Indonesia

40. The potential demand for latrines in Indonesia is enormous: some 27 million households (or perhaps more) currently lack access to sanitation. Annex 1 provides further details on the potential demand for sanitation by providing data by province. However the estimate presented below assumes a more conservative estimate of 21 million households, to discount for any statistical errors (many Indonesian families have more than the four persons normally used to calculate household size in official statistics), those who may not be able to use conventional pour-flush cement-lined pit latrines, and those who would not buy a latrine under any circumstances. Around two-thirds of the households in the potential market are in rural areas, and the remainder are in urban areas, although the distinction may be blurred, especially regarding peri-urban settlements. 41. The following assessment of demand potential takes into account three scenarios for price and quality of products:
Figure 3.1: Potential Demand for Latrines in Indonesia (21 Million households)

Source: Author’s estimates.

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42. A high scenario, where it is assumed that 80% of latrines command the premium price of IDR 900,000 (USD 92), 10% command a price of IDR 400,000 (USD 43) and 10% are simple models priced at IDR 200,000 (USD 22). 43. A medium scenario, where 60% of latrines have the premium price, 20% have a middle price, and 20% have the lowest price. 44. A low scenario, where 40% of the latrines have the premium price, and each of the two lower prices have 30% of the market 45. The high scenario produces a potential market size of about USD 1.8 billion, the medium scenario about USD 1.5 billion, and the low price scenario USD 1.3 billion.

3.2

East Java

46. For East Java, with total population of about 35 million persons (5.2 million households lacking access to improved sanitation) the potential market was discounted to 4 million households for the same reasons mentioned above. The same set of scenarios suggests a total market of USD 381 million under a high scenario, USD 323 million under a medium scenario, and USD 264 million using a low scenario. 47. Strong demand is currently being generated in the wake of triggering communities using the CLTS approach. All of the sanitarian entrepreneurs that the assessment team met in East Java (four persons) had backlogs of orders, the highest being about 150 latrines; one had stopped taking orders because of lack of confidence that he could fulfill them in a timely manner. There is some concern that demand will erode if the supply lag does not improve.
Figure 3.2: Potential Demand for Latrines in East Java (4.2 million Households)

Source: Authors estimates.

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3.3

Rural, Urban, and Peri-urban Demand

48. About half of Indonesia’s current population lives in areas classified as rural. With a population density of some 940 persons/km2, Java island would be 12th in the world in terms of population density if it were a country3, and rural communities are not far from each other. This study focuses on rural areas, although many of the observations would apply to periurban areas. Many rural communities have densely packed, small dwellings; latrine tanks measure only about a meter (39 inches) in diameter, and can be installed quite far from the dwelling or ceramic bowl. 49. Obviously it is necessary to have some piece of land or access to a passageway sufficiently wide to install a latrine pit or tank. Most people in rural communities meet this criteria, and some in peri-urban and urban areas also meet it. For those who do have sufficient space in peri-urban and urban areas, latrine designs can be adapted to fit the space. For example, Mercy Corps is piloting an urban sanitation project for 200 households in Jakarta that is using a local cooperative for consumer financing, and is introducing technology adapted from Aceh for frew or blackwater systems. The latrines can feature square tanks. A major problem, however, is that many people in urban and peri-urban areas are renters, and landlords can be unwilling to make capital improvements unless required to do so.

3

http://wikitravel.org/en/Java and http://en.wikipedia.org/wiki/List_of_countries_and_dependencies_by_population_density citing UN statistics. Viewed 12 June 2010.

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4.

SUPPLY CHAIN

50. Although the terms of reference for the study specify a focus on the supply chain in East Java, initial meetings with IFC and WSP in Jakarta as well as an inception field trip and subsequent field study, confirmed that are were few, if any, issues in the supply chain other than how to improve the role of “one stop shop” where consumers could contract for latrine installation rather than purchasing inputs and serving as general contractors, or other than relying on the sanitarian as entrepreneur. The assessment team, in consultation with the client, decided to focus on the major impediment to transforming the market to operate at scale: the business model, or how to encourage a large-scale “one stop shop” or “business aggregator” market to fill consumer demand. 51. Subsequent field investigation did reveal one key shortage: metal molds for casting concrete on site. An alternative is to use two or three pre-cast rings for lined pits. These are readily available from many construction supply retail shops, but are very awkward to deliver to small sites and to properly seal. Molds have been and are distributed to communities pledging to become ODF, but there are not enough of them for sanitarians to operate at scale. The molds are not prohibitively expensive (about IDR 1,750, 000, or USD 189), and there is a thriving small metals industry in Surabaya, the capital of East Java.4 However, the capital to purchase many molds is an issue for single sanitarian/entrepreneurs. Unlike motorcycles, molds do not qualify as collateral for secured lending. 52. There are also localized (sub-district-level) shortages of trained masons and a shortage of sand on Madura Island in East Java, which includes four districts. 53. There appear to be, however, few, if any, problems with other basic inputs to latrine parts, whether materials or power for manufacture of parts or with transport. All major inputs are manufactured in Indonesia with few, if any, wholly imported inputs. Any major threats to input supply would probably be systemic, for example, a sharp rise in electricity or materials transport costs due to international coal or gasoline price increases. 54. Table 3 below presents the major latrine parts, manufacturers, and distribution route, in approximate order of cost.

4

The assessment team met the Chairman and two memebers of the association of metal manufacturers LPB Mitra Bersama, which is sponsored by ASTRA International, BCA Bank, and Pertamina.

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Table 4.1: Major Latrine Installation Inputs. Major Producers, Distribution Routes and Penultimate customers in Indonesia Input Producer\ Location Distribution Route Ultimate Customer (aside from household) Comments

Metal Molds

Var. (Surabaya has small industry)

Manufacturer directly to customer (district, entrepreneur)

Many distributed directly to communities for self-construction of latrines

Pumps Duty Via authorized distributor Small retailers (some bulk supply to contractors) Ina Toto Found mostly in rural areas of East Java. Wholesale price IDR 60,000 (USD 6.50) retails IDR 63,000 (USD 6.80 in Jombang) Found mostly in urban areas of East Java Only encountered in one retail shop in Pamekasan district; retailed IDR 170,000 (USD 18.40) Locally available Contractors, households, entrepreneurs Over 2,000 trained in latrine construction in East Java by TSSM Program but some localized shortages of trained masons

Ceramic Bowls

Individuals (masons)

Labor

Gresik (state-owned) East Java Indo Cement (private)

Via authorized distributor Via authorized distributor Via independent distributors to small retailers

Small retailers

Small retailers

Cement

Holcim (private) var. including East Java

Small retailer sales to contractors, households, entrepreneurs (volume sales direct from distributor) Contractors, retailers, individuals Abundant in Lumajang, shipped throughout East Java; severe shortage on Madura Island

Various Sand cement mixing) (for

Formal or informal trucking

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Input

Producer\ Location

Distribution Route

Ultimate Customer (aside from household) Contractors, retailers

Comments

PVC pipe

PT Chiwa Indonesia (West Java) PT Multi Anugerah Lestari Texindo (Surabaya) KHI Pipe Industries (Jakarta)

Distributor network.

All private firms

Small Tools Source: Authors.

Various

Distributor network.

Retailers

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5.
5.1

SUPPORTING SCALE

MARKET

TRANSFORMATION

AT

Overview of Market Actors

55. The roles of major market actors including IFC, should it chose to support market transformation are represented in the figure below.
Figure 5.1: Roles of Major Market Actors in Sanitation in Indonesia

Source: Authors.

56. In the short and medium-term, demand generation is being undertaken by government with the support of development partners such as IFC. Ideally, however, the private sector itself will contribute to demand generation in order to build business.

5.2

Business Models

57. There are basically four business models that the private sector is using or might use to meet growing actual demand (and enormous potential demand). These are: 1. The sanitarian as entrepreneur, 2. A small business model, for example retailers serving as sanitation entrepreneurs or “business aggregators”, 3. A district-level small and medium enterprise model, and 4. A large business “agents of scale” model that includes concepts such as micro- or medium- franchising, direct sales, and working through wholesale or distributor networks. Each business model is described in more detail below.

5.2.1 Sanitarian as Entrepreneur
58. A sanitarian is an employee of the district health service, whose basic job is to promote health in a variety of contexts, including environmental sanitation, basic hygiene,

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disease prevention, and maternal and child healthcare. The sanitarian is usually attached to a sub-district health center and may work with midwives, doctors, or other professionals at the center. There is also a close relationship between sanitarians and volunteer health “cadres”. Cadres are typically women who are trained in good health practices and seek to promote these in their communities. Not every health center has a sanitarian; this depends a great deal on the district health budget and on civil service ceilings imposed by the national government (which seeks to set limits on fiscal transfers to districts). Where there is no sanitarian, the responsibilities may be filled by a midwife, nurse, or other health worker. 59. A sanitarian typically has a two-year vocational degree beyond high school. The starting salary in the job was said to be around IDR 2 million (USD 200) per month. There is a perpetual problem encountered in every district visited with the operating budget for sanitarians to fulfill all their responsibilities. Unlike other categories of government employees, sanitarians are not barred from having small businesses in addition to their government jobs. 60. Sanitarians, or their substitutes, are key to triggering demand for latrines in communities although this may be done by other trained facilitators and, importantly, to tracking access to sanitation on a house-by house basis. In some districts in East Java, increasing access to improved sanitation is a performance indicator for sanitarians. No market system can function successfully without a strong role for sanitarians, whether as business partners or marketing agents. 61. The TSSM project piloted a “social franchising” model that sought to turn sanitarians and masons into entrepreneurs. A total of 14 persons were trained in entrepreneurship, including technical requirements, business operations, sales and marketing, and communications. Five sanitarians who were trained, are currently in business in districts in East Java and are actively promoting their latrine construction businesses. The assessment team met five sanitarians: Pak Sumadi, (Nganjuk) Pak Hariyanto and Ibu Endang (Lumajang), Pak Yono (Jember), and Pak Subianadi (Jombang). 62. Pak Sumadi in Nganjuk district, has been recognized nationally for his efforts. Pak Sumadi has developed his own marketing models and packages, has taken a businessman as a partner, and has prospects of forming a partnership with a larger enterprise in the district. He has helped to train other sanitarians, and has enlisted five sanitarians who are actively marketing latrines that his business will construct. He would eventually like to expand beyond Nganjuk district, and has visions of forming a national association. However, without a larger capital base, or adequate financing, he may not be able to expand. He stated that there are about 13,000 households needing improved sanitation in the district, and he and his associates have built around 2,700 already. Moreover, he is thinking of the medium-term sludge removal business with the purchase of a truck to deliver materials on which he can also mount a sludge tank. 63. Based on information supplied by sanitarians, the market assessment team constructed simple business cash flows. There is little doubt that each has a positive gross margin from the business. After paying sales commissions (typically IDR 25,000 or about USD 2.70 per latrine), the business remains profitable, with a typical gross margin of over 30%. However, none of the sanitarians reported overhead expenses or profit withdrawals from the business. Even after allowing for these, the business could remain profitable. Annex 3 has model cash flows for different product mixes. 64. A major problem, however, is access to credit. The majority of consumers demand credit terms ranging from 3 to 8 months, enough to cover one harvest period. This appears to be despite the fact that consumers appear to pay for latrine superstructures—the water tank, cabin, and fittings above ground. This was reported in one case to be about IDR 1 million or USD 92, just over the cost of a complete latrine substructure). Suppliers, typically

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small retail shops, will give credit for up to several weeks for inputs such as ceramic bowls and cement. The mismatch between credit terms from suppliers and offered to customers creates a cash-flow deficit that is difficult to overcome on an ongoing basis, and without adequate working capital financing, threatens the business model. 65. The cash flow analysis and interviews with sanitarian entrepreneurs revealed the following: • • • • None of the sanitarian entrepreneurs are analyzing margins and sales mix between different models of latrines; None are analyzing overhead expenses, withdrawals of profit, or overall need for credit; All have poor record keeping; Three of the four businesses have a credit term mismatch that threatens the business.

66. To be successful, this model would require considerable ongoing training, mentoring, and support for sanitarian entrepreneurs. This would basically involve further training in business analysis, support for preparation of a business plan, and mentoring in business development. All of this is apart from financial issues discussed in section 67. A strengths, weaknesses, threats and opportunities (SWOT) analysis for the sanitarian as entrepreneur model is presented below.

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Table 5.1: SWOT Analysis of Sanitarian as Entrepreneur Business Model

Strengths 1. Experience and high expertise in promotion of health land sanitation particularly technical aspects 2. Strong network with communities, government and private sector in sub district level 3. Trust from communities 4. Possess updated market potential data 5. Open to developing or adapting new technology

Weaknesses 1. Experience as entrepreneur 2. Education background not in business skills 3. Lack of managerial skill 4. Business instincts questionable 5. Major portion of number of sanitarian willing to be ‘salesman/saleswoman’ 6. Original job (as sanitarian) which has social motive sometimes contradicting with business purpose. The government position targets awareness creation

Threats Opportunities 1. Once the business of sanitation 1. Customers may prefer to support sanitarians based on familiarity grows, could be competitors from 2. Few existing competitors private sector 2. Lack of government funding for operational costs limits mobility 3. Demand creation could be threatened by lack of immediate supply
Source: Authors

68. The motivation of sanitarians is a major question. Most stated at some point that their reason for becoming an entrepreneur was to fulfill a social need. The model of supporting sanitarian as an entrepreneur assumes that there will an adequate number of sanitarians with a strong willingness to operate a business. From a market transformation point of view, however, it will take a longer time and considerable resources to continue to train and mentor sanitarians for an adequate supply. The level of effort for this model will be high with unknown results.

5.2.2 Local Small Business: Stores)

Construction Materials Retailers (Hardware

69. There are few, if any, local small businesses currently engaging in latrine construction as a “one stop shop” but this model was examined since there are small businesses in almost every community. The logical choice would be construction material retailers (hardware stores). 70. The assessment team visited four retailers in Nganjuk, Jombang, Lumajang, and Pamekasan districts. These small businesses sell a wide variety of construction materials, including paint and painting supplies, cement, precast concrete rings, electrical equipment, ceramic bowls, and PVC pipe. These are typically family businesses, with women very involved. While some information was freely shared, such as prices and margins for latrine inputs, bank use, and sources of credit, retailers were reluctant to share information such as overall sales volume. Record keeping was generally informal. 71. There seemed to be a general lack of motivation or willingness to consider new enterprise. The retailers contacted seemed content with a passive sales role. This general

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comment may apply across SME development in Indonesia, especially among small, family run enterprises in an established sector such as building materials. 72. For this model to be successful, there would have to be a large amount of technical assistance, including training in technical aspects of latrine construction—but the highest level would probably be in skills such as management, marketing and sales, and business plan formulation.
Table 5.2: SWOT Analysis of Small Business (Retailer) as Sanitation Entrepreneur Business Model

Strengths 1. Strong network within communities, government and private sector in sub-district level 2. Know-how with material as well as latrine input sources (closet, cement, pipes and mason) 3. Ability to provide credit supplier (average 1 month term)

Weaknesses 1. Lack of know-how with aggregating resources: masons, material and other services (e.g finance access) 2. Lack of managerial skill 3. No demand potential data 4. Low willingness 5. Passive marketing style 6. Unlikely to develop or adapt new technology

Threats Opportunities 1. Once the business of sanitation 1. Network of material sources grows there could be many 2. Few sanitarians willing to be entrepreneur. competitors from private sector 2. Large manufacturer (for example Holcim “Solusi Rumah” program) gives preferences to own retailers under Holcim franchise scheme
Source: Authors.

5.2.3 District-Level Small or Medium Enterprise
73. Another possible model is to engage a small or, more likely, medium enterprise or businessperson already operating at a larger level, for example a construction company. This model would operate best with a “preferred provider” (one or several) that could be provided with the incentives of a) exclusivity in working with the network of sanitarians, district government, and any project or program for a limited period of time (perhaps up to two years) and b) access to transfer of know-how in the form of technical assistance. 74. Medium enterprises have the advantage of existing business acumen as well as perhaps some access to financing—which in any case is likely to need enhancement. “Preferred providers” that meet set criteria and would agree to performance standards could be solicited by a roadshow to business associations that would present the opportunity. Such associations—district chambers of commerce or construction associations—are said to exist in most districts. Interested firms could submit proposals, be chosen by a committee and be granted incentives without the need for formal procurement by district government or IFC. A selection committee would most likely include representatives of the district health department, sanitarians, and any program or project seeking to support market transformation. A “preferred provider” model would not prohibit any other firms from entering the market—but other firms would not enjoy program or project incentives. 75. Selection criteria might include experience in construction, ability to mobilize and work anywhere within a district (or several districts), a good track record or reputation, some access to finance (or ability to make necessary capital investments for equipment), ability to

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develop and present a business plan, experience with or willingness to develop consumer marketing and sales techniques, and adequate business systems and record-keeping. They may seek to form partnerships with existing sanitarian entrepreneurs, or to pay sales commissions to sanitarians or other marketing agents (for example health cadres). They may seek voluntary alliances with other businesses. A key criteria would be the ability to fulfill demand within a set period—to operate at scale in communities. 76. To be successful, this model will require setting and communicating clearly the “rules of the game.” It would require the consent of district health departments and buy-in from sanitarians. Business profit incentives should inspire a high degree of creativity and the possibility of manipulating any rules will always exist. Furthermore, this model would require a program of training and technical assistance, not only in latrine construction, but in any required business skills. Finally, strong monitoring and evaluation of results would be essential to analyzing results and expanding efforts to apply the model widely.
Table 5.3: SWOT Analysis of District-Level Small and Medium Enterprises as Sanitation Entrepreneurs

Strengths 1. Strong capacity in terms of skillful human resource in technical and finance fields 2. Strong network at district level 3. Better managerial and administration skill compared with sanitarians or local small businesses 4. Experience as business entity or persons 5. Strong network with large manufacturers, financial institutions, masons, etc. 6. Flexibility as long as profits continue Threats 1. If the business of sanitation grows, there could be many competitors from private sector 2. Large manufacturer (for example Holcim_”Solusi_Rumah” program) gives preferences to own retailers if they enter the market
Source: Authors.

Weaknesses 1. Lack of potential demand information 2. Little social motive 3. Potential for creatively manipulating the business situation 4. Possible inexperience with handling resources especially consumer credit for mid- to low-end rural market 5. Lack of updated management technology 6. Lack of suitable consumer marketing and promotion

Opportunities 1. Network of sources e.g material; possibility to obtain discounts for inputs or lower consumer prices 2. Business expansion into sanitation sector will be a new business sector for district businessmen

  5.2.4 Large Business
77. This model includes several variations of working with a large, established business to ignite supply at scale: partnerships, franchises (or microfranchising), or working through existing distribution networks, whether wholly-owned or independent. The logical fit to develop this business might be a partnership between a cement manufacturer and a ceramic bowl producer, with the goal of increasing product sales by assisting in market

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transformation. Another possibility might be developing a new retailing market or one-stop shop. 78. Analyzing this possibility and facilitating partnerships or any other form of business would probably require extensive further research. Large firms are intensely competitive and would require an internal champion to realize the possibility. The market assessment team tried to meet the largest cement producer in Indonesia, the state-owned company Gresik, but was not successful. An informal exploratory meeting with Holcim cement concluded that their resources are fully occupied with implementing their business strategy; any additional resources for market or product development would have to be provided by the agency facilitating or promoting market transformation. 79. The options for entry of large businesses into the market have several advantages, but in the end are all high-concept options that would require considerable effort in packaging and marketing the opportunity.
Table 5.4: SWOT Analysis of Large Business as Sanitation Entrepreneur Business Model

Strength 1. Wide existing distribution channel 2. Adequate resources (personnel, financial, updated technology, etc) 3. Concern for quality 4. Brand Recognition/Reputation 5. Wider network: a. Trained masons (in the case of cement producers) b. Banks c. Other materials producers

Weakness 1. Decision making takes longer 2. High cost environment 3. Lack of know how and experience with developing retailers and entrepreneurs 4. 5. 6. 7. 8. Lack of front line own retail network A new way to work Lack of potential demand information Little social motive Potential for creatively manipulating business situation 9. Inexperience in rural consumer market 10. Need for internal champion

the

6. Little technical assistance or transfer of know-how required Threats Opportunities 1. If the sanitation business grows, 1. Promotion by project there could be many competitors 2. Broaden stakeholder base Source: Authors

5.3

Facilitating Development Mechanisms

of

Standards

and

Regulatory

80. There are a variety of emerging standards in latrine construction, depending on consumer preferences and income levels as well as environmental conditions. Under the TSSM project, WSP together with the Institute of Technology in Surabaya has developed and disseminated standard technical designs, trained sanitarians and masons, and suggested marketing and presentation techniques. This work could be adapted in any project to foster some level of standardization. 81. A more difficult issue is facilitating regulatory mechanisms. Normally, regulation, inspection, and monitoring would be the role of government. However, with sanitarians or their counterparts (including community health workers) involved closely in marketing latrine construction (they are likely to serve as sales agents and receive commissions), inspection and monitoring would be open to conflict of interest.

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82. Certification of those trained in standards is probably the best ex-ante insurance against faulty products. Educating consumers is a second bulwark. Independent inspection and monitoring could be a role for local higher-education institutions such as technical universities or construction associations; however, to be sustainable this mechanism would need financial support. A tax or fee from business providers to support this service (which is ultimately in their interest) is one possibility, but this mechanism seems difficult to implement and could possibly impede the market. Some mechanism for consumer complaint or arbitration may be a solution. This difficult issue deserves further consideration during any project development.

6.
6.1

FINANCING
Demand for Financing

83. There is no doubt that consumers demand financing terms for latrines in rural East Java, despite what appears to be a willingness to pay an equivalent amount or more in cash for latrine superstructures. Currently, financing comes mainly from terms offered by suppliers, ranging from three to eight months. Essentially, consumer credit must currently be financed from supplier working capital. 84. A very rough estimate of the total amount of financing required for 21 million households throughout Indonesia (based on high-point working capital cash flow analysis of an sanitarian entrepreneur) is IDR 2.3 trillion (USD 250 million) for Indonesia as a whole and IDR 480 million (USD 52 million) for East Java Province.

6.2

Sources of Credit for Existing Entrepreneurs

85. Supplying credit can be a substantial business advantage, adding value to the product or service rendered, although collecting payments no doubt complicates the business. If, however, business people have capital or lending facilities and can charge consumers a commercial (or greater) rate of return, the credit operation in itself could be profitable. 86. The main source of credit for sanitarian entrepreneurs is district health department employee koperasi (cooperative) or a private versions of the same, for example the private Koperasi Wilayah headquartered in Nganjuk which has 53 branches in Java, operates in 22 of the 29 districts in East Java and has over 200,000 customers (it was not clear whether this was members or loans) with total assets of IDR 500 billion (USD 54 million).5 87. The study team met management of health department cooperatives in Jombang, Lumajang, Jember, Nganjuk, and Pamekasan. They varied widely in membership, contributions, and assets, but all had restrictions on loans to members only; the typical lending ceiling approximately IDR 25 million (USD 27), which could be adequate to finance small-scale working capital but not a large-scale operation.

