Water infrastructure, which provides safe water as a public good, is and should be supported by government funding. In low- and middle-income countries, however, governments often lack a robust tax base from which to pay for water services. Private funding, from both donors and investors, can fill a substantial part of this gap. But when governments fail to uphold positive incentives for private sector participation, countries lose out on critical sector investment.
Imagine trying to get a new business up and running, doing the hard work of aligning what your clients want, at the price they want, and quality they expect, and then being told you must give away your product for free. In 2020, this exact scenario played out for 4Ward Development¹ – the main safe water services provider in Wassa East District, Ghana, just after it had expanded services to 90% of the entire district of 100,000 people.
We all remember March of 2020 and the uncertainty that unfolded when the coronavirus was declared a global pandemic. To help ensure its people had access to sufficient water for health and hygiene, the President of Ghana issued a national directive that all water would be free for three months. Then, when the mandate was extended two more times, its negative impacts became clearer. While people could protect themselves from the disease in the short-term, the impossibility of keeping free water services flowing in the long-term became a jarring reality. The mandate was issued with the caveat of a promise that the government would compensate service providers for their losses. However, as of October 2021, the government had repaid 4Ward just 10% of its losses, jeopardizing the sustainability of the business, and therefore risking safe water provision for more than 90,000 people.
In the U.S., we might compare this with a similar set of tradeoffs (although not health-related) created by the eviction moratorium, a 2020 policy disallowing landlords from evicting renters who didn’t pay their rent. The moratorium supported renters in an economy teetering from the secondary impacts of COVID-19, but at the expense of landlords – some who could weather the losses and some who went bankrupt because of the mandate. Those that had used their personal finances to offer mutually beneficial, affordable-rent housing, were punished at the expense of political expediency.
Water4 is scaling water businesses in 13 countries across Africa, and we have seen a host of different policy responses to the crisis. So what have we learned so far through this pandemic-induced free water experiment in Ghana?
Lesson 1: Policy shifts can be swift and have a large impact on the bottom line. In compliance with the policy, 4Ward gave away its sole product for nine months and lost $60,000 in uncollected revenue, a huge loss for a new business. This demand stretched the capacity of the water systems, requiring certain upgrades such as elevated storage and larger pumps. The business had to cover 60% higher operating costs while also making these new capital investments to keep up with demand from non-paying clients. The mandate was expensive. In the midst of chaos and loss of human life, it is understandable that the government would want to provide free water. However, the policy decision was made at the expense of private, tax-paying citizens and the companies they own.
Lesson 2: Free water increases demand. As expected, the policy drastically increased demand for NUMA, Water4’s branded water product sold by 4Ward. Water sales at public kiosks doubled and sales at household connections increased by 30%. More people were using more water for hygiene, but also for laundry and washing cars. Before the mandate it had been customary to use untreated water for such tasks.
Lesson 3: Free water is also free marketing. In 2021, the free water mandate ended for non-public utilities, and quarter two sales at public kiosks are up more than 40% compared with the pre-policy era. Although sales at household connections have returned to pre-pandemic levels, overall the business is bringing in more revenue today than it was before COVID.
Lesson 4: To survive shocks, businesses need savings. Because water prices are set by governments, water is a low profit product, even for a very efficient business. Businesses, which unlike public utilities don’t have a consistent flow of funds from the government, must be able to save their small profit in order to survive a crisis. This is critical for businesses that provide emergency services like water, that are required for health and safety. Reliable insurance schemes, such as those used for larger utilities, could provide backstops for catastrophic events, like COVID, for smaller and more rural water businesses too.
Lesson 5: Sustainability is more likely if the revenue base is more diverse. There are two ways of doing this. The first is to offer different types of services priced to meet different customer needs: schools, homes, clinics, individuals – a diverse customer base for water services. This reduces the risk that any single, unfavorable policy shift will affect all of the customer base/service offerings. The second is to sell more than just water. Using existing kiosks as store fronts, secondary hygiene and nutrition products can bring in additional revenue to help the business withstand unexpected shifts in water sales.
So, what was the overall impact of this experiment on the water business? The COVID season has allowed a greater proportion of the population to try NUMA water and appreciate the benefits of its convenience and safety, something that could not have been predicted at the start of the pandemic. But these positive benefits were delayed, and came at a high, short-term cost. If Water4 had not had immediate access to more capital to sustain operations – if the business had already been spun off as a stand-alone profitable company (which is the future plan) – it would not have survived a free water mandate.
We hope the Water4 experience demonstrates how even short-term and well-intentioned policies can create high barriers to doing business. Governments need to consider how quick policy changes (although necessary) can risk a country’s opportunities for future, long-term, private investment.
We believe change starts with the way we talk about water. Water businesses should not be castigated for making a profit. We need to do away with the idea that water businesses should act like charities, and give away their proceeds for a social cause, or give away water for free. Small profits can be a catalytic incentive for entrepreneurs to invest more in their communities. But, if a profit cannot be made due to local regulations and mandates, then a business will not be able to stay in the community. Unlike government utilities or NGOs, water businesses don’t have public subsidies to fall back on in times of crisis. Money set aside for future needs is therefore necessary and can save lives by preventing the backsliding of essential services in an emergency. We need to recognize how profits can be channeled to build sustainability in a largely unsustained sector.
Water businesses are resilient, flexible and efficient and have much to offer toward achieving SDG6. Let’s ensure they have a seat at the table to help assess policy tradeoffs and provide input on key decisions that impact our shared future. More frequent and sustained communication with the private sector will help governments be prepared to support small businesses in advance of the next crisis.