5

Kooperasi Management stated that they might be able to administer a guarantee fund for SMEs and were interested in exploring the possibility.

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Box 6.1: Credit Solutions by a Sanitation Entrepreneur in Sidoarjo District, East Java

At least one entrepreneur in East Java who is not a sanitarian has entered the market. Pak Irianto became familiar with the product and market by providing training in sales and marketing to sanitarians and masons under contract to the TSSM product. In this year he has constructed over 650 latrines in the district of Sidoarjo, and intends to build the business (he has even re-designed the concrete molds and is having some custom-fabricated). Pak Irianto has solved his financing issue by essentially selling his consumer-credit receivables to investors within a village or community (using the financial technique of factoring). Pak Irianto will build a latrine with a price of IDR 650,000 (USD 70) but offer consumers ten payments of IDR 80,000 each, which most are happy to have. Consumers sign a contract notarized by the village head and also sign a set of notes. Pak Irianto then takes the notes to a local investor (who may be aware of the creditworthiness of the customer), and receives the price of latrines. The consumer receives substantial credit, Pak Irianto is paid immediately, and the investor makes a 25% return on investment. It is not clear whether there is sufficient local capital to use this creative financing on a large-scale basis.

6.3

Alternatives to Supplier Credit for Consumer Financing

88. There appears to be a lack of formal financial institutions in rural areas that can serve to finance sanitation improvement. Many villages have units of the Bank Rakyat Indonesia (BRI), a commercial state-owned bank, but BRI does not appear to offer products suitable for small consumer lending, essentially microfinance. No sanitarian or other supplier of latrines mentioned credit from BRI among any lending sources. 89. Microfinance institutions in Indonesia can be divided into seven categories (Ibrahim 2004 p. 4) 1. 2. 3. 4. 5. Commercial banks (such as BRI and its units and branches); Pegadaian, state-owned pawnshops; Permodalan Nasional Madani (PNM), a state-owned entity managing micro-credit and SME lending programs; Bank Perkreditan Rakyat (BPR), rural banks, some owned by provincial governments; Lembaga Dana Kredit Pedesaan (LDKP), non-bank MFIs established by provincial governments mainly in Central Java and Bali (mostly Bali), microfinance cooperatives, credit unions --“Koperasi Simpan Pinjam” (KSP) is actually a saving and loan cooperatives, and “Unit Simpan Pinjam” (USP) is a unit of saving and loan under a cooperatives; Microfinance programs; and The vast informal sector, that includes moneylenders, traders, hundreds of thousands of self-help groups, informal savings & loan groups and informal cooperatives (arisan).

6.
7.

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90. Notably, the MFI sector does not include many NGOs. Despite the wide variety of institutions and associations listed above, there is a significant lack of MFI activity for consumer finance in rural areas. This appears to be because of some combination of a lack of presence by institutions at village level, an approach to lending that focuses on collateral (whether by formal regulation or conservatism), a lack of trust in formal financial institutions on the part of the population, and simply a personal reluctance to borrow outside of existing informal institutions. 91. One of the microfinance credit schemes that may be available for latrine finance is the National Community Empowerment Program (PNPM-Mandiri), an Indonesian government program that provides investment resources to support proposals developed by communities, using a participatory planning process. A community block grant is allocated to finance two types of activity: construction of economic and social infrastructure and microcredit through community-managed revolving loan fund (RLF). Conversation with sanitarians and others indicated that it was not possible to use infrastructure funds to build latrines (except for the very poor in communities), but that revolving loan funds might be used (but there was apparently no actual instance of the use of these funds). This financial path may merit further investigation, but given the scale of potential demand and the need for rapid access to credit once a community is triggered, it may be a slower route than other means. 92. In other countries, special-purpose revolving funds for sanitation and hygiene improvement have had some success, notably Vietnam. A revolving fund administered by the powerful and pervasive women’s union resulted in a more rapid uptake of latrine construction. It requires an organization that has a deep reach into villages and communities and is willing or could be trained to manage a revolving fund.This avenue might be explored via the two major women’s Islamic organizations in Indonesia, NahdlatulUlama or Muhammadiyah. Clearly, however, not all women or communities in East Java are muslim or would belong to these organizations.

6.4

Implications for Market Transformation and Project/Program Design

93. Aside from the basic model of product delivery, access to finance is the key issue in transforming the private sector sanitation market to operate at scale. IFC’s intervention could include any combination of direct financing via partner institutions, a partial guarantee facility via commercial banks or a special purpose vehicle to cooperatives or other microfinance institutions, or developing a revolving fund that could finance consumers or supplier working capital.

7.
7.1

TOWARD PROJECT DESIGN
Go/No Go Decision: IFC Indonesia Objectives and Programs

94. Whether and how IFC will chose to support market transformation for sanitation in East Java will be the next major decision following this study. A go/no go decision will depend on the strategy and portfolio in Indonesia as well as the desire to implement umbrella programs and objectives. 95. There is substantial potential demand for a fairly standardized product (latrines), and furthermore a business model exists that, supported properly, could ignite the private sector to sustainable activities at large scale, and fairly rapidly. The district-level small and medium enterprise business model is recommended as the most feasible.

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96. A project to promote private sector involvement in sanitation would seem to fit IFC Indonesia’s stated objective of increasing rural incomes by increasing infrastructure investment, reducing the direct costs of healthcare, and raising the economic potential of the population by reducing disease. Moreover, a project would directly fit the Access to Finance Program and perhaps with some modification, the Increasing Access to Infrastructure Program as access to sanitation helps to promote access to clean water.

7.2

WSP-EAP Collaboration

97. Any program or project that is undertaken would require close collaboration with WSP-EAP and work hand-in-hand with a planned second TSSM project. The details of TSSM II are not known, but during the study, WSP stated its commitment to remaining active in East Java in a second program while also expanding to other provinces. An immediate next step would be discussion with WSP-EAP about a second TSSM project and definition of IFC and WSP roles.

7.3

Possible Project Components

98. The following table assumes that IFC will make a “go decision” to choose to develop the concepts and ideas presented in this study. The district-level small and medium enterprise business model is recommended as the most feasible method to achieve the scaled up results that are sought. To implement this preferred business model, three possible project components are suggested including potential activities and their means of implementation which could be included as elements of IFC’s program design.
Table 7.1: Possible Components of IFC Sanitation Market Transformation Project

Project Component Development of access to finance (working capital and/or consumer finance) Consultation with financial institutions Preparation of product and vehicle

Activity Options 1. Developing product with Bank Andara as “mezzanine financier” that might include direct financing (revolving fund) or a partial guarantee line. 2. Creation of a special purpose vehicle for financing/financial guarantees (possibly administered by or operating through Bank Andara).

Means of Implementation

1. Direct work and involvement by IFC staff

2. Consultancy for financial product preparation

NOTE: Access to finance and/or a financial product should apply not only to “preferred providers” but to any SME that is actively entering the sanitation market in East Java). Advisory Services

3. Creation of a revolving fund facility operating through another institution or group with wide and deep reach into rural communities.

3. Legal and technical services

1. Close consultation with 1. IFC and WSP staff and/or WSP-EAP on choice of pilot consultant involvement districts

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2. Consultation with district health offices, district sanitarian groups and other stakeholders on application of the model and mode of implementation (selection criteria, business performance requirements, and selection committee for choice of “preferred provider”)

2. IFC and WSP staff and/or consultant involvement NOTE: Selection criteria might include (a) good reputation (b) Related experience in construction (c) Liquidity or other financial criteria (d) sufficient resources especially full time human capital (e) Commitment to partnering with sanitarians and government (f) Commitment to meet certain quality standards (g) the best practical plan or proposal for next 2 years. 3. Consultancy

3.Packaging and communicating the concept: Development and presentation of opportunity information and roadshow to business associations and individual businesses 4. Assistance with selection of “preferred provider” and advice on business operations 5. Facilitating introduction and contact with financial service provider/product; applies not only to “preferred providers” but any other entrepreneurs operating in sanitation market throughout East Java 6. Facilitating development of quality assurance standards (mechanisms for inspection or consumer complaint) 1. Training and certification of preferred provider in technical standards for latrine construction and design

2. IFC and WSP staff and/or consultant involvement

3. IFC staff and/or consultant

6. IFC staff and/or consultant

1. WSP

Technical Assistance

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2. Training, certification, and, if necessary, mentoring of preferred provider in business skills: business plan development, operations, sales and marketing, other skills 3. Consumer information campaign to support quality assurance

2. Consultancy (similar to course given to sanitarians by WSP)

3. Consultancy

99. Next steps for IFC, following discussions with WSP and a go decision, if desired, will be a more detailed assessment of these project components and activities described above and a more in-depth market assessment perhaps investigating other areas of Indonesia, all leading to detailed project design.

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8.

REFERENCES

Birner and Martinot. 2002. (June) The GEF Energy Efficient Product Portfolio: Emerging Experience and Lessons. Monitoring and Evaluation Working Paper 9. Washington, D.C.: The Global Environment Facility. DFID and SDC. 2008. A Synthesis of the Making Markets Work for the Poor Approach. Available at http://www.value-chains.org/dyn/bds/docs/detail/681/6 Ibrahim, Maulana. 2004. “Policies and Regulations to Promote Sustainable Micro-Finance Institutions (MFIs) for the poor-Sharing the Experience of Indonesia.” Paper prepared for the Asia-Pacific Microcredit Summit Meeting in Dhaka, February 16-19, 2004. IFC. 2009. Safe Water for All: Harnessing the Private Sector to Reach the Underserved. Washington, D.C. JMP. 2009. “Comparing National and International Data on Drinking water and sanitation in Indonesia.” Data sheet prepared for the UNSD and ESCAP meeting, Bangkok, January 2009. Mukherjee, Nilanjana and Nina Shatifan. 2008 (October).The CLTS Story in Indonesia: Empowering communities, transforming institutions, furthering decentralization.http://www.communityledtotalsanitation.org/resource/clts-story-indonesiaempowering-communities-transforming-institutions-furthering-decentrali Viewed 6 June 2009. UNDESA, United Nations, Department of Economic and Social Affairs. 2007. World Population Prospects, The 2006 Revision. Cited at http://en.wikipedia.org/wiki/List_of_countries_by_infant_mortality_rate#cite_note-1 viewed 11 June 2010. World Health Organization (Who).2006. “Mortality Country Fact Sheet 2006”. This is based on 2006 World Health Statistics, which cite 2004 data for Indonesia. WSP. 2008. Economic Impacts of Sanitation in Indonesia. WSP-EAP Jakarta. WSP. 2009. (August).Learning at Scale. TSSM Indonesia Country Update 2009. WSP-EAP Jakarta. WSP. 2010 (a).Sanitation MDG in Indonesia: The Numbers http://www.wsp.org/index.cfm?page=page_disp&pid=20068 Viewed 29 May 2010. Game.

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9.
No 1 2 3 4 5 6 7 8 9

PERSONS MET
Name Dr. Budi Rahayu, Mph Mohammad Iksan, SKM Budiono Bambang Jatmiki Edy Basuki Susilowati Kartikosari Ari Wardani Amir Position Head of Division P2MK Head of Environmental Section Staff Staff Staff Staff Staff Staff Staff Telephone 031-8273098 081934306050 081334126110 081335117600 081333880044 08113431916 08121659383

Health Agency East Java Province

Health

Lumajang District
No 1 2 3 4 5 6 7 8 9 10 Name DR.H.Sahrazad Masdar,MA Dr.Buntaran Suprianto, Mkes Budi Purwanto, SKM Harianto Novita Dr. Tjahyo Bagus EK Endang Zainul Trisanto Halim Position Regent Head of Health Agency Head of Environmental Health Section Sanitarian Puskesmas Gucialit Sanitarian Puskesmas Pasrujember Head of Puskesmas Yosowilangun Sanitarian Puskesmas Yosowilangun Sanitarian Puskesmas kedungjajang “Karya Husada” Cooperative Health Agency Building Materials Salesman Telephone 0334-881066 08123142649 081336726270 081358566896 085236544588 085749801349

Jember District
No 1 2 3 4 5 6 7 Name Dr. Lilik Laksmiati,SP Gunawan, SKM Toni Yono Yumarlis, SH, MM Hj. Hariri Ucok Position Head of Division P2PL Head of Section PL GESIT Coordinator Sanitarian Puskesmas Ledokombo Health Agency Cooperative “Bangkit” Shop selling building materials Bank Syariah Mandiri Telephone 0331-422385 08124952885 08124959222 081358938399

Jombang District
No 1 2 3 4 5 6 Name Dr.Suparyanto, Mkes Dr.Heri Wibowo, Mkes Heri Prijanto, S.Sos Dr.Wibowo Agus Jauhari, Ssos, Msi Subianadi Position Head of Health Agency Secretary Head of Environmental Health Section Head of Puskesmas Sumobito Camat Sumobito Sanitarian Telephone 0321-866197 085235335857

0321-5172448

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ITS and Trainer/Entrepreneur
No 1 2 3 Name Eddy Soejono Lantip Trisunarno Irianto Position LP3M-ITS. Mason Training provider Trainer Trainer /Entrepreneur Telephone 081553207078 0812 324 8312 0812 16 211505

Nganjuk District
No 1 2 3 4 5 Name Sugeng Mulyono Sunaryaji Sumadi Ms Sariyani Thohari Position Head of Sanitation Section Coordinator of Sanitarian Sanitarian Sanitarian Board of Director Member of Tunas Artha Mandiri (saving and loan cooperatives) Head of Health Center Midwife Head of Arisan Group Telephone

081335265157

6 7 8

Dr Ilham Ms. Ratih Ms. Rosmiati

Pamekasan District
No 1 2 3 No 1 2 3 3 Name Djamali Ms Afira Budi Name Almut Isabel C. Blackett Ari Kamasan Saputra Position Head of Sanitarian Sanitarian Sanitarian Position Senior Sanitation Specialist Marketing Specialist Consultant Telephone 0817328336 08123126167

WSP-EAP
Telephone 0813 15 89 57 99 0811 16 25 47 0816 53 74 30

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ANNEX 1: POTENTIAL DEMAND FOR SANITATION
Provincial Data Data on access to improved sanitation in Indonesia comes from several sources. The source cited most often is SUSENAS, periodic surveys of living standards conducted using a representative sample of persons. The most recent published data by province is probably SUPAS 2005, a survey conducted every ten years between the census (the 2010 census is currently underway). It is likely that the planning agency Bappenas will shortly publish updated information. Table A1: Number of Households with Access to Improved and Unimproved Sanitation in Indonesia by Province, 2005 Province Sumatera Utara Sumatera Barat Riau Jambi Sumatera Selatan Bengkulu Lampung Kep. Bangka Belitung Kepulauan Riau DKI Jakarta Jawa Barat Jawa Tengah DI Yogyakarta JawaTimur Banten Bali Nusa Tenggara Barat Nusa Tenggara Timur Kalimantan Barat Kalimantan Tengah Kalimantan Selatan Kalimantan Timur Sulawesi Utara Sulawesi Tengah Sulawesi Selatan Sulawesi Tenggara Gorontalo Maluku Maluku Utara Papua TOTAL INDONESIA
Source: SUPAS 2005

Households with access to improved sanitation 1,436,132 399,079 461,256 255,186 670,066 131,739 680,772 133,326 218,052 1,643,393 4,731,330 3,832,234 583,536 3,847,446 991,033 484,258 270,501 190,062 294,228 127,479 246,276 331,393 321,482 184,470 802,461 163,224 65,622 109,033 64,694 170,366 23,840,129 44%

Households without access to improved sanitation 692,331 607,498 386,910 915,218 248,229 1,064,589 123,922 126,962 567,573 5,453,635 4,529,079 416,384 5,997,723 1,154,165 375,153 814,971 719,128 613,417 345,310 620,330 350,696 242,550 361,196 1,128,102 274,370 168,970 160,548 123,798 418,591 30,236,387 56%

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Figure A1: Household Access to Improved Sanitation in Indonesia by Province, 2005

Source:Supas 2005

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Table A2: Data on East Java
Conservative Estimates Improved latrine 38,509.41 117,799.91 47,630.12 125,999.82 82,803.05 172,678.83 255,212.85 57,432.86 171,269.01 160,767.31 27,197.80 39,222.24 37,059.90 131,775.04 308,133.01 149,715.52 167,428.88 113,278.46 87,624.17 87,590.45 63,285.43 93,523.51 86,969.24 145,082.13 177,750.65 42,304.59 29,085.38

Kabupaten/City Pacitan Ponorogo Trenggalek Tulungagung Blitar Kediri Malang Lumajang Jember Banyuwangi Bondowoso Situbondo Probolinggo Pasuruan Sidoarjo Mojokerto Jombang Nganjuk Madiun Magetan Ngawi Bojonegoro Tuban Lamongan Gresik Bangkalan Sampang

Household 155,581 265,842 199,056 285,274 331,743 425,485 677,029 292,428 640,785 489,428 238,076 210,691 314,921 425,740 474,518 292,596 351,387 304,512 198,173 189,262 266,802 354,901 305,799 338,534 292,507 233,366 228,228

Unimproved Latrine 69% 45% 70% 45% 69% 49% 53% 75% 67% 59% 86% 77% 85% 61% 19% 36% 40% 54% 45% 42% 70% 67% 64% 46% 24% 77% 84% 107,444 118,592 139,518 127,774 228,239 209,636 358,013 220,637 426,699 288,469 204,079 161,663 268,596 261,021 89,352 105,452 142,101 162,914 88,643 79,774 187,695 237,997 197,087 157,181 70,319 180,485 191,871

Improved Latrine 31% 55% 30% 55% 31% 51% 47% 25% 33% 41% 14% 23% 15% 39% 81% 64% 60% 47% 55% 58% 30% 33% 36% 54% 76% 23% 16% 48,137 147,250 59,538 157,500 103,504 215,849 319,016 71,791 214,086 200,959 33,997 49,028 46,325 164,719 385,166 187,144 209,286 141,598 109,530 109,488 79,107 116,904 108,712 181,353 222,188 52,881 36,357

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Kabupaten/City Pamekasan Sumenep Kediri Blitar Malang Probolinggo Pasuruan Mojokerto Madiun Surabaya Batu East Java Resource: Susenas  East Java 2007    

Household 203,286 333,311 68,668 33,649 236,503 55,114 49,998 31,005 49,795 786,611 53,137 10,683,741

Unimproved Latrine 71% 88% 23% 17% 21% 46% 28% 14% 12% 9% 38% 51% 144,496 292,147 15,698 5,619 49,618 25,132 14,044 4,344 5,975 74,413 19,980 5,662,719

Improved Latrine 29% 12% 77% 83% 79% 54% 72% 86% 88% 91% 62% 49% 58,790 41,164 52,970 28,030 186,885 29,982 35,954 26,661 43,820 712,198 33,157 5,021,022

Conservative Estimates Improved latrine 47,032.25 32,931.13 42,376.40 22,423.69 149,507.74 23,985.61 28,762.85 21,328.96 35,055.68 569,758.08 26,525.99 4,016,818

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ANNEX 2: MILLENIUM DEVELOPMENT GOALS FOR SANITATION IN INDONESIA
Millennium Development Goal (MDG) target 7c calls for governments to “halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation.” (JMP 2008 p. 1) The official MDG indicator for sanitation is “the proportion of the population using an improved sanitation facility, urban and rural.” (JMP 2008 p. 1). “Improved” means a facility that hygienically separates human excreta from human contact, and includes flush or pour-flush outlets to piped sewer systems, septic tanks, or pit latrines as well as non-flush facilities such as a ventilated improved pit latrine (VIP), a pit latrine with a slab, or a composting toilet. Unimproved facilities include flush or pour-flush outlets “elsewhere”, pit latrines without slabs or covers, buckets, hanging toilets, and “no facilities or open defecation.” People using public toilets or sharing toilets are not considered to have access to an improved sanitation facility for measurement purposes. Until recently, there was considerable variance between the numbers reported by Indonesian national statistics—working with the United Nations Development Programme— and the JMP figures. The following paragraphs explain this issue and are quoted directly from a January 2010 WSP newsletter 2010 (a) On January 19, WSP (as the chair of the group of sanitation donors) together with UNICEF, hosted a discussion on the sanitation MDG - Counting Toilets or Measuring Access to Basic Sanitation in Jakarta. The discussion was an opportunity for water and sanitation practitioners in Indonesia to compare various monitoring techniques and their comparative advantages. The guest speaker for the discussion, Rolf Luyendijk, is the Senior Statistics and Monitoring Specialist for Water and Sanitation in UNICEF, he is responsible for updating the WHO/UNICEF Joint Monitoring Programme (JMP) data on water supply and sanitation. Mr. Luyendijk provided a short introduction to the JMP methodology, this methodology is used to generate country coverage estimates and compare international JMP monitoring and access estimates with national monitoring and coverage estimates. The discussion centered on the definition of JMP indicators, the reliance on national household sample surveys and national censuses, and how JMP validates and ensures comparability of data across surveys and countries. Further discussion was triggered by differences between the latest JMP data (published in 2008) and the UNDP/National Planning Development Agency (Bappenas) report Lets Speak Out for MDGs (Nov. 2007). The JMP data shows slow progress towards the sanitation MDG target in Indonesia and a high likelihood of not meeting the target, while the UNDP/National Planning Development Agency (Bappenas) report states that Indonesia has already achieved its sanitation MDG target. Mr. Luyendijk explained that the discrepancies can be largely explained by using a different definition of access. For example, the Indonesian household survey SUSENAS has a category called "pit/hole", without providing further information on whether these facilities are an improved facility as per JMP definition. In cases of unclear definitions, JMP applies a standard rule of counting 50% of the facilities as improved. In addition, the two surveys took two different baselines; the national survey used data from a SUSENAS survey in 19921994 to establish a baseline, which was significantly lower than the findings of the DHS 1991 and 1994 surveys used to determine the baseline in the JMP. For example, the SUSENAS 1992 data shows 19.1% improved sanitation

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access in rural areas while the DHS 1991 survey shows 44.6%. The lower baseline results in lower and more achievable MDG target for 2015. Although the discussion was informative and generated a lot of interest, the issue of whether the sanitation MDG has been achieved is secondary when looking at absolute numbers. While a significant number of people have gained access to basic sanitation since 1990, over 94 million Indonesians still do not have sanitary toilets. In fact, the percentage of people practicing open defecation has not changed substantially over the last two decades, with about 18% in urban and over 40% in rural areas still defecating in the open. Taking into account the population growth, this translates into more people being forced to practice open defecation every day. The lack of access to sanitation should be a top priority of the Government as well as donors in addressing sanitation needs in Indonesia.

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ANNEX 3: MODEL CASH FLOW ANALYSIS
Using price and cost information obtained from sanitarian entrepreneurs and making several assumptions, the assessment team created a cash flow model to examine basic factors for business success. Under reasonable circumstances, an entrepreneur should be able to generate a positive weekly cash flow; however, it would take some time to repay initial capital outlays if the entrepreneur makes an initial investment in sufficient equipment (molds, pumps, and small tools). The sanitation picture may be more optimistic, depending on the price or quantity of pumps, which were unknown (assumed here equal to the price and quantity of molds). The model assumes that the entrepreneur is able to somehow get access to a 36 month loan at 14% for initial investment costs. If, however, the credit terms offered to customers is at odds with payments for labor, materials, and supplies, or if the product mix is skewed toward low-price latrines (which have lower models), cash flow could be negative overall. Basic Model Cash Flow Assumptions and Results Initial Investment   IDR, Thousands  Initial Investment  Price  Number  Total  Misc Tools  100  10 1,000 Pump  1,750  15 26,250 Mold  1,750  15 26,250 Est  Total  initial  Investment      53,500 Product Prices, Mix, and Costs
Gross Margin % 33% 41% 55% 54%

Latrine Type Basic (one tank) Mid-Range (two tanks) Premium (three tanks) Blended/Weighted

Price 250 500 850 755

Sales Mix 10% 10% 80%

Materials Cost 133 191 239 224

Labor Costs 35 105 140 126

Gross Margin 82 204 471 405

Credit Terms
Credit Terms from Materials Supplier 50% 3 No. Weeks 2

Credit Terms Customer Down Pmt

to

Remainder, Monthly

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Assuming overhead expenses that include truck rental for transport of molds, a payment to the business owner of 350,000 rupiah per week, and some miscellaneous expenses, the four-month cash flow including an initial investment is presented below Accumulated  Four‐Month Cash  Flow, IDR  thousands  420    158,550   44,847   53,500     256,897   53,500     80,496   52,920   10,500   23,100  ‐     7,314   227,830  ‐     29,067 

    Number of Units Installed    Down Payments    Installment  Payments  (arbitrary  cut‐off  at  four  months)  Loan for Initial Investment    Total Inflow     Initial Investment (Molds, Pumps Tools)  Materials    Labor     Sales Commissions    Operating and Overhead Expenses        Loan Payments    Total outflow         Accumulated Cash Flow    

USD  17,168  4,856  27,818 

8,716  5,730  1,137  2,501  0  792  24,670  0  3,147 

While the accumulated cash flow may seem small, it is worth bearing in mind that the model assumes a salary to the owner already equal to the monthly salary that a sanitarian was said to receive at the beginning of his or her career. The four-month cumulative cash flow is also roughly equal to the annual per capita GDP of Indonesia presently. The model does not include any taxes. There is a major difficulty with this model, however. Few sanitarians would have access to finance for the initial investment. Typically, health department credit cooperatives offer a maximum loan of IDR 25 million, and the estimated initial investment (which is probably conservative, on the high side) is twice that.

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Changing the Product Mix Changing the product mix to the following weightings and margins has a negative effect on cash flow; margins go down, and investment loan repayments remain high.

 
Sales Mix 250 500 850 525 25% 50% 25%

IDR, Thousands 
Materials Cost 133 191 239 189 Labor Costs 35 105 140 96 Gross Margin 82 204 471 240 Gross Margin % 33% 41% 55% 46%

Latrine Type Basic (one tank) Mid-Range (two tanks) Premium (three tanks) Blended/Weighted

Price

    Number of Units Installed    Down Payments    Installment  Payments  (arbitrary  cut‐off  at  four  months)  Loan for Initial Investment    Total Inflow     Initial Investment (Molds, Pumps Tools)  Materials    Labor     Sales Commissions    Operating and Overhead Expenses        Loan Payments    Total outflow         Accumulated Cash Flow    

Accumulated  Four‐Month Cash  Flow, IDR  thousands  420    110,250   31,185   53,500     194,935   53,500     67,860   40,425   10,500   23,100  ‐     7,314   202,699  ‐     (7,764)

USD  11,938  3,377  21,108 

7,348  4,377  1,137  2,501  0  792  21,949  0  (841) 

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Changing the Credit Terms A far worse effect, however, comes from a more severe mismatch of credit terms between what the business receives from customers and what it must pay to suppliers. Returning to the original product mix of the basic cash flow model, but reducing the down payment to 25% of the price yields disastrous results.
Credit Terms from Materials Supplier 25% 3 No. Weeks 2

Credit Terms to Customer Down Pmt Remainder, Monthly

    Number of Units Installed    Down Payments    Installment  Payments  (arbitrary  cut‐off  at  four  months)  Loan for Initial Investment    Total Inflow     Initial Investment (Molds, Pumps Tools)  Materials    Labor     Sales Commissions    Operating and Overhead Expenses        Loan Payments    Total outflow         Accumulated Cash Flow    

Accumulated  Four‐Month Cash  Flow, IDR  thousands  420    79,275   67,271   53,500     200,046   53,500     80,496   52,920   10,500   23,100  ‐     7,314   227,830  ‐     (27,785)

USD  8,584  7,284  21,662 

8,716  5,730  1,137  2,501  0  792  24,670  0  (3,009) 

The credit terms reported by the sanitarian entrepreneurs varied widely, with one reporting a fixed down payment no matter what the price level, and one planning to have a low down payment for basic models and a high one for premium versions (which were unfortunately a minor part of his product mix). Whatever the plans of current entrepreneurs, the cash flow analysis highlights the need for access to finance, whether for initial investment or for working capital.

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ANNEX 4: TERMS OF REFERENCE

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ANNEX 5: LITERATURE REVIEW

Indonesia Sanitation Market Assessment

SANITATION FINANCE LITERATURE REVIEW
Prepared for: International Finance Corporation (IFC) Jakarta, Indonesia

Prepared by: Cowater International Inc. (Canada) in association with: Swisscontact Indonesia (Jakarta)

June 10, 2010

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Table of Contents
Acronyms and Abbreviations...........................................................................................................ii 1. Introduction ............................................................................................................................. 1 2. Literature Summary ................................................................................................................ 1 2.1. Sanitation Market Challenges......................................................................................... 1 2.2. Market Based Transformations ...................................................................................... 2 2.3. Current Financing Mechanisms in the Sanitation Market .............................................. 3 3. Conclusions and Recommendations...................................................................................... 5 4. Sanitation Finance Bibliography ............................................................................................. 6 5. Literature Abstracts............................................................................................................... 10

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Acronyms and Abbreviations
APSS BoP CBO CFLs CHUEE CLTS CSSP CWASC DFID DRA ELI FIs GEF GHG HSSP IFC IPC M4P MDGs MFIs NGO O&M PELP PSSP SCS SHG SME STBM SWAp TSC TSSM TWU VERC WASH WBCSD WSES WSP Alternative Pro-Poor Sanitation Solutions (Peru) Bottom of pyramid Community-based Organizations Compact fluorescent lamps China Utility-Based Energy Efficiency Finance Program Community led total sanitation Community based small service providers Community Water and Sanitation Committee UK Department for International Development Demand-responsive approach Efficient Lighting Initiative Financial Institutions Global Environmental Facility Greenhouse gases Households as small service providers International Financing Corporation Town-people committee Markets for the Poor Millennium Development Goals Microfinance institutions Non-governmental organization Operation and Maintenance Poland Efficient Lighting Project Private small service providers Sanitation Credit Scheme (Vietnam) Self-help Group Small and medium-sized enterprise Community Based Total Sanitation Strategy Sector-wide Approach Total Sanitation Campaign (Bangladesh) Total Sanitation and Sanitation Marketing Town Women’s Union Village Education and Resource Centre (Bangladesh) Water, Sanitation and Hygiene World Business Council for Sustainable Development Water Supply and Environmental Sanitation Water and Sanitation Program

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1. Introduction
The following literature review was undertaken as a part of the Indonesia Sanitation Market Assessment Project funded by the International Finance Corporation. The objective of the literature review was to prepare a synthesis of past experience with sanitation finance, drawing on sanitation finance literature from ongoing WSP projects as well as past and ongoing market transformation programs undertaken by IFC, in addition to documentation identified through internet research. The focus of the literature review was concentrated on the identification of viable mechanisms for engaging the private sector in sanitation service delivery and exploring applicable funding models, other than subsidization, to encourage household sanitation demand that could be applicable to the context of the sanitation sector in East Java and in other areas of Indonesia. Section 2 of the report provides a brief overview of the applicable information encountered in the literature review outlining common sanitation market challenges, market based transformation approaches and current financing mechanisms employed in various areas. A list of the fifty articles reviewed is provided in Section 3, organized by primary, secondary and tertiary resources with respect to the applicability to the current project and Section 4 provides brief abstracts on each article reviewed.

2. Literature Summary
2.1. Sanitation Market Challenges

To establish a sustainable sanitation market both demand- and supply-side challenges must be overcome. The Water and Sanitation Program (WSP) Total Sanitation and Sanitation Marketing (TSSM) Project has had considerable success in East Java in stimulating the demand and increasing the prioritization of sanitation at the household level. However, households often struggle to collect the upfront lump sum payment required. (In Indonesia, household renovations [which include latrine construction] fall into the ‘expenditures that wait for extra money’ category, meaning that having a latrine is not prioritized and only considered when households have extra money [1]1.) Especially Bottom of the Pyramid (BoP) consumers often lack the cash on hand to make these purchases, and limited consumer access to credit presents a major challenge to improved access to sanitation. On the supply-side, the sanitation supply chain is generally inadequate and involves a wide range of diverse and unconnected providers, making it more costly for BoP consumers to access sanitation solutions. Limited access to credit for small and medium enterprises (SME) presents a further challenge by preventing new suppliers from entering the market. There is also an overall capacity gap at the SME level in the supply-side of sanitation. To effectively scale-up the sanitation market, suppliers are in need of general business skills, including accounting and cash flow management (2). Marketing capacities are often underdeveloped and suppliers of sanitation products and services encounter difficulties when marketing and educating potential customers about the benefits of sanitation. In Indonesia, past
1

 Numbers in brackets refer to the Bibliography list provided in Section 3.  

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experience indicates promotional activities that are specifically designed for latrine products are non-existent in some areas and retailers prefer to take a passive-selling action as latrine products are not traffic generator items (1). This lack of information on design options or pricing makes it difficult for consumers to make decisions. Installation and maintenance services may exist but they are not necessarily qualified or certified in the provision of sanitation systems and other services crucial for sustainability, such as sludge management. There are often few recognizable quality standards for consumers to differentiate technology and the market can be easily spoiled by bad quality products (3). Not only can poor quality construction and latrine placement compromise the hygienic benefits of new latrine constructions, poor quality within the market also generates a lack of trust among potential consumers toward suppliers of latrine components or construction services (9).

2.2.

Market Based Transformations

As a result of the challenges mentioned above, the market for sanitation products is stagnant in many BoP communities. Producers are unwilling to produce sanitation products because no established market exists while consumers are not demanding these products because they are not produced or marketed. To overcome a stuck market such as this, market transformation initiatives aim to effectively stimulate existing market forces, with a typical program providing both ‘supply push’ and ‘demand pull’ for a particular technology (4). A successful market transformation program will change the entire market so that sanitation products become the norm and no longer require incentives. It also emphasizes partnerships between government, the private sector, NGOs and other stakeholders, because each has the ability to influence the market. Market research, information, technology promotion and technical assistance can all increase demand while simultaneously increasing the willingness of suppliers to produce. More specifically, mechanisms to overcome supply-side barriers include providing technical assistance to manufacturers necessary to upgrade their product designs, developing standards and regulatory requirements, piloting new distribution mechanisms through retailers, providing financial incentives to producers, providing quality testing and providing financing for manufacturing upgrades. Demand-side approaches include educating consumers about the characteristics, costs and benefits of a particular technology, using media campaigns to increase consumer awareness and providing consumer financing. Many of these aspects are currently being employed through the WSP TSSM project. Making Markets Work for the Poor (M4P) is a similar overarching market transformation approach based on the idea that the poor are dependent on market systems for their livelihoods (5). Creating market systems that work more effectively and sustainably for the poor will thus improve livelihoods and reduce poverty. In contrast to the stagnant sanitation market that is present in many countries, a more accessible and competitive market will have wider economic benefits, stimulate investment and encourage firms to innovate, reduce costs, and provide better jobs, goods and services to more people. The M4P approach is built on a framework that analyzes the poor in market systems and provides guidance on how to achieve large-scale positive change. Priority is placed on developing capacity in the market system rather than delivering benefits directly. By planning for

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sustainability at entry rather than exit, M4P seeks to operationalize sustainability into every activity and address the causes rather than the symptoms of market constraints. It also requires organizations to play a facilitating role, working with different players to make the system work more effectively without becoming a part of it. This approach has successfully stimulated significant change in a variety of market systems, such as improving the number of people accessing and benefiting from new services. M4P is thus a viable approach to transforming the sanitation market that will have sustained impact in the future.

2.3.

Current Financing Mechanisms in the Sanitation Market

New financing approaches in the sanitation market are designed to address key failures of the traditional financing approaches and involve new actors such as microfinance institutions (MFIs), small scale service providers and local entrepreneurs. They aim to make sanitation facilities affordable by adjusting the payment requirement and modalities to the ability of people to pay and to the mechanisms they use, recognizing that the problem is often not the total amount of money needed, but the upfront lump sum payment. Subsidies have been a predominant financing mechanism in the sanitation market, however their effectiveness is widely contested and new approaches to the traditional hardware subsidy are emerging. For example, in Nepal it is now common practice to subsidise latrines only up to pan level or to provide graded subsidies, although the cost of this type of program is up to 30 times higher than community led interventions and even though latrine coverage is generally good, latrine usage is not always that encouraging (9). The presence of subsidies can also greatly hinder the success of community led interventions. In Bangladesh where subsidies were being provided by NGOs in nearby communities, people were reluctant to take their own action, preferring to wait for outside support and similarly, in India much of the disappointing progress with CLTS is attributed to the presence of subsidies (10). The Government of Indonesia has recently changed its approach to subsidies, by developing the National Community-Based Total Sanitation Strategy (STBM) in 2008, which forbids the use of subsidies for household sanitation facilities. The manufacturer subsidy approach as used in IFC’s Poland Efficient Lighting Project (PELP) presents an innovative financing approach whereby subsidies were provided to manufacturers to increase the availability of a new technology and lower the cost (11). Subsidies encouraged manufacturers to join the efficient lighting market, proving that direct incentives to manufacturers can be an efficient way to bring about market transformation. In addition to subsidies, consumer financing through informal credit is very common in the sanitation market. For example, BoP consumers seek loans from relatives or the head of their community to build latrines, which can often be of greater cost to the consumer due to high interest rates. Addressing this gap in formal lending mechanisms, the Grameen Bank is an example of an institution providing credit and loan services to BoP consumers (6). Although commercial interest rates are charged, it has a very high repayment rate because it is prepared to give very small loans to individuals, does not ask for collateral, allows repayment at sustainable intervals, and has local branches or representatives close the their consumers. Growth of suppliers in the sanitation market is also hindered by limited access to more formal lending mechanisms. CrediAmigo, implemented by Banco de Nordeste and the World Bank in

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Brazil provides an example of a formal loan scheme which targeted urban micro-entrepreneurs from informal sectors such as carpenters and artisans (12). The program is based on a solidarity group lending model, whereby a group of individuals provide collateral or a loan guarantee through a group repayment pledge. In addition to providing short-term and long-term loans, CrediAmigo also provides its customers with consulting services at no additional cost to help them run their businesses more efficiently. This provides not only a benefit to the customer but also helps to reduce default risk by improving the customers’ ability to manage their own business effectively. BoP consumers who often have an irregular cash flow, prefer products sold on credit. In the sanitation market, supplier credit is another common financing mechanism for consumers to access the necessary funds for latrine construction. In Indonesia, the common payment term among stores is credit within a one month period and is usually collected by an appointed sales person (1). Where supplier credit is common, a one-stop sanitation service reduces the cost for consumers by providing them with the material supplies and on-site installation. Microfinance is becoming increasingly popular at the community level as a mechanism to stimulate the small scale private sector and allow households to manage the capital costs of sanitation. For SMEs, the role of MFIs is to provide financial services such as micro-credit, micro-guarantees and micro-insurance services. At the consumer level, there is also potential and demand for MFIs to act as consumer financiers providing individual retail loans. While MFIs may provide physical distribution channels and sources of credit, simple distribution may not be enough and customer education and demand stimulation are also important. At present, the limited or non-existent presence of MFIs in rural communities restricts this mechanism from improving access to funds for sanitation at scale. Domestic mobilization of funds through the revolving fund approach is another appropriate financing solution for the sanitation market. For example, in Vietnam a sustainable revolving sanitation credit fund was developed at the Town Women’s Union (TWU) level to meet the credit needs of poor households to build septic tanks (13). This innovative approach to using microfinance for increased access to sanitation yielded very high leverage of user contributions and according to the TWUs, for every two to three loans disbursed by them, another septic tank is built without financial assistance. This is in part due to more knowledge and awareness about septic tanks, as well as direct motivation by the TWU for those who can afford to build a septic tank without borrowing money. Active and enthusiastic borrowers have also become motivators for their relatives, friends or neighbours to build septic tank toilets. Although these financing mechanisms represent a significant portion of the current sanitation market, additional approaches are emerging. The use of rewards is gaining popularity, especially with CLTS programs, as an effective tool to encourage achievement of public outcomes and construction of quality latrines, without providing any kind of hardware subsidy (8). Microfranchising has also emerged as a powerful new market-based approach that leverages the basic concepts of traditional franchising, but it is especially focused on creating opportunities for BoP members to own and manage their own businesses (16).

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3. Conclusions and Recommendations
Improving access to sanitation sustainably and at scale requires a transformation of the sanitation market and effective financing mechanisms to overcome limited consumer access to credit. Although a variety of financing mechanisms exist to improve access to funds for sanitation, each has its limitations and a combination of approaches may be required depending on the specific sanitation market context. A market transformation that simultaneously seeks to increase both supply and demand for sanitation products and services is crucial and the M4P framework presents a holistic approach for stimulating this market change sustainably. Demand-side initiatives include consumer marketing and technology promotion, while the objectives of supply-side initiatives should be to strengthen capacity to ensure that the private sector optimally plays a role in information exchange, demand creation, and sales closure (14). The donor and investment community have the opportunity to play an important role in transforming the sanitation market, using their financial and technical resources to develop a more robust and mature market among BoP consumers for sanitation products and services. Private sector involvement could include: strengthening the enabling environment; strengthening commercial financial intermediaries; increasing BoP consumer demand; increasing BoP consumers’ access to credit; providing soft and flexible funding to sanitation entrepreneurs; investing in a portfolio to technologies and business models; investing as much in the entrepreneur as in the technology; identifying and supporting enterprises that match products and strategies to the right market segments; improving technologies and business models through advisory services; and incentivizing producers of high-end technologies to target BoP markets (7).

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4. Sanitation Finance Bibliography
Primary Sources
(1) Nielsen Indonesia. 2009. Total Sanitation and Sanitation Marketing Research Report. Jakarta, Indonesia: Nielsen Indonesia. (2) Nielsen Indonesia. 2009. Discovering Paths Untraveled: The process by which East Java rural sanitation marketing strategy evolved and initial results from its application. TSSM Global Team Meeting, Indore, Indonesia. (3) International Finance Corporation (IFC) and Global Environment Facility (GEF). 2005. The ELI Story: Transforming Markets for Efficient Lighting. Washington D.C.: IFC. (4) Birner, Sabrina and Eric Martinot. 2002. The GEF Energy-Efficient Product Portfolio: Emerging Experiences and Lessons. Monitoring and Evaluation Working Paper 9, Washington, D.C.: Global Environment Facility. (5) UK Department for International Development (DFID) and Swiss Agency for Development and Cooperation (SDC). 2008. A Synthesis of The Making Markets Work for the Poor (M4P) Approach. Bern, Switzerland: SDC. (6) IRC, Christine Sijbesma, Carlos Diaz, Catarina Fonseca, Christelle Pezon. 2008. Financing Sanitation in Poor Urban Areas. Delft, The Netherlands: IRC Symposium. (7) International Finance Corporation (IFC), Joe Brown, Tom Outlaw, Thomas Clasen, Jianyong Wu, Mark D. Sobsey. 2009. Safe Water for All – Harnessing the Private Sector to Reach the Underserved. Washington, D.C.: IFC. (8) WaterPartners. 2008. Creating Access to Credit for Water and Sanitation Improvements: A Case Study of Women’s Self-Help Groups in Tiruchirappalli, India. Kansas City, MO: WaterPartners.

Secondary Sources
(9) Pretus, Laia Domenech and Oliver Jones. Money down the pan? Community level models for financing sanitation in rural Nepal. Nepal: WaterAid Nepal. (10) Chambers, Robert. 2009. Going to Scale with Community-Led Total Sanitation: Reflections on Experience, Issues and Ways Forward. Practice Paper Volume 2009 Number 1, Brighton, UK: Institute of Development Studies. (11) World Bank Global Environment Facility (GEF). 2006. Post Implementation Impact Assessment: Poland Efficient Lighting Project. Washington, D.C.: World Bank GEF.

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(12) World Business Council for Sustainable Development (WBCSD). 2004. Banco do Nordeste’s CrediAmigo – A development bank’s success with micro-finance. Geneva, Switzerland: WBCSD. (13) World Business Council for Sustainable Development (WBCSD). 2008. GHD – Vietnam’s urban sanitation program. Geneva, Switzerland: WBCSD. (14) Water and Sanitation Program (WSP). 2008. Identifying Constraints to Increasing Sanitation Coverage – Sanitation Supply and Demand in Cambodia. Field Note, Phnom Penh, Cambodia: WSP.

Tertiary Sources
(15) Achwal, Nilima. 2010. Getting BoP Products in Consumers’ Hands – MFIs and Microdealers Can Help. Ann Arbor, Michigan: The William Davidson Institute. (16) Acumen Fund, David Lehr. 2008. Microfranchising at the Base of the Pyramid. New York, NY: Acumen Fund. (17) Baskovich, Malva Rosa. 2008. Building Inclusive Sanitation Markets for the Poor (Peru). Delft, The Netherlands: IRC Symposium, Sanitation for the Urban Poor, Partnerships and Governance. (18) Budinich, Valerie. 2005. A Framework for Developing Market-Based Strategies that Benefit Low-Income Communities. Ashoka, Changemakers. http://www.changemakers.net/journal/300508/framework.cfm (19) Changemakers. 2008. Banking on Social Change: Seeking Financial Solutions for All. http://www.changemakers.com/en-us/bankingonsocialchange (20) Changemakers. 2008. Tapping Local Innovation: Unclogging the Water and Sanitation Crisis. http://www.changemakers.com/en-us/waterandsanitation (21) Fonseca, Catarina and Marieke Adank. 2004. Innovative Financing Mechanisms at Local Level. Workshop Report, WEDC Conference, Vientiane, Laos. (22) Government of Indonesia. 2003. Development of Community-Based Water Supply and Environmental Sanitation. National Policy, Jakarta, Indonesia: Government of Indonesia. (23) International Finance Corporation (IFC). China Utility-based Energy Efficiency Finance Program (CHUEE). Brochure, Beijing, China: IFC. (24) Institute for Financial Management and Research, Nachiket Mor. 2006. Some Thoughts on Access to Markets as a Strategy to Address Poverty. Working Paper Series, Chennai, India: IFMR.

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(25) IRC, Sophie Trémolet, Rachel Cardone, Carmen da Silva, Catarina Fonseca. 2007. Innovations in Financing Urban Water and Sanitation. Bellagio, Italy: Centre for Urban Sustainable Development, Financing Shelter, Water and Sanitation Summit Paper. (26) Jawa Pos Institute of Pro-Otonomi (JPIP). 2009. Accelerating the Change: Selecting Best Practices to Promote Total Sanitation and Sanitation Marketing (TSSM) in East Java. Surabaya, Indonesia: JPIP. (27) Mehta, Meera. 2008. Assessing Microfinance for Water and Sanitation – Exploring Opportunities for Sustainable Scaling Up. A study for the Bill & Melinda Gates Foundation. (28) Monitor, Nishant Lalwani and Michael Kubzansky. 2009. Stretching the Fabric of MFI Networks. Mumbai, India: Monitor Inclusive Markets. (29) Netherlands Water Partnership (NWP) and IRC. 2007. Microfinance for Water, Sanitation and Hygiene – An Introduction. Delft, The Netherlands: NWP. (30) Netherlands Water Partnership (NWP) and IRC. 2009. Smart Finance Solutions: Examples of innovative financial mechanisms for water and sanitation. Amsterdam, The Netherlands: KIT Publishers. (31) Practical Action Consulting. 2006. Bangladesh Rural Sanitation Supply Chain and Employment Impact. Human Development Report Office, Occasional Paper, UNDP. (32) Priyono, Edy. 2009. Institutional Dimensions of Scaling Up of CLTS in Indonesia. Bekasi, Indonesia: AKADEMIKA, Center for Public Policy Analysis. (33) Schaub-Jones, David. 2009. A Sanitarian Turned Entrepreneur, Bapak Sumadi, Nganjuk, East Java, Indonesia. World Water Week, Stockholm, Sweden. (34) UN-HABITAT. 2006. Guidelines on Revolving Funds for Community Managed Water Supply Schemes and Construction of Household Toilets in Urban Slums in Madhya Pradesh, India. Nairobi, Kenya: UN-HABITAT. (35) UN-HABITAT, Rachel Cardone and Catarina Foncesca. 2006. Innovative Financing: Experiences with Secondary Urban Centres Water Supply and Sanitation Service Delivery. Nairobi, Kenya: UN-HABITAT. (36) WaterAid Australia and International WaterCentre. 2008. Sharing Experiences: Sustainable Sanitation in South East Asia and the Pacific. Brisbane, Australia. (37) Water and Sanitation Program (WSP). Sanitation Marketing Communication Grid. (38) Water and Sanitation Program (WSP). 2006. Manual of Sanitation Market Activities in TSSM Program. Marketing Manual, v.1, Washington, D.C.: WSP. (39) Water and Sanitation Program (WSP). 2008. Communication Tools – Total Sanitation and Sanitation Marketing (TSSM) in Indonesia. Washington, D.C.: WSP.

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(40) Water and Sanitation Program (WSP), S.A. Ahmed. 2007. Ensuring Scaling Up and Sustainability of Rural Sanitation. Washington, D.C.: WSP. (41) Water and Sanitation Program (WSP), Francois Brikké and Malva Rosa Baskovich. 2009. Alternative Pro-poor Sanitation Solutions in Peru. Washington, D.C.: WSP. (42) Water and Sanitation Program (WSP), Meera Mehta. 2003. Meeting the Financing Challenge for Water Supply and Sanitation – Incentives to Promote Reforms, Leverage Resources, and Improve Targeting. Washington, D.C.: WSP.

(43) Water and Sanitation Program (WSP), Sophie Trémolet with Pete Kolsky and Eddy Perez. 2010. Financing On-Site Sanitation for the Poor: A Six Country Comparative Review and Analysis. Washington, D.C.: WSP Technical Paper. (44) Water and Sanitation Program Africa (WSP-Africa), Meera Mehta and Kameel Virjee. 2003. Financing Small Water Supply and Sanitation Service Providers: Exploring the Microfinance Option in Sub-Saharan Africa. Nairobi, Kenya: WSP-Africa.
(45) Water and Sanitation Program Africa (WSP-Africa), Meera Mehta and Andreas Knapp. 2004. The Challenge of Financing Sanitation for Meeting the Millennium Development Goals. Nairobi, Kenya: WSP-Africa. (46) Water and Sanitation Program for East Asia and the Pacific (WSP-EAP). Total Sanitation and Sanitation Marketing (TSSM): Scaling up community-led approaches to safe, healthy sanitation and improved hygiene. Jakarta, Indonesia: WSP-EAP. (47) Water and Sanitation Program for East Asia and the Pacific (WSP-EAP), Nilanjana Mukherjee. 2009. Learning at Scale – Total Sanitation and Marketing Project: Indonesia Country Update June 2009. Field Report, Jakarta, Indonesia: WSP-EAP; Field Report. (48) Water and Sanitation Program East Asia and the Pacific (WSP-EAP). 2009. Information on Improved Latrine Options. Informed Choice Catalogue, Jakarta, Indonesia: WSP-EAP. (49) Water Supply & Sanitation Collaborative Council (WSSCC), Barbara Evans, Carolien van der Voorden and Andy Peal. 2009. Public Funding for Sanitation – The many faces of sanitation subsidies. Geneva, Switzerland: WSSCC. (50) World Bank and International Finance Corporation (IFC). Lighting Africa – Catalyzing Markets for Modern Lighting. Washington, D.C.: World Bank and IFC.

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5. Literature Abstracts
(1) Nielsen Indonesia. 2009. Total Sanitation and Sanitation Marketing Research Report. Jakarta, Indonesia: Nielsen Indonesia. Background The Total Sanitation and Sanitation Marketing (TSSM) program implemented by the Water and Sanitation Program (WSP) aims to promote the development of a self-sustaining demand and supply mechanism. To achieve this, the WSP team are engaged with Nielsen Indonesia to conduct marketing research studies in East Java and this report focuses on both the supply and demand side within the sanitation markets. Demand Household renovation (including a latrine) falls into the “expenditures that wait for extra money” category. This means that having a latrine is not prioritized and only considered when households have extra money. Consumers do not feel that shopping for sanitation materials is a complicated process and both materials and masons are available. Thus, primary barrier is not the lack of outlets or human resources to build it, but the funds to buy the materials and pay the masons. In terms of price, consumers prefer the least expensive option while demand is higher for the squat latrine which is made of concrete, confirming consumers prioritize the look of a latrine rather than its function. Supply Latrine pans/ bowls are the main component that is unique for a sanitation facility construction. The presence of foreign, local and unbranded latrines in the East Java market creates a different supply chain for each. Promotional activities that are specifically designed for latrine products are non-existent and stores prefer to take a passive-selling action as latrine products are not traffic generator items. The selling price to end-consumers varies depending on brand and store location and is slightly more expensive in urban areas. Common payment term among stores is credit within a one month period and is usually collected by an appointed sales person. Masons are typically contracted by households based on word-of-mouth and the labour cost depends on whether masons are responsible for the purchase of materials or not. All masons have specific stores as their regular suppliers and they build the relationship by advising household owners to purchase materials in these stores. In return, store owners usually give masons incentives, in the form of cash or construction tools. Conclusions and Recommendations Sanitation is a low priority and open defecation is still a widely accepted habit, thus having a sanitation facility deals with a change in behaviour which cannot be done in the short term. There are also a number of misconceptions that need to be clarified including: the pollution / disease path of human waste in the water; the function of a sanitation facility; and the concept of water-flushed toilets. Information regarding different types of latrines also needs to be shared with consumers, so they are aware of the options available. While latrine products may not be front-line items, stores do not have any problem in providing or distributing them and claim to be making profit. Therefore, the issue relies mostly on low consumer demand. Both the consumer and the supply chain studies indicate that the “real” challenge regarding sanitation habits is how to change the cultural perception of an “ideal” sanitation facility. This is an essential foundation

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to gradually increase demand for sanitation facilities. While the process is mainly a long-term goal, there are several options to explore in the short-term: innovation of low-cost sanitation facilities; support for low-cost latrine manufacturers; and social reinforcement.

(2) Nielsen Indonesia. 2009. Discovering Paths Untraveled: The process by which East Java rural sanitation marketing strategy evolved and initial results from its application. TSSM Global Team Meeting, Indore, Indonesia. Background This document discusses the development of the rural sanitation marketing strategy of the Total Sanitation and Sanitation Marketing project implemented by the Water and Sanitation program in East Java. Consumer Motivation and Preference Sanitation marketing is based on understanding what the consumer wants to pay for and delivering what the consumer wants. Where behaviour change has been triggered by CLTS, people either build improved toilets of their choice, or, when they can’t afford it, share other people’s toilets or dig simple pit latrines and cover them. Pit users generally consider it a temporary measure until they can afford more permanent and safer versions. The cost to acquire a new basic facility with all the desired features is IDR 180,000 (USD18), around 30% of average monthly expenditure of the lowest socio-economic status. Sanitation Marketing in East Java The resulting marketing strategy used an upgradeable product concept to reduce the price barrier, allowing people to adopt a permanent facility and upgrade it whenever they have excess money. To manage resources for competitive prices, a one-stop service reduces cost for consumers by providing them with material supplies and on-site installation. Integrated one-stop sanitation service conditions include after installation warranty, pit emptying service, and flexible payment terms. The promotional strategy included branding, product presentation at community meetings, participation in district exhibitions and price discounts for bulk orders. Managing Resources The providers act as a conduit for the flow of money from the financial institution to the community and from the community to the financial institution. Financial institutions include local banks (cost of capital: 1% monthly instalment), micro credit (3.5% monthly instalment) and community savings (2-2.5% monthly instalment). Labour and equipment includes 20 workers (masons and manual labourers) and 10 sets of moulds for onsite installation. For development, labourers are recruited based on recommendation of current masons and they are trained directly at the installation site. Challenges to be addressed The challenges to be addressed for replication of this business model include: limited knowledge and skills on accounting and cash flow management; cost and source of capital; limited number of concrete moulds which could not cover demand raised from surrounding districts; repackaging (product quality standardization, branding, promotional tools, sales management); and gaining private partnership.

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(3) International Finance Corporation (IFC) and Global Environment Facility (GEF). 2005. The ELI Story: Transforming Markets for Efficient Lighting. Washington D.C.: IFC. Background The Efficient Lighting Initiative (ELI), implemented by the IFC between 1999 and 2003 with funds from GEF, was a dynamic market experiment that engaged multiple actors to promote efficient lighting in Argentina, the Czech Republic, Hungary, Latvia, Peru, the Philippines, and South Africa. Aim The primary aim of the initiative was to accelerate sustainable market development for efficient lighting across each of the seven markets. Market Barriers There were several barriers that needed to be overcome including a lack of credible information about the economic and environmental benefits, the high “first-cost” of buying efficient lighting products and with few recognizable quality standards for consumers to differentiate new technology, the market can easily be spoiled by bad quality products. Market Transformation Approach ELI focused on four market support strategies to promote efficient lighting: providing consumers with reliable information on efficient lighting; increasing the availability of efficient lighting by strengthening distribution and retail channels; supporting commercial financing to overcome the high first-cost barrier of efficient lighting products; and promoting open market competition, especially among lighting manufacturers. IFC strengthened the competitiveness of the market by targeting the special interests of multiple market players and empowering them to become agents of change. ELI collaborated with manufacturers, electric utilities, retailers, lighting professionals, and designers to create a cycle of commercial investment that improved product quality and availability, boosted sales, and put downward pressure in prices. Forging partnerships with electric utilities allowed ELI to promote investments as part of “demand-side management” schemes that met a number of utility business interests. To help overcome the high cost of providing efficient lighting products and services, ELI supported commercial financing channels and drove manufactures to lower prices by encouraging housing and consumer associations, large offices and utilities to make bulk purchases. The use of subsidies was limited due to their potentially market-distorting effects and customized advertising campaigns and ELI-qualified products were used. Key Outcomes and Learning ELI's multi-faceted programs leveraged commercial investment by manufacturers; improved distribution to consumers in partnership with electric utilities; built market capacity for efficient lighting by training lighting professionals; and developed new business models to deliver efficient lighting benefits. ELI also worked with public agencies to reinforce lighting standards and change regulations in support of efficient lighting use. In each country, ELI demonstrated substantial market impact with product prices decreasing, sales climbing, and sales of traditional incandescent lamps falling. ELI cultivated links throughout the lighting supply chain to lever long term market preferences toward efficient lighting, the ELI logo serves as a symbol of high quality efficient lighting products, both within and outside ELI countries.

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(4) Birner, Sabrina and Eric Martinot. 2002. The Global Environment Facility (GEF) Energy-Efficient Product Portfolio: Emerging Experiences and Lessons. Monitoring and Evaluation Working Paper 9, Washington, D.C.: GEF. Background From 1991 to 2000, the GEF approved eight projects designed to stimulate markets for energyefficient products in 12 developing and transitional countries. Many of these projects took “market transformation” approaches, aiming to change market structure or function through both “supply push” and “demand pull” in order to sustainably increase the adoption of energy-efficient products, services, and practices. Project Designs and Approaches The GEF projects reviewed in this report used a combination of approaches to remove supplyside and demand-side barriers to markets for energy-efficient products. Supply-side strategies included providing technical assistance and know-how transfer to manufacturers to upgrade their product designs, supporting minimum efficiency standards and regulatory mechanisms, facilitating voluntary agreements with manufacturers and distributors, piloting new distribution mechanisms through retailers or electric utilities, providing financial incentives to producers, providing quality testing, and providing financing for manufacturing upgrades. Demand-side strategies included educating consumers and professionals about the characteristics, costs, and benefits of the energy-efficient technology; running media campaigns to increase consumer awareness; reducing retail prices of technology through rebates, subsidies, or bulk purchases; providing consumer financing; and offering buy-back/recycling programs. The IFC/GEF Efficient Lighting Initiative (ELI), developed a toolkit of market transformation approaches, including public education, standards and labelling, electric utility programs, financing mechanisms, targeted subsidies, and market aggregation. Programs oriented towards the private sector, such as the Poland Efficient Lighting Project, have also been effective at transforming markets and demonstrated that educational and labelling campaigns with a single and straightforward message could significantly increase demand for efficient lighting. It also demonstrated high leverage in using subsidies to reduce retail prices. Lessons Learned Eight fundamental design principles were recommended for future market transformation projects: (1) target both supply and demand sides of a market; (2) take a holistic view of the market by carefully examining all stages of the supply and demand chain; (3) leverage competitive market forces whenever possible; (4) build flexibility into program design so that program activities can respond effectively and rapidly to changing market dynamics; (5) carefully consider what vehicles for technical assistance and technical know-how transfer will be workable; (6) emphasize on standards, labelling, and business codes; (7) allocate a portion of the program’s budget for activities that support replication and the dissemination of results; and (8) begin monitoring and evaluation early to measure pre-program baselines.

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(5) UK Department for International Development (DFID) and Swiss Agency for Development and Cooperation (SDC). 2008. A Synthesis of The Making Markets Work for the Poor (M4P) Approach. Bern, Switzerland: SDC. Background Making Markets Work for the Poor (M4P) is an approach to poverty reduction based on the idea that the poor are dependent on market systems for their livelihoods. Changing those market systems to work more effectively and sustainably for the poor will thus improve their livelihoods and consequently reduce poverty. More accessible and competitive markets enable poor people to find their way out of poverty by providing more choices and opportunities, have wider economic benefits, stimulate investment and encourage firms to innovate, reduce costs and provide better quality jobs, goods and services to more people. This synthesis paper explains the M4P approach including evidence of impact and key features in implementation. Approach M4P is an overarching approach to poverty reduction that is neither prescriptive in nature nor a branded tool. Instead it is a flexible, comprehensive approach with application in both economic (e.g. agriculture, finance, investment climate and livelihoods) and social (e.g. water, health and education) fields. The approach is built on a framework that analyzes the poor in market systems and provides guidance on how to bring about positive change. By focusing on market systems within which people live and work it is possible to effect substantial and lasting change that can impact on many sustainably rather than a few temporarily. By focusing on systems, M4P seeks to go beyond individual organisations and groups to consider how the wider system can be enhanced to influence many and achieve large-scale change. M4P projects think continually about how to go beyond their immediate context and consider from the outset how resources will promote large-scale change. Large-scale does not imply that interventions only aim at the national level, but depends on the nature of the market system. Priority is given to developing capacity in the market system rather than simply delivering benefits directly. Sustainability is operationalized into every aspect of M4P activities and requires that realistic future scenarios be developed, planning for sustainability at entry rather than at exit. M4P is also based on identifying and pursuing the causes rather than the symptoms of constraints. It requires that organisations play a facilitating role, working with different players to make the system work more effectively and stimulating changes without becoming part of it. M4P differentiates between short-term temporary subsidies that can encourage or facilitate lasting change and longer term recurrent subsidies that may be required to ensure on-going access to ‘merit goods’, such as water and health services. Where long term subsidy is required to ensure access, M4P simply asks how this will be provided, and how such recurrent expenditure will be financed once support ceases. Key Outcomes and Learning There is growing evidence that M4P works and major programmes in different contexts and markets systems explicitly using the M4P approach have achieved significant change. Change is manifested in high levels of outreach and impact, for example, the number of people accessing and benefitting from new services. More importantly, capacities and incentives have been developed to show that change is sustainable and therefore impact will grow further in the future.

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(6) IRC, Christine Sijbesma, Carlos Diaz, Catarina Fonseca, Christelle Pezon. 2008. Financing Sanitation in Poor Urban Areas. Delft, The Netherlands: IRC Symposium. Background Cities are facing an increasing challenge to provide adequate living conditions for new residents who lack power and money. This paper focuses on the financing challenge, indentifying innovative financial approaches and mechanisms to provide the urban poor with adequate sanitation. Examples are also presented including a credit-saving initiative for domestic waste management in Burkina Faso; revolving funds in Honduras and Ghana; and ‘component sharing’ in Pakistan. Overview of Innovative Approaches Innovative approaches are designed to address key failures of the traditional financing approach (i.e. targeting large infrastructure development projects, top-down decision-making, and unsustainable financing) and involve new actors (microfinance institutions (MFIs), small scale service providers and local entrepreneurs). They aim to make sanitation facilities affordable by adjusting the payment requirement and modalities to the ability of people to pay and to the mechanisms they use, and increasing acceptability and willingness to pay, recognizing that the problem is often not the total amount of money needed, but the upfront lump sum payment. Important characteristics required to achieve this include: low-income groups having information about various options; users and communities deciding for themselves; finance schemes acknowledging the need to cover both soft and hard costs; involvement of the local private sector; user fees as main source of finance; and breaking barriers to extend the service to the unserved. At the micro-level financing has historically been gift-money because of the generalized perception of high risk associated. Innovative mechanisms look to lessen this perception and enable communities to access a bigger inflow of resources. Potential mechanisms at the local level include: grants, loans, group saving schemes, and investments in and by individual entrepreneurs. At the meso or intermediate level of government financing mechanisms include: central government transfers, local revenue sources for municipalities, donor funds, north-south solidarity funds (twinning cities), private sector/ water company investments, market linked sources, and international financing institutions. MFIs also play an important role by giving micro-credit, micro-guarantees, micro-project finance and microinsurance services to finance micro-enterprises and targeting these financial services on small businesses in the sanitation sector. Conclusions Adjusting the terms and conditions for credit and loan services to the specific situations of the target area is essential. For example, the Grameen bank charges commercial interest rates, but has a very high repayment rate because it is prepared to give very small loans to individuals, does not ask for collateral, allows repayment at suitable intervals, and has local branches or representatives close to their customers. Promising outcomes could come from financial products linked to existing housing loans and to slum improvement schemes and although the greatest attention is often on the impact of improved sanitation on health and the time saved, other impacts on the productive use of water and the rise in property values are also important and may generate sufficient income to pay back loans.

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(7) International Finance Corporation (IFC), Joe Brown, Tom Outlaw, Thomas Clasen, Jianyong Wu, Mark D. Sobsey. 2009. Safe Water for All – Harnessing the Private Sector to Reach the Underserved. Washington, D.C.: IFC. Background Most investment in safe-water products and services in developing countries is aimed at middleand upper-income markets as suppliers have few obvious incentives to pursue the riskier, more challenging Base of the Pyramid (BoP) markets. This report discusses the role of the private sector in increasing access to safe water among lower-income populations, highlighting East Africa, India, and China as important emerging markets. Business Models A number of business models have evolved that strive to overcome the major barriers to reaching the BOP markets and realize both social and financial returns at scale. For these models, success is based in part on the public benefit derived from providing greater access to safe water for lower-income market segments, but to maintain successful and sustainable operations, earned income (direct or indirect) is necessary to reduce dependence on grants or charitable contributions. For example, some companies have explored the carbon-offsetting potential of water treatment options by earning indirect income from selling carbon credits. Several factors can influence the success of social enterprises and their attractiveness to private sector investors including legal structure, access to financing, entrepreneurial capacity, strategic partnerships, and revenue models (e.g. Advertising and leasing revenue, microfinance, franchising). Financial Barriers Although a number of new private and public-private sources of investment are emerging, the amount of investment remains limited and continued efforts are needed to encourage new investors to enter the market. To address inadequate credit and risk-management instruments, development of an aggregated pipeline of opportunity, a reasonable payback scenario, support for capacity building, and a risk-sharing mechanism are critical. Microfinance institutions may also be wary of products that are non-revenue-generating durable goods and it is therefore important to increase their awareness of the potential market and risk-mitigation alternatives for developing safe-water products. Key Recommendations The following is a list of recommendations for how the donor and investment community can use their financial and technical resources to develop a more robust and mature market among BOP consumers for safe-water products and services: • Strengthen the enabling environment • Strengthen commercial financial intermediaries • Increase BOP consumer demand • Increase BOP consumers’ access to credit for water-related borrowing • Provide soft and flexible funding to safe-water entrepreneurs • Invest in a portfolio to technologies and business models • Invest as much in the entrepreneur as in the technology • Identify and support enterprises that match products/strategies to the right market segments • Improve technologies and business models through advisory services • Incentivize producers of high-end technologies to target BOP markets.

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(8) Pretus, Laia Domenech and Oliver Jones. Money down the pan? Community level models for financing sanitation in rural Nepal. Nepal: WaterAid Nepal. Background A range of different actors are engaged in promoting sustainable sanitation coverage in Nepal; however there is a lack of knowledge and understanding within the sector of the different approaches to financing sanitation at a community level. This document reviews the various financing models used by sanitation programmes in Nepal. Approaches The main financing models in Nepal include: hardware subsidies, loans, software subsidies (community awareness) and rewards. There are still programs in Nepal which give high subsidies to construct latrines; however, it is now common practice to subsidise latrines only up to pan level or to provide graded subsidies. In the graded subsidy approach, household cash and labour contribution are graded depending on the category of household wellbeing, physical ability, technological choice and geographical location. Households are also requested to deposit a nominal amount in the users’ committee bank account in order to create a sense of ownership. Taking loans to build latrines is another common practice in Nepal with money generally borrowed from informal sources at very high interest rates. Borrowing from institutional sources is also becoming increasingly popular through saving and credit groups and revolving loans. Most sanitation programmes now incorporate a community awareness component to stimulate latrine construction within a community. Some programmes provide only software support, whereas others combine software activities with financial assistance to promote latrine construction. Use of rewards is also gaining popularity (especially with CLTS programs) as an effective tool to encourage achievement of public outcomes and construction of quality latrines, without providing any kind of hardware subsidy. Key Findings and Recommendations The different financing models were evaluated from the economic, social and sustainable total sanitation perspective, with CLTS scoring the highest. Emphasis on stopping open defecation and presenting sanitation as a public good ensure effective behaviour change and improve community unity in addressing sanitation. It encourages the provision of cross subsidies among community members to address the additional support required by the disadvantaged households. Thus, despite financial support not being provided, the disadvantaged households are targeted through collective community action. Graded subsidy models are also effective; however, the cost of these programmes is significantly higher than those approaches which maximise community contribution. The cost of programmes offering subsidies up to pan level is up to 30 times higher than community led interventions and even though latrine coverage is generally good, latrine usage is not always that encouraging. Approaches making use of revolving loans increase community contribution and have resulted in the construction of quality latrines, but often fail to reach the poorest households, with many low-income households unable to afford to take loans. Resources should be targeted at community activities, such as mobilisation and training, and community outcomes, not supporting individual latrine construction but rewarding community sanitation outcomes. Other key recommendations include: provision of additional support for poor and marginalised groups; improve access to institutional microfinance facilities; reduction in the overlapping of programs promoting different approaches; increased local planning and coordination amongst stakeholders; and development of a national sanitation program.

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(9) Chambers, Robert. 2009. Going to Scale with Community-Led Total Sanitation: Reflections on Experience, Issues and Ways Forward. Practice Paper Volume 2009 Number 1, Brighton, UK: Institute of Development Studies. Background Continuous learning, adaptation and innovation are all required to spread CLTS well, but it is not without challenge. The purpose of this paper is to review experience gained as CLTS has spread, and to explore options and ways forward for the future. Effective Practices One of the most important characteristics for creating a favourable and enabling environment for CLTS is the absence of hardware subsidies. In Bangladesh where subsidies were being provided by NGOs in nearby communities, people were reluctant to take their own action, preferring to wait for outside support and similarly, in India much of the disappointing progress with CLTS is attributed to the subsidies of the national Total Sanitation Campaign. The market is largely self-sustaining once stimulated, however the speed of action by communities often creates a demand for hardware not available in local markets. Many initiatives have sought to meet this demand such as local manufacture and marketing by NGOs and self-help groups, inviting traders to community meetings to assess demand, rural ‘sani-marts’ where hardware is on display and for sale, and finding cheap, light and effective materials. In the Panipat District in India, self-help groups were provided with seed money to set up rural sanitary marts to supply hardware to communities in response to bulk orders. Having an adequate and timely supply of low-cost hardware encourages those who can to start above the bottom rung of the sanitation ladder, and others to progress up it. Challenges The acceptance, spread and quality of CLTS and its impact face three major obstacles: opposition at senior levels, especially from professionals who have been working for many years in rural sanitation; institutional factors including pressures to disburse large budgets, vested interests and decreased quality resulting from rapid scaling up; and programs to subsidise hardware for individual rural households. Recommendations Going forward, four key areas for innovating, learning and sharing, stand out for the spread of CLTS: methodological development and action learning; creative innovation and critical awareness; learning alliances and networks; and seeding and strengthening CLTS as a movement.

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(10) World Bank Global Environment Facility (GEF). 2006. Post Implementation Impact Assessment: Poland Efficient Lighting Project. Washington, D.C.: World Bank GEF. Background This report summarizes an impact assessment conducted to better understand the extent of impacts of GEF’s Poland Efficient Lighting Project (PELP), implemented by IFC in Poland from 1995 to 1998, the sustainability of these impacts, and lessons learned. Aim PELP was designed to encourage the replacement of conventional incandescent bulbs with energy-efficient compact fluorescent lamps (CFLs) in households in Poland, ultimately avoiding electricity consumption and the emission of greenhouse gases associated with electricity generation and distribution. Approach Relying on private sector involvement, PELP provided subsidies on a competitive basis to Polish CFL manufacturers, using a “manufacturer subsidy” approach to increase the availability of CFLs and lower their price. Manufacturers who were able to provide the greatest energy savings for the smallest application of subsidies were allocated larger shares of subsidies. By providing subsidies to manufacturers PELP took advantage of the CFL manufacturers’ existing distribution channels and networks. The project also promoted the luminaire market with a subsidy to fund a technology transfer and education program. The public education component provided general consumer information on the benefits of energy-efficient lighting using a combination of traditional advertising vehicles and cooperation with the NGO community and public schools. The pilot demand-side management (DSM) component was designed to test the effectiveness of promoting CFLs through Polish municipalities with the help of electric utilities, including targeted installation of CFLs, a city-wide promotion campaign, and capacity building of indigenous Polish expertise. Key Lessons and Recommendations PELP showed that a high-profile CFL promotion program could be operated at a reasonable cost using private sector delivery channels. It required an energetic consumer culture and product distribution system, but was not dependent on high subsidies to encourage consumer purchases. Subsidies were important, but more as an enticement to lure manufacturers and other participants into the program. The following lessons were identified: direct incentives to manufacturers can be an efficient way to bring about market transformation; for sustained impact, appropriate champions must be identified and integrated into the initiatives; it can be beneficial to work more with end users and final consumers, who have the most to gain from electricity savings; and the health argument can be a convincing factor in bringing public support. Key recommendations were also formulated for sustaining market transformation: further use of existing networks that raise consumer awareness should be built on; a phased strategy for consumer awareness is recommended, focusing initially on economic aspects to induce a shift, but then focusing on global environmental aspects to address sustainability; increase municipalities’ awareness of available funds and build related capacities to facilitate access to those funds; and finally, the enabling environment, including the legal structure and enforcement, must be considered to address capacity development for policy making, implementation, and enforcement; future initiatives should look at the development of mechanisms to ensure CFL quality.

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(11) World Business Council for Sustainable Development (WBCSD). 2004. Banco do Nordeste’s CrediAmigo – A development bank’s success with micro-finance. Geneva, Switzerland: WBCSD. Background In 1996, the World Bank and Banco do Nordeste initiated a collaborative process to jointly implement a local micro-credit program, which would provide technical capacity-building, institutional development, environment development and saving/financing techniques. Motivated by the fact that small informal companies were not being served by the Bank's financing activities due to the restrictive regulation of Brazil's Banking Systems, Banco do Nordeste and the World Bank developed and launched a low-income bank (CrediAmigo), targeting urban micro-entrepreneurs from informal sectors including commerce, trade (carpenters, artisans) and service. Approach Partly due to the unsuccessfulness of their previous highly subsidized individual lending program, Banco do Nordeste chose to adopt the solidarity group lending model, whereby a group of individuals provide collateral or a loan guarantee through a group repayment pledge. Under this model, if one group member defaults, the other group members make up the payment amount. This “moral collateral” replaces the traditional requirement for physical collateral. In addition to providing micro-credit including short-term (3-6 months) and long-term (up to 18 month) loans, CrediAmigo also provides its customers with consulting services at no additional cost to help them run their businesses more efficiently. This provides not only a benefit to the customer but also helps to reduce default risk by improving the customers’ ability to manage their own business effectively. In response to customer demand, it now offers both solidarity group loans and individual loans, however these tend to be offered to customers that have established a strong repayment record through the group loan product. To ensure longterm financial sustainability, its interest rate is high enough to compensate for the higher transaction cost and risk associated with micro-credit, but still considerably lower than the rate that micro-entrepreneurs could get elsewhere (usually their only alternative is to borrow from an informal-lender at rates as high as 300%). CrediAmigo uses both traditional and market-specific communication strategies to promote its offerings such as television and radio ads and information sessions at local schools, churches and other public gathering places. CrediAmigo also goes door-to-door to local micro-businesses to better understand the financial needs of its current and potential clients and advise them on the best products for them. Key Outcomes and Learning From 1998 to 2001, CrediAmigo’s number of clients grew at least 40 percent each year, and reached full financial self-sufficiency in July 2003. An early encounter with uncontrolled growth provided a valuable lesson about the importance of focusing on quality of growth and of having appropriate procedures in place to effectively manage growth. By providing effective and replicable procedures that could be applied in each branch CrediAmigo increased productivity and significantly improved its portfolio quality, demonstrating that with proper planning and appropriate policies, training and incentives in place, micro-credit institutions can maintain very high repayment rates.

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(12) World Business Council for Sustainable Development (WBCSD). 2008. GHD – Vietnam’s Urban Sanitation Program. Geneva, Switzerland: WBCSD. Background The Three Delta Towns Water Supply and Sanitation Project (3DT) aims to improve sanitation facilities and services in three flood-prone towns in the Mekong Delta in Vietnam and to develop the capacity of local institutions and community groups to manage these systems on a sustainable basis. GHD has co-managed the 3DT program over the past seven years, with external funding from AusAID. Approach Sustainable revolving sanitation credit funds at the town’s women’s union (TWU) level were established in each town to meet the credit needs of poor households to build septic tank systems. Project staff worked with each town people’s committee (TPC) and TWU to establish the sanitation credit scheme parameters so they were suitable for borrowers and lenders, and also acceptable to local administrators. Management arrangements and responsibilities of the project, TPCs, TWUs and other stakeholders were defined, and training was given to TWUs. The schemes were documented, agreed and signed in January 2003 by the project, TWUs, the water supply and environment company, TPCs, ward and commune people’s committee, community representatives and volunteers. Initially the project gave each TWU AUD 38,000 as a seed fund for loan capital, with additional funds provided for training and awareness materials relating to septic tanks and improved sanitation. The TWUs took full management control of the sanitation credit schemes and ownership of the seed fund in 2005. Loans to households were fixed at VND 1,500,000 (about AUD 190 in 2002) with a repayment term of 15 months. This was sufficient to cover the cost of the essential elements of the septic system, from the toilet pan and slab through to the septic tank treatment system and connection to drains. Loans were not provided for the construction of above ground toilet housing. Borrowers made fixed monthly repayments with an interest rate of 1% per month. 50% of the interest amount was returned to the credit fund to add to the loan capital, with the other 50% used to pay for salaries and overheads. Key Outcomes and Learning Septic tank coverage increased significantly in the three towns, with more than 4,500 households, or approximately 22,500 people, having new sanitary toilets at home. According to the TWUs, for every two to three loans disbursed by them, another septic tank is built without financial assistance. This is in part due to more knowledge and awareness about septic tanks, as well as direct motivation by the TWU for those who can afford to build a septic tank without borrowing money. Active and enthusiastic borrowers have also become motivators for their relatives, friends or neighbours to build septic tank toilets.

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(13) Water and Sanitation Program (WSP). 2008. Identifying Constraints to Increasing Sanitation Coverage – Sanitation Supply and Demand in Cambodia. Field Note, Phnom Penh, Cambodia: WSP. Background This field note summarizes research undertaken in rural and peri-urban areas of Cambodia on the demand for latrines among consumers and the supply of latrines by the private sector. It discusses the opportunity for market forces to increase latrine purchase and installation and outlines the recommended interventions on both the demand and supply dimensions of the market to achieve this. Current Approach The private sector is responding to an unsubsidized demand for latrines and providing the majority of latrine installations in Cambodia. It is composed of importers and wholesalers, retailers, prefabricated concrete producers, and masons and characterized by a fragmented set of independent businesses, each supplying a single ingredient of latrine construction or the onsite construction service itself. This and the fact that latrines only account for a relatively small amount of each of the businesses’ activity results in a supply system that has limited ability to innovate, package, or price products/services that could yield more attractive, simpler, and clearer purchase options for consumers. Very few, if any of the supply chain actors are involved in any kind of promotional activities and rather than reach out to find and attract new customers, the supply system remains passive, simply reacting to consumer decisions to build a latrine. Masons, who would possibly be best placed to market their services verbally and therefore at relatively low cost, suffer from a lack of trust among consumers that discredits them as providers of reliable or credible information. Challenges There is a strong demand for latrines among the Cambodian population, yet this demand remains mostly unrealized primarily due to the following challenges: a prevalent perception of an ‘ideal’ yet prohibitively expensive latrine design; and a lack of urgency toward investment in latrines even though consumers recognize the advantages of latrine ownership. The supply side is challenged by: no readily available or clear information on design options, or pricing that would help consumers make decisions; a lack of trust among potential consumers toward the very businesses which supply latrine components or construction services, and who are most optimally placed to interact with customers concerning latrine purchase decisions; a lack of affordable designs that are accepted by discerning customers as durable and investmentworthy; and poor quality construction and latrine placement in relation to water points that compromises the hygienic benefits of new latrine constructions. Key Recommendations Demand-side initiatives include consumer marketing to: overcome the perception of an ‘ideal’ design, and encourage users to choose options that can be upgraded toward the ‘ideal’ designs, but with lower entry-level costs; and encourage latrine purchases that can be upgraded over time. The objectives of supply-side initiatives should be to strengthen capacity to ensure that: the private sector optimally plays a role in information exchange, demand creation, and sales closure; and affordable, hygienic, and upgradeable latrines are available through the market.

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(14) Achwal, Nilima. 2010. Getting BoP Products in Consumers’ Hands – MFIs and Microdealers Can Help. Ann Arbor, Michigan: The William Davidson Institute. Background Selling a product to a bottom of the pyramid (BoP) member, either physically or in marketing, is no easy task and microfinance institutions (MFIs) are increasingly becoming attractive partners for companies wanting to sell their products to BoP customers. In support of using MFIs, a recent study has found that borrowers, who often have an irregular cash flow, prefer products sold on credit. In addition, loan officers frequently visit borrower’s homes and have a deep understanding of their needs and preferences. This brief paper examines the role of MFIs and micro-dealers to get cutting-edge products and innovations into the hands of those that need them the most. MFI Approach MFIs have incentive in distributing others' products as even though revenue goes back to the company, if borrowers buy the products on credit, all interest will accrue to the MFI. The company may also offer commission to the MFI or loan officers for selling the products. They may, however, be reluctant to offer non-functional products that do not contribute to borrowers' livelihoods as it increases their credit risk. Even more importantly, the sales/distribution process must be as unintrusive as possible to the MFIs current processes as the loan officers are often underpaid and overworked and selling outside products may be low on the priority list. There are varying degrees of involvement including MFIs acting as: sales agents (having loan officers sell the products directly); micro-dealer facilitators (employing borrowers to be salespeople in their own communities); customer order aggregators (letting loan officers just take product orders); consumer financiers (where the MFI agrees to offers loans for the borrowers to buy the products); or simply customer/marketing data providers. Key Learning MFIs provide valuable pathways to penetrate the BoP, especially because of BoP consumers' preference for credit. Using micro-dealers (related or not to MFIs) can facilitate the distribution process, as well as employ and empower individuals. Applying insights from field results of different distribution methods heightens a company's probability of success and the probability that a much-needed product will end up in the hands of a BoP consumer. Drawing from experiences in India where several companies have capitalized on MFIs' ready-made distribution networks to the BoP several important observations have been made: (1) loan officers must be able to transport products easily; (2) there is low working capital at MFIs; (3) sales must not need follow-up service; protect the MFI’s brand (and borrower-officer relationship); and (4) do not create an entirely new supply chain. It has also been found in India that BoP consumers have a lot of interest in non-productive items (TVs, cupboards), little interest in products that are functional and contribute to income (fertilizer, livestock), and even less in those that have an indirect benefit, even if it is for their health (water filters, solar lanterns, insurance). This means that sale of most "good-for-you" items should include an intensive marketing strategy. It is also important to realize that distribution is not merely about transportation and infrastructure, in the BoP, a feeling of personal trust cannot be understated in its importance in household decision-making. The key is to foster a deep connection and relationship with a large network of BoP consumers, with the help of MFIs, micro-dealers, and other means.

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(15) Acumen Fund, David Lehr. 2008. Microfranchising at the Base of the Pyramid. New York, NY: Acumen Fund. Background Microfranchising is emerging as a powerful new market-based approach to alleviating poverty. It is a development tool that leverages the basic concepts of traditional franchising, but it is especially focused on creating opportunities for the world’s poorest people to own and manage their own businesses. This paper builds upon the cross-cutting issues and insights uncovered at a workshop led by Acumen Fund India in 2007. Approach Microfranchising is based on traditional franchising, which copies a successful business and replicates it at another location. The franchisor (who owns the overall rights to the business) sells or licenses its systematized business approach to a franchisee. The franchisor typically controls many of the macro aspects of the business such as creating and marketing the brand, procuring inputs, and recruiting and training franchise operators. Once the business model has been proven, potential licensees of this business, the franchisees, can operate subsequent outlets at lower risk. The franchisor, motivated by continued returns from the franchisee, usually provides ongoing training and support to help ensure their success. The franchisor often has better negotiating power with suppliers and can reach economies of scale in other areas (such as product design, use and development of new technologies, and supply chain development). The franchisor is usually better equipped to focus on marketing and growth as well. Furthermore, with the presence of a central franchisor, innovations developed by one franchisee can be quickly implemented throughout an entire network of franchisees. One avenue for taking microfranchising to scale is to partner with microfinance institutions, which have broad distribution networks and know the entrepreneurs in the communities they serve. This kind of partnership could improve access to financing and address many of the recruitment and distribution issues noted above. Challenges Many challenges still remain and due to the more sophisticated business processes required, microfranchising will likely work best with people who are better educated, who have the math and reading skills required to fill out reports, and who have a risk profile to handle larger financial transactions. Microfranchisees may overborrow and create a larger spiral of individual debt than would traditional microcredit borrowers. In addition, microfranchisees are tied to the franchisor that may close or fail, withdrawing the support that made the business opportunity attractive and possibly leading to default on the debt those microfranchisees hold. Key Outcomes and Learning Learning from the experiences and successes of other microfranchises the following lessons were identified: (1) developing a successful model is expensive; (2) models should be well documented and simplified wherever possible; (3) efficient supply chains are needed, but difficult to create; (4) location matters; (5) brand matters; and (6) contracts and legal considerations must be situationally appropriate. Key lessons learned in understanding microfranchises include: (1) microfranchisees are difficult to find; (2) they require financing; (3) franchisees must be profitable, quickly; and (4) resistance to franchisee fees increases over time. Finally, lessons learned about operating a microfranchising organization include: (1) local policies and regulations matter; and (2) quality control is essential.

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(16) Baskovich, Malva Rosa. 2008. Building Inclusive Sanitation Markets for the Poor (Peru). Delft, The Netherlands: IRC Symposium, Sanitation for the Urban Poor, Partnerships and Governance. Background Despite significant public investment in sanitation in Peru a large number of households remain uncovered and some of those who were reached showed little satisfaction with the sanitation solution they received. The “Alternative Pro-poor Sanitation Solutions in Peru” (APSS) initiative by WSP proposes a market approach to sanitation and pays special attention to the active involvement of the private sector in sanitation supply. Challenges Latrines are perceived as a factor of social differentiation among Peruvians and in poor people’s minds, latrines are like a label saying, “I am poor”. The sanitation supply chain is inadequate or nonexistent and often involves a wide range of diverse and unconnected providers making it costly for poor families to access sanitation solutions. Installation and maintenance services may exist but they are not necessarily qualified or certified in the provision of sanitation systems and other sanitation services crucial for sustainability, such as sludge management, are not yet addressed as potential business for local sanitation providers. Approach The APSS has four components: (1) demand stimulation; (2) strengthening of supply; (3) access to micro-credit options; and (4) supporting institutional capacities. Supply strengthening seeks to improve private sector involvement in research and innovation and promote the creation of sanitation small businesses (hardware stores, service providers and artisans). They are encouraged to improve their management capacities and link with national sanitation suppliers in order to offer alternative products and technologies. To facilitate credit for sanitation, the initiative promotes private financial institutions to develop specialized financial products for sanitation, as well as increase their coverage in new segments. In support of institutional capacities, the local government is encouraged to provide an enabling institutional environment and to implement integrated public sanitation policies. For sustainability, the identification and implementation of rules and laws, incentives and sanctions that guide both producers and customers and guarantee technical and quality standards is also encouraged. Key Outcomes and Learning APSS developed an integrated supply package that responds to expectations for suitable, sustainable and low-price sanitation options. Involving three different kinds of financial institutions (international banks, national and regional microfinance organizations and nonregulated community-based organizations and NGOs), diverse financial products and schemes were offered such as sanitation wholesalers promoting credit cards, micro-finance institutions operating individual and community loans, and NGO savings groups. An accessible and good quality local sanitation supply was built using local materials and resources and supporting local providers through technical assistance and training. The competencies of three types of sanitation providers (retailer stores, service providers and artisans) were also improved to provide simultaneous access to products and services, thus reducing transaction costs. Sustainability will depend on maintaining a ‘win-win’ exchange between a population that demands sanitation quality services and social inclusion and a supply that responds to expectations and needs by trying new and profitable business opportunities.

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(17) Budinich, Valerie. 2005. A Framework for Developing Market-Based Strategies that Benefit Low-Income Communities. Ashoka, Changemakers. http://www.changemakers.net/journal/300508/framework.cfm Background In 2005 Ashoka's Full Economic Citizenship Initiative and Changemakers launched a global search for innovative market-based strategies from both businesses and citizen sector organizations that improve the lives of low-income individuals in different parts of the world. This article describes the conceptual framework for the competition that aims to identify and spread market-based models that achieve both social impact and profits. Barriers For the most part, there are three factors that negatively affect the ability of private companies and civil society organizations to serve low-income markets: (1) the limited purchasing power of individual clients; (2) high volume businesses based on small transactions; and, (3) a poor understanding of the human and social capital that low-income communities possess. Key Principles There are three key principles for succeeding in this bottom of the pyramid (BoP) space that represent new standards emerging from practical applications which are meant to inspire and guide the innovation process going forward. • Design products and services that tap into the wealth of the poor: transforming the apparent scarcity of means into multiple opportunities by capitalizing on the resources already available to low-income communities. • Change radically the logic behind your business model: succeeding in reaching scale requires not only an affordable product but re-thinking each step along the value chain from production and distribution to pricing, promotion and delivery to end consumers. • Leverage the power of communities as both consumers and producers: in a way in which interventions that contribute to increasing the income of small producers and micro entrepreneurs have the synergistic effect of increasing the demand for goods and services of low-income families. Illustrating these three principles are nine examples of market-based solutions developed and refined over the years by creative businesses or social entrepreneurs who are determined to demonstrate that it is possible to reach scale, deliver impact, and generate profits at the same time.

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(18) Changemakers. 2008. Banking on Social Change: Seeking Financial Solutions for All. http://www.changemakers.com/en-us/bankingonsocialchange Background The Changemakers Innovation Awards series is based on a unique "open source" format where participants compete by entering the best solutions to pressing social issues while collaborating to advance current initiatives. The purpose of this competition was to find solutions from around the world that apply creative approaches to providing financial solutions for all (both not-forprofit, as well as market-driven, profitable solutions). Barriers The main barriers preventing the poor and disadvantaged from participating in the formal economy are: non-affluent are not valued customers; lack of access to markets or products; social benefit businesses not deemed investment worthy; and lack of skills and incentives to join formal economy. Design Principles Based on insights from work of leading social innovators, to overcome these barriers to financing for all, six design principles to lever change are presented: • Leverage the stake individuals have in financial success of the group: As microfinance has proven through its innovation of lending circles in which each person is accountable for the debts of others, there is value in setting up structures that tie incentives to group success. • Prove that social return doesn’t preclude financial gain: This strategy has worked both in terms of drawing individuals to an investment vehicle as well as from the perspective of persuading institutions that social return is not the only value involved in for-benefit companies. Coupling real financial return to lending to the poor, through micocredit and other vehicles, has allowed the amount of money being poured into the cause of relieving poverty to expand exponentially. Finding ways to leash market-solutions to social causes is pivotal to scale and sustainability. • Lower the entry threshold: Simply addressing the entry point barriers to services and participation is key. Removing geographic barriers by allowing mobile phone access or “doorstep service” is one form this innovation takes. Others include eliminating traditional financial barriers, such as collateral requirements, minimum balance thresholds, etc. • Turn hidden value into alternative markets: Many innovators have found ways to assign value to previously unmonetized assets to drive a new form of commerce, or spur participation in the established economy. • Aggregate demand or supply to influence market: One poor consumer or one small business is too small of a voice to sway markets. Aggregated, this voice is louder and hugely powerful. • Shorten timeline on individual “returns”: One of the primary hindrances for the poor in participating in the formal economy is that any benefit from decisions that take the long term into account invariably hamper their ability to survive in the now. Programs that shorten the timeline on that payback, whether it is an immediate credit to be used for health insurance, or a cash payment to reward the decision to keep a child in school rather than employ him on a farm, all provide some opportunity for longer term planning and investment.

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(19) Changemakers. 2008. Tapping Local Innovation: Unclogging the Water and Sanitation Crisis. http://www.changemakers.com/en-us/waterandsanitation Background The Changemakers Innovation Awards series is based on a unique "open source" format where participants compete by entering the best solutions to pressing social issues while collaborating to advance current initiatives. The purpose of this competition was to find solutions to the water and sanitation crises. Barriers The main barriers to change identified for the water and sanitation sector were: policies distort pricing, lower profits, and misuse water and waste; public information alone does not change behaviour; limited focus on long-term impact; lack of access to equity/credit in the sector; and participation (collective action and ownership) can limit accountability and effectiveness, rather than improve service provision. Principles of Innovation To overcome these barriers, five principles of innovation are presented based on efficient services delivered to the consumer and earned income for the entrepreneur. • Value-added services mean additional business income: Entrepreneurs can create profitable businesses based on service provision as long as they are seen by customers to directly improve wellbeing such as raising earned incomes. When those services increase income significantly for entrepreneurs, they can scale-up their businesses and demonstrate new models for water and sanitation provision. • Move people up the water & sanitation ladder: Although constructing a pit latrine is not a long-term solution, it can be an important first step. Consider how a businessperson could earn income by delivering new sanitation options to communities, just as salespeople graduate users of consumer products to more sophisticated options. • Increase accountability through design for the long-term: The current public sector approach that disconnects water delivery from sanitation has actually undermined public sector investments in water. Investors who help develop a complete system - from design to construction to system management - can claim the full value of the system. They can claim not just the financial return on investment, but also the economic benefit of bringing longterm savings and efficiency to a community. • Connect solutions to the finance and housing sectors: Housing and sanitation entrepreneurs could work together to find low-cost ways for the urban poor to own or rent land, or to build low-cost housing with a small-scale sanitation option as part of the design. In dense urban dwellings, MFIs may be willing to lend for housing stock improvements that add a toilet, which could also earn the dweller income. In rural areas, other financiers may offer loans to create multiple-use water systems that provide both agricultural and household water access. • Financing for the new consumer: Expanding the range of investment options in water and sanitation could shift the water market away from a quasi-monopoly, and in turn cultivate new customers. Water co-operatives could dedicate a portion of user fees to upgrading services; or small monthly payments could ensure continued usage of toilets in a way that fee-for-service payments may not. Financiers can also think beyond microcredit toward savings products and other options that tap consumers' willingness to pay.

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(20) Fonseca, Catarina and Marieke Adank. 2004. Innovative Financing Mechanisms at Local Level. Workshop Report, WEDC Conference, Vientiane, Laos. Background There is a growing number of experiences with financing mechanisms that contribute to sustainable service delivery, however it remains unclear which are the most effective at local level for scaling–up maintenance and expansion of drinking water and sanitation services to the poorest. An increase in local investments or revenues will only be effective with an appropriate “enabling environment”, such as incentives and a regulatory framework that allow innovative financing mechanisms to flourish. To share ideas and experiences on these issues, a workshop was organised by Crepa (Burkina Faso), NGO Forum for Drinking Water Supply and Sanitation (Bangladesh) and IRC (the Netherlands) at the WEDC Conference in Vientiane, Laos in 2004. This report presents the outcomes of this workshop. Approaches There is a great variety of innovative financing mechanisms; however, there seems to be a gap in those focussing on sanitation compared to water supply. In urban areas, sanitation financing mechanisms include revolving funds for sanitation schemes and national water funds. In rural areas, mechanisms include graduated tax for public sanitation, community environmental health funds, self help groups as rural bankers and micro-credit. A series of case studies are presented to highlight the different financing mechanisms. Success Factors Decentralisation and planning at local level are generally perceived as the most crucial elements of an enabling environment. Financial decentralisation has been mentioned as one of the most important success factors if accompanied by capacity building. Community capacity building in management of funds is also considered crucial.

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(21) Government of Indonesia. 2003. Development of Community-Based Water Supply and Environmental Sanitation. National Policy, Jakarta, Indonesia: Government of Indonesia. Background As a result of ongoing issues including lack of effective and efficient investment and limited government capacity, in 1998 the Government of Indonesia began the process to formulate the Community-Based Water Supply and Environmental Sanitation National Policy. This policy was prepared in stages by a Water Supply and Environmental Sanitation (WSES) Working Group led by the National Development Planning Agency/BAPPENAS and involving the Ministry of Home Affairs, the Ministry of Settlement and Regional Infrastructure, the Ministry of Health, and the Ministry of Finance. Aim The aim for WSES sector development is “people’s improved welfare through sustainable management of water supply and environmental sanitation”. Principles of Approach Water is treated as an economic and social good with the underlying principle that “the user pays for service”, implying that the costs paid for WSES service includes the costs of convenience and ease of access to WSES infrastructure as well as fees for operations and maintenance of the facilities. Using the demand-responsive approach (DRA), the community is placed in the role of decision-maker in the selection, financing, and management of the WSES system. Initiatives to change behaviour emphasize comprehensive proper hygiene and healthy living education as a compulsory and principal component of future WSES development and development planning and implementation does not focus solely on the physical construction of infrastructure. The new policy focuses on the poor and other disadvantaged members of the community, requiring them to be active participants and decision-makers. Women are also encouraged to actively participate in determining problems, identifying underlying causes, recommending possible solutions, and ultimately making decisions to solve related problems. The policy also aims to enhance community ownership of infrastructure and community awareness of sound management principles early in the process, under the principle “by, from, and for the community”. The role of the government in the empowerment process is that of facilitator, not provider, such that it offers continuing technical and non-technical advisory services, as opposed to direct subsidies for infrastructure construction. To ensure sustainability, future development and management of WSES infrastructure should be based on the principle of cost recovery, meaning that all financial components of development (such as budget planning, physical construction, O&M, and depreciation) are considered and accounted for. Recurring fees required to pay for the operational costs of WSES services are discussed and agreed to by the user communities, and are in line with ability to pay (poor, middle, and well-off).

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(22) International Finance Corporation (IFC). China Utility-based Energy Efficiency Finance Program (CHUEE). Brochure, Beijing, China: IFC. Background The China Utility-based Energy Efficiency Finance Program (CHUEE) was founded in 2006 by IFC as an innovative market-based solution to China’s energy and environmental challenges, where key economic players are motivated to join forces in creating a new, yet sustainable financing model to promote energy efficiency. Aim The programs intends to create effective, commercially sustainable delivery mechanisms for systematically developing, implementing and financing energy efficiency projects with the ultimate aim of reducing greenhouse gas (GHG) emissions and other adverse environmental impacts. Challenges Marketing capacities are underdeveloped and suppliers of products and services encounter difficulties when marketing their equipment and educating potential customers on the economic benefits of energy efficiency investments. Access to credit is also limited, especially for small and medium enterprises, and loans are still a fairly new concept. In addition, commercial banks in China lack experience in sustainable financing and tend to be risk-averse. Approach To overcome these challenges, the CHUEE program addresses two key aspects of the problem: the need for technical assistance in financial engineering and the need for loan guarantees for risk-averse financial institutions, particularly private Chinese banks. The program provides its partners (commercial banks, utilities, energy efficient equipment suppliers and energy management companies) with a package of technical assistance on marketing, engineering, market research, project development, and equipment financing services. It cooperates with commercial banks and offers them a risk-sharing facility under which IFC shall bear a certain portion of the loss for all loans within the energy efficiency financing portfolio. The purpose of the risk-sharing facility is to provide incentives for participating banks so that they can experiment with energy efficiency financing, and also to build their capacity to undertake this kind of business as one of the standard business lines. Expected Outcomes The specific objectives to be achieved at the end of the program implementation are as follows: by 2010, 20 million tons of C02 and other GHG emission reduction per year; the mobilization of RMB 5-10 billion (US$ 0.7-1.45 billion) for energy efficiency project financing; further development of financing mechanism for environment protection in China; and improved private enterprises access to finance in the energy efficiency sector.

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(23) Institute for Financial Management and Research, Nachiket Mor. 2006. Some Thoughts on Access to Markets as a Strategy to Address Poverty. Working Paper Series, Chennai, India: IFMR. Background The key to ICICI Bank’s work on poverty alleviation is the belief that most regions of India possess economically viable occupations (such as running a rural provision store and engaging in simple home based craft) that even the very poor can engage in without the need for any specialised inputs or skill building. The only input required to leverage these economic opportunities is access to basic financial services, including savings, credit, insurance and tools for risk management. This paper aims to outline the process driving ICICI Bank’s work in building access to finance for the poor in India. Approach It is expected that with the following three broad strategies it should be possible to scale the access to a set of essential financial services quite rapidly: 1. Development of a network of community based financial institutions (FIs), including Cooperative Banks, Non-Banking Financial Companies, local bank branches of commercial banks, Civil Society Organizations or Producer Cooperatives that are able to develop operating models that draw on local information and operationalize low cost structures that make the business of serving poor sustainable over the medium term. 2. The participation of one or more main-stream FIs that are willing to partner with this network of entities to provide: (a) Financial resources for on-lending such as the ‘partnership model’ which leverages the local presence of these entities with the ability of the bank to diversify risk and provide wholesale lending funds in large quantums; (b) Access to equity capital for growth; (c) Financial engineering and product development; and (d) Direct links with capital markets as the entities mature. 3. Creation of an enabling environment that supports continued growth in the entities that make-up this network by: (a) Creation of Venture Capital Funds engaged in the task of identifying and providing equity finance, and mentoring new entrepreneurs wanting to create such entities; (b) Creation of specialized institutions to provide research training and product design capabilities; (c) Launch of the MFI Strategy Unit to provide a broad range of consulting and training services; (d) Launch of an Application Services Provider that seeks to provide front-end (smart card, point-of-sale terminals), back-end (banking software, performance management and reporting, MIS) and information services (credit bureau); and (e) Launch of a website to provide access to human resources to these entities to enable unconstrained expansion. Key Learning It is suggested that such access is best provided in a commercial and sustainable manner through creative partnerships between banks and a network of local financial institutions. The information gained from observing the unconstrained livelihood choices of clients, the scale of financial access created and the implementation capability of local financial institutions then provide the unique opportunity to conceptualise well targeted livelihood enhancement interventions. It is believed that interventions that build on ‘access to finance’ and subsequently include both ‘access to markets’ as well as creation of systemic infrastructure have the potential to provide large positive income shocks.

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(24) IRC, Sophie Trémolet, Rachel Cardone, Carmen da Silva, Catarina Fonseca. 2007. Innovations in Financing Urban Water and Sanitation. Bellagio, Italy: Centre for Urban Sustainable Development, Financing Shelter, Water and Sanitation Summit Paper. Background Traditional approaches to financing the sector have contributed to the development of unsustainable, oversized and inefficient facilities. Over recent years, innovative financing solutions have emerged to encourage financial flows into the sector from a wide range of organisations, each with its own responsibilities, but working together in greater coordination. These innovations seek to offer financial systems better suited to devolved services and to provide options for low income service users and communities. This paper describes the role of financing water and sanitation for the urban poor, identifies current innovations and maps out the next steps to take. Innovative Financing Broadly, innovation marks a shift from a supply-driven to a demand-led approach. Innovation in financing seeks to maximise harmonisation and collaboration by funders, to support effective decentralisation of services and decision-making, and to help utilities to become commercially viable. Innovations seek ways to leverage local liquidity and to apply microfinance approaches to the sector. At the international level, donors are urged to harmonise their efforts and to base their decisions on need within recipient countries rather than other factors. Adopting country level programmatic approaches can channel funding flows to the sector in a targeted and coherent way. Innovations also help international donors to directly support devolved organisations and even in some cases local community organisations. At the national level, the major task is to help governments to shift financial resources to devolved bodies to match their new responsibilities and to finance effective structures and practices that are demand responsive. Empowering local government organisations to raise funds has proved effective in increasing sanitation coverage as well as for water. The use of municipal and utility bonds in this respect is being extended. Innovative ways have been introduced in some countries to crosssubsidize services so that the connection charges for the poorest people are covered. At the community level microfinance can stimulate the small scale private sector and allow households to manage the capital costs of starting or connecting to services. The creation of federations of community groups to access funds is also described. Utilities and municipalities too can form associations to access finance, for example through revolving funds. In all these approaches international support agencies can play a significant role, especially in scaling up demand-led approaches and building capacity within devolved bodies. Challenges and Next Steps Holistic interventions (combining supply-side and demand-side approaches) and longer time frames are needed to allow time for success to take root. There is also a need to identify the true scale of urban poverty, accurate data on expenditure (for example by households on sanitation) and per capita costs. There is an urgent need to find ways to share information honestly about failures as well as successes.

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(25) Jawa Pos Institute of Pro-Otonomi (JPIP). 2009. Accelerating the Change: Selecting Best Practices to Promote Total Sanitation and Sanitation Marketing (TSSM) in East Java. Surabaya, Indonesia: JPIP. Background This report seeks to record initiatives of 38 districts in East Java on sanitation development and demonstrates achievement of sanitation development in each district (Otonomi Awards). It also highlights challenges and suggests strategies to improve sanitation in East Java. Awardees For the Otonomi Awards, programs were assessed and ranked on three categories: community behaviour improvement, sanitation marketing (economic value added) and institutionalization. The top three awardees were: • Lumajang Regency – demonstrated an innovative integrated approach to total sanitation including improved access to healthy toilets, raising awareness of hand washing with soap, community based solid waste management, networking among actors, and implementation of domestic liquid waste management. • Nganjuk Regency – shifted from a physical oriented program to raising awareness through CLTS. The pemda (local government) incorporates sanitation policy into all sectors of development, supported by several offices, such as Health office, Education office, and Local Development Planning Agency. • Blitar Municipality – sanitation improvement is focused on the poor with the promotion of “The Increase of Sanitation Quality for the Poor” program in collaboration with the local government program to fight against poverty using sanitation quality mapping and waste management master plans. Challenges The control of head of districts in decision making to improve sanitation is the primary weakness as success depends on their willingness and commitment. Secondly, more effort is spent on behaviour change and sanitation institutionalization, meaning that the districts have yet to realize the economic potential of sanitation marketing. Finally, among the five pillars of sanitation, most districts have not undertaken domestic liquid waste management improvement and it is necessary to identify the barriers preventing this initiative from occurring. Key Recommendations The first recommendation outlined by JPIP relates to the importance of pemda endorsing sanitation marketing to encourage business through positive incentives to communities, cooperatives, and private enterprises. Incentives are not merely financial incentives or subsidies, but also include enabling policies to stimulate sanitation marketing. Next, alternatives to formal polices for sanitation improvement are urgently needed, such as public campaigns engaging non-government actors and mass media. The dependence on head of districts must also be alleviated so that pemda can keep sustaining sanitation improvement programs even though head of districts are periodically changing. A solution to handle the problem of domestic liquid waste management is also needed and JPIP encourages the undertaking of pilot projects at the level of community to foster learning. Finally, pemda needs to design more creative positive incentives for communities to accelerate sanitation improvement.

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(26) Mehta, Meera. 2008. Assessing Microfinance for Water and Sanitation – Exploring Opportunities for Sustainable Scaling Up. A study for the Bill & Melinda Gates Foundation. Background A study was commissioned by the Bill & Melinda Gates Foundation to assess the potential market for using microfinance in the water and sanitation sector. This report discusses the findings from this study, and more specifically: the scope of the market, the size of the demand, the contexts where microfinance is likely to achieve sustainable impact at scale, the measures needed to overcome barriers to the use of microfinance, and specific opportunity areas for support by the Bill & Melinda Gates Foundation or other funding agencies. Microfinance Approaches There are three main product segments for the microfinance market for water and sanitation across urban and rural areas: (1) retail loans for household water and sanitation; (2) small and medium enterprise (SME-type) loans for small water supply investments; and (3) loans for urban services upgrading and shared facilities in low income areas in towns and cities. Key Learning and Recommendations The highest potential for making a clear business case for microfinancing is through individual retail loans for sanitation and while all regions considered in this report have a significant potential demand, the highest potential portfolio is in South Asia. To support sustainable scaling of this market, the following activities are critical across the three product segments: (1) industry assessment, to understand demand from both the household and microfinance institution perspectives; (2) availability of business development support to support SMEs working in the sector; (3) research support for product development, to determine loan tenor, assess risk, and set interest rates; (4) project development support, to help reduce appraisal costs and risk; and (5) guarantees may be needed to lower risk for microfinance institutions to enter this market.

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(27) Monitor, Nishant Lalwani and Michael Kubzansky. 2009. Stretching the Fabric of MFI Networks. Mumbai, India: Monitor Inclusive Markets. Background Providing a stable, legitimate, and affordable source of credit, microfinance can help the poor meet their basic needs and build a better life. The success of microfinance in reaching the poor is now raising hope that the networks these institutions have created, and the credit they offer, may serve as a channel and platform for the provision of many other critical goods and services. Challenges Not only are the poor geographically hard and expensive to reach, they often also lack the cash on hand to make purchases that would improve their lives over time. Microfinance institutions (MFIs) can provide a solution to both of these barriers; however, market-based solutions work only if low-income populations actually perceive them as the answer to a felt need. Demand is often low for most of the socially beneficial products which suggests that, while MFIs provide physical distribution channels and sources of credit, simple distribution may not be enough and customer education and demand stimulation are also important. A second implication is that bottom of the pyramid (BOP) customers want to use credit to buy assets that will not necessarily contribute to their ability to repay the associated loan. By enabling the purchase of such products, MFIs may significantly increase their credit risk, and, in some cases, may increase demand for consumption rather than just promoting livelihoods. Approach Monitor’s research on market-based solutions in India has examined previous and ongoing experiments with MFI channel expansion and has identified five models of leveraging MFI networks that show the greatest potential: 1. MFI as Sales Agent – suitable for virtual or portable products having low distribution and inventory costs; products that can be sold centrally (e.g. pre-paid phone cards) 2. MFI as Microdealer Facilitator – suitable for high margin, repeat purchase goods; small enough to be distributed by a single person; low ticket price, to limit working capital requirements; goods that require minimal marketing expertise (e.g. healthcare products) 3. MFI as Customer Order Aggregator – suitable for products with high single-unit distribution costs; Goods with network demonstration effects, where a customer buys the product and as their neighbours see it work they also want it (e.g. water filters) 4. MFI as Consumer Financier – applicable to most products, but preferably productive assets so as to help limit the MFI’s credit risk exposure (e.g. farm equipment) 5. MFI as Provider of Customer Data and Access – suitable for customized products; products targeted at specific demographics, like livestock owners, wealthier BOP households, etc. (e.g. Home improvements including toilets) Key Recommendations For MFIs: beware of taking on too much; do not underestimate how hard it is to sell products; credit is always likely to be your most profitable product; do not overburden customers with excessive credit; if the products are bad, you will get the blame; manage public perceptions of your activities; and despite the pitfalls, there are opportunities to create significant social impact. For product and service providers: an MFI distribution channel can be expensive; and credit can create massive demand for your product.

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(28) Netherlands Water Partnership (NWP) and IRC. 2009. Smart Finance Solutions: Examples of innovative financial mechanisms for water and sanitation. Amsterdam, The Netherlands: KIT Publishers. Background Smart and innovative ways are needed to leverage public and private investments in the water, sanitation and hygiene (WASH) sector. This booklet gives examples of how different financial mechanisms are being used to finance water and sanitation projects and small local businesses that contribute to reaching MDG-7. It also provides a quick overview on how to write a successful business or project plan, and how to find the appropriate financial mechanisms to finance it. Approaches In practice, for WASH services delivery, a blend of different mechanisms are often used together to meet the needs of a particular situation. These different approaches can be broken down into micro- and meso-level financing mechanisms and products. Micro-level is the level at which men and women, as householders, micro-entrepreneurs, members of CBOs, or water user / sanitation associations, have assumed responsibility for the delivery of their own WASH services. Micro-level financial mechanisms and products are based upon pro-poor principles and the financial services are often offered in combination with skills and capacities enhancement opportunities on generating income and micro-enterprise management. Mechanisms and approaches to accessing finance at the micro-level include: grants and subsidies; fundraising, co-financing and financial matchmaking through IT; community-based loans; revolving funds; and microcredit. The meso-level, also called the intermediate level, is comprised of those actors and institutions at the sub-sovereign level involved in WASH services delivery to the public and private sectors. Included here are municipality, district, regional and/or provincial government administrations, as well as NGOs, User Association umbrella organisations, water boards, water utilities, SMEs, or other actors concerned with WASH service delivery. In any decentralized service delivery model, these actors play various interconnected roles, each functioning to some extent as ‘go between’ between the national government and end-users. At this level mechanisms include: co-financing through publicprivate partnerships; venture capital; quasi-equity (investors receive a percentage of a company’s revenues for a number of years in return for money invested in that company); meso-finance (the community, as a registered legal entity, applies for a loan from a local bank which enables the community to invest in water and/or sanitation facilities); loans; and revenue collection. Conclusions The examples presented in this booklet illustrate not only how existing financial mechanisms can be used in a smart way, but also how new innovative coalitions between the public, private and the financial sectors can increase access to finance for the bottom of the pyramid. One of the main challenges for achieving the MDGs for water and sanitation is to bridge the gap between the financial sector, that has the means to finance WATSAN services and the local community that needs these services to improve access to safe drinking water and proper sanitation.

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(29) Netherlands Water Partnership (NWP) and IRC. 2007. Microfinance for Water, Sanitation and Hygiene – An Introduction. Delft, The Netherlands: NWP. Background This booklet, launched during a finance workshop in India, gives a short introduction on microfinance issues in the water and sanitation sector. Microfinance Approaches Linked to cost recovery policies aiming to increase user’s contributions, microfinance is being used for water services to help pay for capital costs and to cover operation and maintenance costs. For households or communities, microfinance can help when high lump sum costs have to be paid upfront. It is also a mechanism to improve access to credit for small-scale water providers such as borehole operators who often rely on family or informal loans which limits their potential for growth. Microfinance through municipalities is another approach to overcome their inability to access credit because of the legal framework or because they cannot obtain a credit rating. For sanitation-related services, clients of microfinance include small scale private providers and households who have used it for the construction of household latrines, construction of public toilets, manual latrine-cleaning or pit emptying services. For households, there is a real opportunity to make better use of finance by developing revolving funds in rural areas for latrines or peri-urban areas for household sewerage connections. For the small scale private sector, microcredit can be used for starting up activities to improve the supply chain for sanitation products, such as providing materials for construction, emptying the pits and treating the sludge. Strategic Partnerships Most microcredit loans are designed for income generating activities; however, because of its popularity, competition between microfinance institutions (MFIs) has been increasing as they need to build new markets and expand the client base. Water and sanitation is sometimes included in ‘improved housing’, but MFIs have low levels of awareness and information about how to develop specific products for the water sector. The exception is for infrastructure, where loans are limited to capital investments such as water storage facilities which have a more certain short-term return. MFIs have capacities and experience in managing credit, but many have limited capacities for understanding the nature of demand for water sector-related finance, or helping poor communities prepare projects that do not have a straightforward income generation component. Institutions in the water sector such as NGOs and resource centres are not generally experts in credit provision, but are able to provide important inputs in support of finance. They can become financial intermediaries between MFIs and households or Community Based Organisations and help to improve processes and results by mobilising startup funds for water and sanitation credit schemes, bringing in technical support for feasibility studies, training staff in participatory tools and helping with monitoring. Challenges Microfinance for the water sector is not without challenges such as limited outreach (especially for the poor), financial sustainability (the cost of providing microfinance is not low) and scalable solutions (financial allocations need to be linked with activities such as training, counselling, and sensitisation, to achieve more sustainable solutions).

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(30) Practical Action Consulting. 2006. Bangladesh Rural Sanitation Supply Chain and Employment Impact. Human Development Report Office, Occasional Paper, UNDP. Background This paper focuses on the Total Sanitation Campaign (TSC) that has been in operation in rural Bangladesh since the late 1990s. The approach was pioneered by the Bangladeshi NGO, the Village Education and Resource Centre (VERC), with the support of the international NGO WaterAid. It takes a community based approach to achieving 100% sanitation coverage, working on the principle that the community itself has the resources and ability to address sanitation problems. Involvement of community members from the beginning, in awarenessraising and planning, through to implementation and monitoring, is a key supporting factor in the success of the approach. With appropriate external support from NGOs to identify the current sanitation situation and need for improvement, the community plans and implements solutions to meet that need. Approach Key features of the VERC approach include: strongly community-based; identifies appropriate drivers for creating demand; addresses the issues of the supply side through developing small entrepreneurs; and overall outcomes are increased coverage associated with user satisfaction. There was no “blue print” technical solution offered and householders were encouraged to innovate to provide latrines that match what they could afford. This marks an important difference from the experience in predominantly supply-driven sanitation programmes from a number of countries, where it is typical to specify a standard latrine design on a “take it or leave it” basis. The approach is based on a working partnership between small scale entrepreneurs and community groups, with appropriate support provided by national and local government institutions, national and international NGOs. Households are responsible for financing the infrastructure component and are offered an extensive range of latrine models, based on affordability within the community. Hardware was provided by small-scale independent providers of low-cost latrine components who were trained in providing a range of products. An important driver for this was the lack of subsidy, which encouraged people to identify existing sources of supply. This contrasts strongly with traditional centrally driven approaches where a new source of (subsidised) supply associated with a programme would appear. The existence of subsidised products (in this case waterseal latrines and pit lining rings) creates market difficulties for the local private sector. It was found that the profit on latrines was very marginal and enterprises had to sell other products to survive. They provided a range of services to their customers, including: pit digging; superstructure construction; transportation of components, all at a quality to suit the customers. Latrine pit cleaners also reported increased business. It was observed that private producers of latrines tended to spring up near to Village Sanitation Centres. This legacy may well be relevant to the important role adopted by the local private sector in the Total Sanitation approach, and equally, the need to diversify from selling only latrine components. Conclusions The Total Sanitation approach addresses a number of the key constraints around scaling up sanitation programmes: political commitment; resource allocation; impact on the local economy; approach to partnerships; and capacity to deliver (matching supply and demand).

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(31) Priyono, Edy. 2009. Institutional Dimensions of Scaling Up of CLTS in Indonesia. Bekasi, Indonesia: AKADEMIKA, Center for Public Policy Analysis. Background A study was conducted in three districts in Indonesia (Pandeglang in Banten Province, Muara Enim in South Sumatera Province and Sambas in West Kalimantan Province) focusing on the institutional dimensions of scaling up CLTS to identify the impacts of prevailing institutional arrangements on the speed of implementation, success of implementation and spread of CLTS. Key Findings Institutionalization is necessary for the spread of CLTS and effective coverage across all areas of the country requires CLTS to be included as part of an official government program/approach. An authority to allocate resources (funds) is also an important factor for health centre involvement, however health centres from this study did not have specific budgets to fund CLTS-related visits. At the Health Office level there was budget allocation for training purposes, but this was only available for planned training activities and funding for CLTS-related visits was usually taken from monitoring and evaluation budgets not specific for CLTS. The CLTS approach relies heavily on demand from public and thus motivation becomes one of the critical factors for implementation. Whoever is involved, at any stage, must have motive or incentive to continuously maintain CLTS practice. Conclusions and Recommendations The spread of CLTS in Indonesia faces a challenge of shifting CLTS from project-based activities into government programs. This spread must be initiated by intensive information dissemination across all levels of government to provide a clear understanding of how CLTS could support health program achievements, particularly in the area of environmental health. Although project-based institutions are effective, the spread of CLTS would be better performed by existing institutions, such as community health centres (puskesmas) with sanitarian and village midwives as front-runner in undertaking the facilitator function at the village level. An enabling policy environment is needed to support implementation by health centres and they should be given more authority to allocate their resources. CLTS implementation would be much improved if health centres (and/or Health Office) allocated specific budgets or if they had authority to allocate resources to meet their needs for CLTS implementation.

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(32) Schaub-Jones, David. 2009. A Sanitarian Turned Entrepreneur, Bapak Sumadi, Nganjuk, East Java, Indonesia. World Water Week, Stockholm, Sweden. Background Sumadi is a sanitarian working for local government in the Jatikalen sub district of Nganjuk. Sanitarians are positioned within District Health Services and are responsible for illness prevention through environmental health and hygiene initiatives. A sanitarian is positioned in each health centre and usually services one sub district. In one of the villages in Jatikalen, Begendeng, Sumadi observed that only 4 out of 267 households had an improved latrine facility. He conducted small surveys and discovered that latrines are difficult to maintain and easily broken in the area due to two big rivers with unstable soil conditions, the community felt that acquiring a latrine was expensive and could easily use the river as a defecation alternative and pay nothing. Although the situation was challenging, Sumadi viewed it as a business opportunity. Approach By the end of 2001, Sumadi started introducing a community latrine model constructed from 5 concrete rings (subsequently modified to 7 rings in 2005), however between 2001 and 2007 the market did not respond as expected and people continued to use the river for defecating. In late 2008, Sumadi attended a series of supply and promotion workshops and became aware of increasing demand and market research findings generated from WSP’s Total Sanitation and Sanitation Marketing (TSSM) project in East Java. Intrigued by some of the findings including pricing and consumer preference, he started to rethink his business strategy as his only latrine model cost over three times the recommended price due to rising cement and labour costs. With assistance from the Institute Technology of Surabaya, a technical consultant hired by TSSM to support the project, he then designed and introduced upgradeable products, along with on-site installation to contain costs and to accelerate market penetration. He also promoted a one-stop sanitation service including after installation warranty, pit emptying services and flexible payment terms. To promote the new facilities, Sumadi branded the four different options and presented his products at community meetings. He also prepared a product brochure and distributed these to customer points of contact including facilitators and natural leaders. Key Outcomes, Challenges and Learning By 2009, Sumadi had installed a total of 2,270 facilities in the Nganjuk district. Participation in the Nganjuk District Development exhibition provided great exposure and Sumadi expanded his service to cover three neighbouring districts. Important challenges faced by Sumadi included a limited knowledge and skills on accounting and cash flow management, limited number of concrete moulds which could not support increased demand and seasonal competition with other projects.

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(33) UN-HABITAT. 2006. Guidelines on Revolving Funds for Community Managed Water Supply Schemes and Construction of Household Toilets in Urban Slums in Madhya Pradesh, India. Nairobi, Kenya: UN-HABITAT. Background Most governments are increasingly becoming aware of the significance of domestic mobilization of funds and recognize the ‘Revolving Fund’ approach as an appropriate financing solution for community initiatives in water and sanitation, particularly for managing drinking water supply and construction of individual household toilets for safe sanitation. Water for Asian Cities Programme, a collaborative initiative between UN-HABITAT and Asian Development Bank created a Revolving Sanitation Fund for the Slums Environmental Sanitation Initiative, which was implemented as a demonstration project in Bhopal, Indore, Gwalior and Jabalpur. Approach The Revolving Sanitation Fund is a special micro-financing measure maintained by the Urban Local Body and managed by a NGO on behalf of the Urban Local Body. The NGO provides loans to Community Water and Sanitation Committee (CWASC)/ Self Help Groups (SHG) from the fund and then uses the repayments from the CWASC/SHG to provide loans to other members of the same CWASC/SHG or different CWASCs/ SHGs, thus “revolving” or reusing the capital. Recovery of the cost is expected to generate a sense of ownership and ensure the usage and maintenance of the toilet in the future. Key Recommendations The guidelines further highlight the major steps involved for the implementation mechanisms of a revolving sanitation fund including community mobilization, sanctioning of loan, execution, recovery, and maintenance of records and audit requirements.

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(34) UN-HABITAT, Rachel Cardone and Catarina Foncesca. 2006. Innovative Financing: Experiences with Secondary Urban Centres Water Supply and Sanitation Service Delivery. Nairobi, Kenya: UN-HABITAT. Background Water and sanitation service provision in secondary urban centres is often a combination of public-private utilities and small-scale domestic providers that serve their customers through a variety of technologies. Traditional sources of external finance are often inadequate and secondary urban centres lack the scale of larger urban utilities to attract both public and sometimes private investment, yet they are often too large to benefit from the community-based and micro-finance mechanisms that are often applied with success in rural areas. This paper reviews some of the creative financing mechanisms that have emerged to address these constraints to secondary urban centres water and sanitation service delivery and emphasizes domestic sources of finance for both hardware and software investments. Approaches Experiences with six different innovative financing mechanisms are discussed: (1) using grants as a lever for change at district / municipal level; (2) use of micro-finance mechanisms to stimulate financial sustainability; (3) equity mechanisms to support domestic private sector development; (4) risk mitigation; (5) use of municipal capital markets to fund water sector infrastructure; and (6) municipal development funds and public sector financial agencies which are dedicated to providing loan finance for municipal investors. Key Learning When considering debt mechanisms, the key innovation is how to stimulate the use of loans by and from all stakeholders, including users, NGOs, central and sub-sovereign governments, utilities and financial intermediaries. Other financial mechanisms, including equity, guarantees, and special purpose funds are important, in the sense that they deepen the impact and potential for use of debt mechanisms. Secondary urban centres economies often support both smallscale industry and commercial sectors that are often left out of discussions about water supply and sanitation infrastructure. There is scope for engaging with these businesses to support investments, particularly for sanitation and drainage, given the potential positive benefits to their business. The number of microfinance institutions is increasing as a result of existing institutions (mostly banks) seeking new clients among the low-income segments of the financial markets, which were previously seen as un-bankable. This is stimulating competition and leading to breakthroughs in scale and depth of outreach, mainly in Asia. Innovations in microfinance include strategic alliances with NGOs or companies offering complementary services such as business skills, water supply and sanitation, and health.

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(35) WaterAid Australia and International WaterCentre. 2008. Sharing Experiences: Sustainable Sanitation in South East Asia and the Pacific. Brisbane, Australia. Background This collection of nine case studies explores sanitation initiatives in three countries in South East Asia (Indonesia, Timor Leste, Vietnam) and six Pacific Island Countries (Kiribati, Papua New Guinea, Fiji, Tonga, Tuvalu, Vanuatu). In each case study, the authors discuss various dimensions of these initiatives including financial aspects and focus on practical implementation issues. Important Considerations Good practice in sanitation has come to be closely associated with better understanding end users’ needs and preferences, stimulating demand and improving the supply of a range of appropriate options. Microfinance schemes require a good deal of start-up support to build human and financial capacity including detailed business planning, strong local financial management skills, strict loan parameters, careful assessment of borrowers and strong institutional support. Care must be taken to ensure that demand can be matched by adequate supply. Approaches like CLTS generate a great deal of initial demand for sanitation, which can often be met within a community. However, as households seek incremental improvements to their sanitation systems, secure supply of affordable options can become an issue. Training local suppliers can help to promote sanitation and generate income. People trained in constructing latrines and manufacturing latrine parts have an incentive to generate demand for their products and services. Once trained, local labourers seek to become ‘recommended’ suppliers and local producers can be active promoters. Credit Scheme Case Study The Sanitation Credit Scheme (SCS) is part of the Three Delta Towns Water Supply and Sanitation Project (3DT), supported by AusAID in Vietnam. The objective is to establish a sustainable revolving sanitation credit fund at the Town Women’s Union (TWU) level in each town in order to meet the credit needs of poor households to build septic tanks. Loans to householders were fixed with a repayment term of 15 months. The loan amount was sufficient to cover the cost of the essential elements of the septic system: from the toilet pan and slab through to the septic tank treatment system and connection to drains. Loans were not provided for the construction of above ground toilet ‘housing’ or bathrooms, as this was left to the capacity of borrowers. The operation of SCS involves the following activities: establishing a Fund Management Board; opening a private bank account; setting up an office area for SCS; setting up a bookkeeping system; selecting the target client group; carrying out Information Education and Communication activities; loan approval; loan disbursement ceremony; constructing the septic tank; loan repayment; and monitoring and reporting. As a result of the program, borrowers have improved their own savings habits, in some cases saving from daily earnings in order to meet their repayments. The poor have shown that they can afford to build septic tanks and repay loans and after repaying they are continuing to save money informally for other essential items to improve their living conditions. Finding the right organisation to carry out all aspects of a credit scheme, not just the financial loans, is very important. As a mass organisation with networks at the grass roots level, credit experience, and with a charter to promote better family health, the Vietnam Women’s Union has unique advantages as the operator and manager of these schemes.

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(36) Water and Sanitation Program (WSP). Sanitation Marketing Communication Grid. Background This one page grid provides an overview of the overall communication strategy, including communication objectives and key messages, based on the target segment (open defection and fixed point open defecation). Approach For open defecation segments the target behaviour is fixed point open defecation (OD), including shared, unimproved, improved. The communication objectives are: (1) build category need to non OD; (2) affordable latrine options awareness; and (3) safe latrine (Jamban Sehat) features awareness. The key message is to address collective (social) norm. The overall strategy is to enhance community-led total sanitation using communication tools and mass media campaigns. For fixed point OD segments the target behaviour is improved sanitation. The communication objectives are: (1) product awareness; (2) trial and purchase; and (3) safe latrine (Jamban Sehat) features awareness. The key message is to satisfy individual (household) preferences for product and service. The overall strategy is to develop competency, promote quality providers by using brand name and logo, and provide point of sales and product presentation materials.

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(37) Water and Sanitation Program (WSP). 2006. Manual of Sanitation Market Activities in TSSM Program. Marketing Manual, v.1, Washington, D.C.: WSP. Background To improve CLTS, the TSSM program has adopted a sanitation marketing approach composed of three main components: demand creation, sanitation product and service supply development, and enabling environment. The products of these three components are also adjusted based on the current state of sanitation in the community segment (i.e. open defecation or having only access to unimproved latrines). The meeting of demand with supply is facilitated by an enabling environment that creates the meeting media between sanitation marketers, improves competition to ensure quality and price and improves local and national government roles. When demand meets supply, the market will automatically create a sustainable process of rural sanitation improvement. This Sanitation Marketing Manual is intended to be used by other parties including district level stakeholder interested in adopting Sanitation Marketing as part of their efforts in improving sanitation practices among villagers. This manual specifically provides practical guidelines for stakeholders in developing sanitation marketing strategies. Approach A triggering process supported by sanitation promotion activities is used to promote sanitation behaviour change and ultimately improve CLTS. The formulation of sanitation promotion activities starts with a series of research to determine inhibiting factors and explore encouraging factors and community motivation in adopting sanitation. Findings from this research are then used as input in setting communication or campaign strategies. In the normally functioning market, when a demand is created, the supply will follow; however, the rural sanitation market does not always function as expected and intervention is necessary, particularly in building a supply chain. In building a supply chain activities aim to ensure sufficient alternative supply of sanitation facilities including the development of rural suppliers’ skills to invest in affordable product development and the supply of products in the distribution chain. The sanitation marketing process consists of five phases: (1) market diagnosis (explore data and information on the market; analyze the market and the capacity of distributors including supply chain mapping); (2) prepare and test a creative concept of the menu of sanitation marketing options; (3) set marketing strategies (communication and supply); (4) implementation focusing on the output using the menu of sanitation marketing options; and (5) monitor and evaluate the implementation. Expected Results • Create open defecation free villages. • Change rural behaviour to adopt improved latrines. • Create a sustainable process of improving the quality of rural sanitation through a market mechanism including the process of creating demand and supply of sanitary facilities to achieve total sanitation.

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(38) Water and Sanitation Program (WSP). 2008. Communication Tools – Total Sanitation and Sanitation Marketing (TSSM) in Indonesia. Washington, D.C.: WSP. Background The sanitation marketing process of the TSSM project consists of several activities including communication, supply strengthening, capacity development and environmental support. In support of the communication activities, this booklet contains a menu of communication options designed to be used as support tools to implement the sanitation marketing plan. A range of media options are presented consisting of various materials that can be selected and adjusted to achieve the local communication objectives. Approach The communication activities are divided into 3 components (demand, supply, enabling) based on target audience and communication objectives. A series of tables highlighting the communication media options for each component are included in the booklet. Examples of behaviour change communication materials (posters, print advertising, radio spot, area and village level competitions, calendars, videos, school drama/plays, and games) are also presented along with a brief description and implementation plan for each. For supplier promotion sample leaflets, merchandise, product catalogue, store signage, and posters are included. Finally, information is provided to assist with the preparation of a funding and actuating plan including a table of material and production costs.

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(39) Water and Sanitation Program (WSP), S.A. Ahmed. 2007. Ensuring Scaling Up and Sustainability of Rural Sanitation. Washington, D.C.: WSP. Background A project was implemented in Bangladesh by WSP in alliance with different donor partners, including Local Government Division, Swiss Agency for Development and Cooperation SDC, DFID, Netherland Development Corporation, WaterAid Bangladesh, Plan BD, and Dhaka Ahsania Mission. Aim The project aimed to enable local governments to scale up sustainable rural sanitation practices in accordance with the National Sanitation Strategy. Approach WSP assisted the national sanitation program in Bangladesh through a local government based sanitation project named Dishari. Valuable lessons were learned in this process and WSP developed a second phase of intervention to provide strategic input for enhancing the national program towards sustainable scaling up of CLTS. The project implemented knowledge management, policy advocacy and capacity building. As part of knowledge management a new financing mechanism to support movement up the sanitation ladder from the basic latrine models to more sustainable provisions was developed. Desired Outcomes • The Government of Bangladesh adopts lessons and tools developed by the project • All households in the project area have access to and are using sanitary latrines and practicing hygiene

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(40) Water and Sanitation Program (WSP), Francois Brikké and Malva Rosa Baskovich. 2009. Alternative Pro-poor Sanitation Solutions in Peru. Washington, D.C.: WSP. ***Update to WSP Sanitation as a Business in Peru (2006)*** Background A pro-poor sanitation project was implemented in Peru (Pachacutec, La Encañada, Namora, Chinchero, Independencia and Belén) in alliance with different donor partners, including WSP. Aim The project aimed to increase access to appropriate sanitation services for the poor, excluded segments of the population in peri-urban and rural areas of Peru. Approach Based on successful experiences in Asia and India, the project focused on the implementation of an alternative approach to increase the access to basic sanitation services to excluded segments of the population in selected localities. Creating local sanitation markets included well informed demand for sanitation alternatives and a capacitated supply to respond to the local need. A favourable environment was also created to promote local business opportunities and increase local population adoption of improved sanitation behaviour. Desired Outcomes • Sector authorities and regional and local governments have the right information and awareness in order to integrate new approaches and technologies in the policy sector. • Public, private and social alliances promote sanitation market for the poor at local and national level. • Local governments have capacities to respond to integral sanitation demand, including solid waste and waste water solutions.

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(41) Water and Sanitation Program (WSP), Meera Mehta. 2003. Meeting the Financing Challenge for Water Supply and Sanitation – Incentives to Promote Reforms, Leverage Resources, and Improve Targeting. Washington, D.C.: WSP. Background This paper provides a framework for understanding the water supply and sanitation (WSS) financing challenge and a selective global review of financing mechanisms used in different contexts. Key issues in the use of these financing mechanisms in different local contexts were also identified. Innovative Financing Mechanisms Financing mechanisms are categorized within the context of three aspects of the financing challenge for the WSS sector: to promote and support reforms, to leverage additional resources for the sector, and to ensure appropriate targeting of subsidies to the poor. Financing mechanisms that promote sector reforms include decentralization-linked mechanisms such as fiscal frameworks and intergovernmental transfers to promote local reforms or special fund mechanisms (social investment funds, community development funds, institutional reform-linked challenge funds). Programmatic approaches can also promote sector reforms such as the sector-wide approach (SWAp), investment lending through sector investment and maintenance loan or a poverty reduction support credit. Financing mechanisms to leverage resources for WSS include attracting private sector participation and investments by an enabling reform framework, partial guarantees for risk mitigation and project development support and focused interest by domestic financial institutions. Promoting local investments through local credit markets can also be used to leverage resources such as municipal development funds, specialized financial intermediary and refinance to banks; direct market access through municipal bonds, credit rating and regulatory framework for local borrowing; and pooled finance mechanisms. Finally, resources can be leveraged by enhancing household and community resources such as enabling sector frameworks for cost recovery and regulation in community WSS, credit for household facilities and community-level infrastructure, and integrated facility for scaling up community infrastructure finance. Pro-poor subsidies include access subsidies for WSS such as partial capital grants for access to rural WSS and slum improvement, demand promotion for sanitation and hygiene, and social connections for the urban poor. Improving cross-subsidies through water tariffs is another mechanism and includes principles for improved cross-subsidies, universal service funds, and auctions for minimum subsidies. Finally, output-based aid such as consumption through direct subsidies, access through social connections, subsidy-linked concessions, supporting transitions to reforms such as tariff reforms, and sanitation through demand approach. Further Research The issues of fiscal viability at scale should be explored further as most efforts and programs in the WSS sector fail to address this key concern. Further research needs to focus on a more critical analysis of selected mechanisms to assess their impact on financing challenges and efforts should also identify their relevance in different WSS sub-sectors such as the rural water supply, urban water supply, systems in small towns, and sanitation and hygiene improvements.

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(42) Water and Sanitation Program (WSP), Sophie Trémolet with Pete Kolsky and Eddy Perez. 2010. Financing On-Site Sanitation for the Poor: A Six Country Comparative Review and Analysis. Washington, D.C.: WSP Technical Paper. Background This study aims to improve understanding of the finance of on-site household sanitation through careful analysis of practical field experience in a wide range of projects. The study reviews six carefully selected case studies in Bangladesh, Ecuador, Maharashtra (India), Mozambique, Senegal and Vietnam, examining financing sources and approaches and evaluating each based on: impact on sustainable access to services; costs; effectiveness in the use of public funds; poverty targeting; financial sustainability; and scalability. Approaches The projects and their financing approaches were categorized according to the percentage of the total costs of sanitation adoption coming from public funds. At one end of the public finance spectrum, some projects (such as in Bangladesh and India) only offered subsidies for software activities and for limited and targeted hardware subsidies for poor households. Limited amounts of public funding were also used for the Sanitation Revolving Fund in Vietnam, an innovative approach to using microfinance for increased access to sanitation that yielded very high leverage of user contributions. At the other end of the spectrum, projects in Senegal and Ecuador adopted a relatively high hardware subsidy. Key Findings Taken together, the case studies make a compelling case that partial public funding can trigger significantly increased access to household sanitation and show that it is not a matter of whether subsidies are good or bad, but rather a matter of how best to invest public funds. The approach used has a significant impact on the cost-effectiveness, equity, impact, and scalability of sanitation projects. Households are key investors in on-site sanitation, and careful project design and implementation can maximize their involvement, satisfaction, and financial investment. All of the reviewed projects assumed that the poor can contribute to their own sanitation facilities, and in several cases they paid the bulk of the hardware costs. Poor households can make substantial sanitation investments (up to 25 or 30 percent of annual income, as in Vietnam) if they can see the need and potential benefits from it. The Vietnam case study shows that limited access to credit (and thus the opportunity to spread investment over time) can be a more severe problem than basic affordability for many, if not for all. Hardware subsidies of some form played a critical role in all six case studies and their provision on an output basis rather than an input basis can be effective at stimulating demand and leveraging private investment. All of the case studies included a significant publicly funded software component (promotion and community mobilization). The Maharashtra and Bangladesh case studies invested heavily in software (with targeted hardware subsidies for the poorest) and had some of the highest leverage and basic-access-to-investment ratios of all the case studies. As these six case studies show, a wide spectrum of finance arrangements has been used with varying degrees of success and together, they make a strong argument for the benefits of appropriate public investment in sanitation. The challenge is to define appropriate approaches, shares, and mechanisms to finance sanitation for the poor that match the specific local context.

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(43) Water and Sanitation Program Africa (WSP-Africa), Meera Mehta and Kameel Virjee. 2003. Financing Small Water Supply and Sanitation Service Providers: Exploring the Microfinance Option in Sub-Saharan Africa. Nairobi, Kenya: WSP-Africa. Background Increasingly small water and sanitation service providers, such as community-based organizations and private sector suppliers, are being acknowledged as important suppliers within the African water and sanitation sector. One of the important constraints faced by these providers is finance and access to credit. This paper discusses the development of the microfinance sector and services in sub-Saharan Africa and the potential demand for financial services by small WSS service providers. The role of governments and development partners in facilitating the finance and credit for small providers is also discussed. Challenges The microfinance sector in Sub-Saharan Africa is still relatively young and lags behind developments in Asia and Latin America. Their level of outreach in terms of clients served is also significantly lower and in general MFIs in Sub-Saharan Africa perform poorly in terms of portfolio quality and operational and financial sustainability. Financing Service Providers There are three WSS market segments: community-based small service providers (CSSPs), private small service providers (PSSPs) and households as self-service providers (HSSPs). Potential demand for finance by CSSPs could be for new investment (to meet the community share in capital contribution) or for investments in major repairs/ rehabilitation/ augmentation. Potential demand for finance from PSSPs is mainly for capital investments, either at entry level or for expansion and augmentation after an initial period of operation. In most cases the PSSPs rely on their own savings and borrowings from friends and relatives. Depending on the level of required initial investment, lack of access to credit inhibits new entry and can therefore limit competition. To achieve financial sustainability the PSSPs need to increase their service coverage, which in turn is often dependent on access to credit for the necessary capital investments. Households are often their own service providers and access to credit would enable more households to install household-level facilities. However, particularly in the case of sanitation, such efforts require support from the government and other stakeholders (NGOs) for demand promotion and adequate technical support in order to provide cost-effective solutions and quality control. A household may also require credit to pay the connection fees to gain access to an improved system, possibly a CBO-based system in rural areas or through an urban utility. The Role of Government and Development Partners The main role of governments is to create an enabling environment for the small providers and for the institutions that provide microfinance services, both through policies and through specific support programs. Actions by development partners (donors, multilateral financial institutions, or large NGOs) need to be guided by ensuring microfinance institutions have space in which to operate, capacity building support, and access to medium-term capital.

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(44) Water and Sanitation Program Africa (WSP-Africa), Meera Mehta and Andreas Knapp. 2004. The Challenge of Financing Sanitation for Meeting the Millennium Development Goals. Nairobi, Kenya: WSP-Africa. Background The inclusion of direct sanitation targets in the Millennium Development Goals (MDGs) and an understanding that improved sanitation is essential to achieving targets for health, education and environmental sustainability highlights the importance of addressing the challenge of financing scaled up sustainable sanitation. This paper outlines the key issues and steps in developing a public finance strategy to meet the MDGs for sanitation. Approach Conventional public finance in sanitation in the past has generally focused on subsidies for household and public toilets, and grants for urban sewerage and solid waste systems. A review of emerging thinking and practice suggests that a shift in sanitation financing is required from financing ‘subsidies and grants for sanitation facilities’ to funding ‘sanitation promotion and leveraging resources’. Immediate focus for leveraging needs to be on household and community resources, with market based resources mobilized only in the medium to long term.
 

Key Recommendations Implementing this shift in sanitation policy at scale can be achieved in practice by developing an appropriate public finance strategy that supports sanitation promotion and focuses on leveraging resources and there are six key elements for its design: consensus building on approach; clarity in institutional mandates; sources and allocation of financial resources; ‘fundable activities’ and financing mechanisms; addressing tradeoffs in public allocation; and monitoring and continuous feedback.

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(45) Water and Sanitation Program for East Asia and the Pacific (WSP-EAP). Total Sanitation and Sanitation Marketing (TSSM): Scaling up community-led approaches to safe, healthy sanitation and improved hygiene. Jakarta, Indonesia: WSP-EAP. Background Rural sanitation development in Indonesia is challenged by cultural practices and insufficient funds from government and donors. As such, innovative approaches are needed to accelerate investment in large amounts from non-government sources including the household and private sectors. Learning from the CLTS experience and sanitation marketing, the Indonesian government decided to implement the TSSM project (also known as SToPS) in 29 districts of the East Java region from 2007 to 2010. This document provides a brief overview the TSSM project objectives and approach. Aim The primary aim of the project is to rapidly scale up access to safe and healthy sanitation, and sustainable behaviour change. Approach Facilities provided by the program include: training of community facilitators; technical assistance for sanitation market research and the development of media campaigns to increase demand; implementation support for supply improvement programs to strengthen market capacity to supply a variety of sanitation products and services; creation of institutional learning mechanism linked to monitoring and evaluation; and promotion of learning activities. The program encourages districts to find alternate ways to use funds already available for subsidizing household latrine construction such as: providing awards for communities for achievement of collective behaviour change; stimulate competition between villages to achieve open-defecation free status; and developing local sanitation markets. Primary support for implementation and development comes from the districts.

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(46) Water and Sanitation Program East Asia and the Pacific (WSP-EAP), Nilanjana Mukherjee. 2009. Learning at Scale, Total Sanitation and Marketing Project: Indonesia Country Update June 2009. Jakarta, Indonesia: WSP-EAP; Field Report. Background In 2007, the Total Sanitation and Sanitation Marketing (TSSM) project commenced in Indonesia, as well as in India and Tanzania, as an innovative four-year subsidy-free initiative to generate sanitation demand at scale and increase the supply of sanitation products and services. The TSSM collaboration between the Government of Indonesia, the Bill and Melinda Gates Foundation and WSP-EAP provided an opportunity to do things differently and operationalize at a province-wide scale the Government’s National Strategy for Community-based Total Sanitation, which forbids the use of subsidies. Aim The project aims to help 1.4 million additional people in all districts of East Java gain effective access to improved sanitation, as defined by the Joint Monitoring Program and appropriate national government standards. Approach TSSM is demonstrating a new combination of methodologies and tools using a stakeholder demand-driven approach with cost-sharing and takeover commitment of district governments after 8 months of TSSM intervention. Stakeholder buy-in was generated through one day roadshows where facts and figures were presented on the economic impact of poor sanitation and the social and economic returns from investing in sanitation improvements. TSSM combined CLTS with sanitation marketing, a formative research-based behaviour change communication strategy and local supply chain strengthening. The behaviour change communication strategy, Sani-FOAM (the Sanitation Framework of Opportunity, Ability and Motivation), departed from the common “Information Education, Communication” approach and instead capitalized on people’s motivations for change. Supply improvement measures included: promotion of definitions of “improved” and “unimproved” sanitation; a thumbs-up sign branding for facilities that meet the improved sanitation criteria – “WC-ku Sehat” (my latrine is healthy/hygienic); Informed Choice Catalogue of safe sanitation options; mason training/accreditation program; and a vendor orientation program to promote WC-ku Sehat options and link consumers with trained masons. Key Outcomes and Learning As of April 2009, 932 villages had asked for and received CLTS triggering and 715 declared themselves as open defecation free. In the 21 districts covered, USD 1.76 million worth of TSSM project assistance had leveraged more than USD 1.69 million of community investment. Over 325,600 additional people have gained access to improved sanitation with demand accelerating even after the TSSM intervention concludes. TSSM has shown that catalyzing demand and supply allows consumers to invest in what they really want, thus unleashing market forces which could have an enormous potential for scaling up. Providing access to markets and financing options enables people to move up the sanitation ladder quickly and even poor consumers find the means to pay for what they like. Interventions such as sanitation marketing are effective, but both skilled manpower-heavy and resource-intensive and may not be feasible through existing government budgets in other provinces in Indonesia. For both scaling up and sustainability of the outcomes, an enabling environment that promotes mutually self-sustaining growth of demand for and supply of improved sanitation is essential.

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(47) Water and Sanitation Program East Asia and the Pacific (WSP-EAP). 2009. Information on Improved Latrine Options. Informed Choice Catalogue, Jakarta, Indonesia: WSP-EAP. Background In Indonesia, very few households have access to safe latrines. This may be partly explained by the fact that many existing latrines are elaborate and expensive, giving the impression that they are not affordable to low-income families. As part of the TSSM project, the Informed Choice Catalogue of Improved Latrines provides a wide range of rural latrine options and designs adapted for users with special needs or for use in special circumstances. It is intended for anyone interested in and working on sanitation programs, to raise people’s awareness of options, and create sanitation demand and provide some ideas for those working on actual construction of latrines. Aim The booklet aims to increase sanitation demand in Indonesia by enabling people to make informed choices about technically feasible and affordable sanitation options. Approach To promote behaviour change and ultimately total sanitation, the Informed Choice Catalogue provides information on improved latrines to minimize contamination, helps people identify latrines according to their needs and ability, and serves as a means of communication for selecting a latrine technology. The decision about how to present the information in the booklet is left up to the creativity of the user; however, the first step is to ensure that everybody understands what a latrine is before discussing detailed designs. The booklet outlines the purpose and design considerations for the three main parts of the improved latrine structure: above-ground (superstructure); on-the-ground (slab); and underground (pit). The advantages and disadvantages of different materials are highlighted as well as the quantities required to allow for quick cost calculations. Finally, information on latrine options for special conditions, including high groundwater table, flooding areas, tidal areas and densely populated areas, are presented.

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(48) WaterPartners. 2008. Creating Access to Credit for Water and Sanitation Improvements: A Case Study of Women’s Self-Help Groups in Tiruchirappalli, India. Kansas City, MO: WaterPartners. Background This case study explores a micro-lending program carried out in Tiruchirappalli (Trichy). The program was implemented by Gramalaya, a water and sanitation-focused NGO, in partnership with WaterPartners and involved the construction of water and sanitation facilities by mobilizing a network of women’s self-help groups (SHGs) to utilize a revolving loan fund. Approach The loan program was executed through the Women’s Action for Village Empowerment Federation network, consisting of 2,190 women’s SHGs with over 32,000 members. Gramalaya provided extensive training activities for the SHG members, including community organizing, census data collection, community needs assessment, health education, toilet construction techniques, management of loans, engagement of local government officials, and selfgovernance systems. It embarked upon “total sanitation” campaigns, with SHGs putting pressure on community members to become open defecation free and helping to stir demand for safe water and toilets. Loans were provided directly to SHGs, who then distributed the loans among borrowers. The entire SHG was liable for repayment of the loan. SHGs generally had 10-12 members and functioned similar to the Grameen Bank model, having an elected president, treasurer, and secretary. Loans were for 24 months with a 12 or 18 percent interest rate and were used to construct latrines, toilets, bathing facilities, water connections, and stand posts. Gramalaya and SHG members also monitored the construction of improvements and after the construction period, the SHG members were responsible for system operation and maintenance and paying municipality fees. Key Outcomes and Learning The program opened up access to water and sanitation loans by creating a strong demand for affordable water and sanitation improvements; establishing the social collateral necessary to secure loans; and demonstrating the viability of water and sanitation loan products to the private lending sector. Over the course its program, Gramalaya realized an overall average repayment rate of 78% and its success brought attention from local financing institutions. Several commercial banks and a development bank were interested in providing significant additional capital for Gramalaya’s program. Gramalaya plans to leverage its revolving loan fund as a loan guarantee to obtain the additional capital from commercial loan sources. Work with the Federation also served as a launching pad for women to procure loans for income-generating activities previously not considered acceptable for women. Some SHGs have started their own businesses that supply materials needed for toilet construction. There are limitations to universal replication and even though the program mobilizes local resources it still requires subsidies to create and maintain the necessary organizational structure. Efforts to make microcredit organizations self-financing and subsidy-free have almost universally been failures and resulted in catering to higher income clients. Revolving funds are only appropriate for those whose total income is capable of covering the cost of the sanitation project over all other necessities, but who have not been able to carry out the project due to a lack of liquidity or motivation of some members of the household.

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(49) Water Supply & Sanitation Collaborative Council (WSSCC), Barbara Evans, Carolien van der Voorden and Andy Peal. 2009. Public Funding for Sanitation – The many faces of sanitation subsidies. Geneva, Switzerland: WSSCC. Background Given that many of those who lack access to sanitation are extremely poor and given the public health benefits of universal access to sanitation, public funding to increase access seems an obvious policy response. However, this response is widely contested as a mechanism to increase access based on past experiences with failed public subsidies, insufficient public funds, and inadequate targeting of the poor. The purpose of this paper is to assist in understanding the global debate on subsidies and sanitation financing and to provide some guidance on how to select the most appropriate funding arrangements in different situations. Subsidy Approaches Ten types of mostly hardware subsidies are discussed, including the advantages and disadvantages of each: direct subsidies; infrastructure subsidies; connection subsidies; operational subsidies; subsidies to small-scale operators; cross-subsidies; consumption subsidies; output-based subsidies; regulatory advantages (inadvertent subsidies); and subsidized credit. Key Learning and Recommendations It was concluded from this review that public subsidies do not fail per se but that they fail when they are associated with supply-driven approaches which fail to take account of household preferences and behaviour or where they focus too much on hardware and there is insufficient funding available for the essential software elements. The design of smart subsidies is a challenging task and will require close attention to the specifics of every case. For example, public subsidies could be used to leverage much greater investment if they are used explicitly in support of other sources of funds for more appropriate goods and services. This approach, widely recognized in the literature on both sanitation marketing and CLTS, suggests greater emphasis on financing sanitation promotion and the enabling environment (software), with limited but smarter subsidies for hardware where required. Increased leveraging requires a shift in funding away from direct or infrastructure subsidies to alternatives such as subsidized credit, support for small-scale providers, and better, smarter funding for public elements of the sanitation system. It can potentially unleash new sources of funds and at the same time empower communities and households to take control of their own development and rather than being anti-poor such a shift in emphasis can enable improved access for the most excluded groups.

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(50) World Bank and International Finance Corporation (IFC). Lighting Africa – Catalyzing Markets for Modern Lighting. Washington, D.C.: World Bank and IFC. Background Lighting Africa is a joint initiative by the World Bank and IFC to address the lighting needs of rural, urban, and peri-urban customers without electricity access. It offers an alternative to current lighting options for this market, which is dominated by costly, inefficient, poor quality, and often hazardous fuel based products. Lighting is often the most expensive item among lowincome household energy uses, and yet, while consuming a large share of scarce income, fuel based lighting provides little in return. New advancements in lighting technology promise clean, portable, durable, lower cost, and higher quality lighting. The challenge is to make these products accessible to the half billion “energy poor” in Africa. Aim The Lighting Africa initiative aims to provide up to 250 million people in Sub-Saharan Africa with access to non-fossil fuel based, low cost, safe, and reliable lighting products with associated basic energy services by the year 2030. Approach Lighting Africa seeks the rapid scale-up and delivery of affordable, non-fossil fuel lighting, and dramatic cost reductions. It is technology neutral and works with public and private sector stakeholders across a variety of sectors to reduce transaction costs, mitigate market risks, and promote commercial discipline. The initiative will facilitate the transition to modern lighting services by: catalyzing the private sector; facilitating consumer access; improving market conditions; and mobilizing the international community. It is a multi-pronged initiative addressing both demand and supply-side constraints to improve access to better lighting by: supporting market research to better understand consumer demand behaviour and preferences, and local supply, marketing, and distribution channels; strengthening ties between the global lighting industry and local service providers to design, develop, and deliver low cost lighting products; financing facilitation to increase access to affordable financing for suppliers and end-users, reduce investor risks, mobilize local financial institutions (and micro-finance), offer World Bank Group financing, and apply Clean Development Mechanism methodologies to bring down consumer costs; developing standards, certification, and labelling to improve product quality and increase consumer awareness and confidence in new-to-market lighting products and services; aggregating market demand through policy support, bulk market purchasing, risk sharing, and linkages to cross sector programs; and stimulating knowledge sharing and capacity building to include a business-to-business web portal, training and train-the trainers programs, publicprivate partnerships, institutional strengthening, and development of new business models and toolkits. Expected Outcomes The following outcomes are expected for the initiative: easy access to improved, modern lighting products and services for the poor; substitution of fossil-fuel based lighting sources with better quality lighting at lower costs; improved quality of life for consumers; enhanced capacity and increased incomes for local entrepreneurs and businesses; and effective engagement of global lighting manufacturers in a new market segment.

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