Safe
Water System Manual
8.0
Plan for cost recovery
Tasks:
Possible
approaches to cost recovery include:
•
Providing vessels and disinfectant free of charge _ all funding is covered by
donors or government
•
Recovering the costs, or part of the costs, of some project components _ some
funds are generated through sales of products
•
Recovering all costs _ all costs of the project are repaid through sale of products.
This requires sale of large volumes of the products at higher prices.
In a Safe Water
System project, the products are low cost items, and the project is conducted
in settings with low household incomes. Consumer ability and willingness to pay
are critical factors that depend on how much money people have and how much they
want to spend on safe water.
8.1
Decide on an approach to cost recovery
Cost
recovery plans will depend on the objectives of the project in terms of coverage
and sustainability, and the source, amount and timeframe of funding available.
Consider feasibility, advantages and disadvantages of different cost recovery
schemes.
•
Providing vessels and disinfectant free of charge — Providing
products free of charge is likely to result in higher coverage and distribution
to the people who are poorest and most in need. However, experience has shown
that people do not value items as much when they are given away free. Donation
of vessels and disinfectant to families may result in little use initially and
no sustained use. Donation is also expensive and unsustainable in the long term.
An exception to these recommendations is in disaster settings where sale of any
items would not be possible.
•
Recovering the costs of some project components — Most Safe
Water System projects decide to try to recover some costs. This is usually done
by selling products at prices that generate funds to offset some of the project
costs. An advantage of charging for products is that if a product has a cost,
people feel it is more valuable. A disadvantage is that some people cannot afford
to buy the product. However, this can often be compensated for by some creative
payment methods. Also, demand creation, through such techniques as social marketing
or community-based promotion, can induce people to buy a product they might otherwise
feel they cannot afford.
Usually,
the original donation is used to cover the costs to establish production of water
storage vessels and disinfectant, and also initial project costs such as promotion
and education. Then by establishing a pricing and a payment collection system
for sale of products, the project can generate some revenue. If the project can
recover some or all of the ongoing costs of producing and distributing the disinfectant
and perhaps vessels, the supply will be more sustainable. In Zambia, for
example, the project recovered 80% of production costs for the disinfectant; this
did not include marketing costs.
•
Recovering all costs — With full cost recovery, a project receives
a donation that is placed in a revolving fund. All expenditures for supplies,
distribution, promotion, monitoring and management are recovered through sales
of the products. Theoretically the project can sustain itself into the future.
The disadvantage of full cost recovery is that the necessary price of the products
is likely to make them unaffordable, except for relatively wealthier members of
the community, and result in low demand. Because of this possibility, full cost
recovery may be less likely to succeed.
In
Bolivia, for example, in the CLARO project, full recovery of the cost of 20-liter
water vessels led to an initial surplus in the revolving fund, but the project
subsequently saw a decline in sales. The CARE project in Western Kenya
managed to procure inexpensive, locally-produced hypochlorite solution, used locally
available containers, and had low marketing costs. In these ways, this project
attempted to achieve full cost recovery from products that were affordable to
their poorest clients.
In
summary, donation of vessels and disinfectant to families is not recommended because
it is unlikely to result in sustained use (except in the case of disasters). Full
cost recovery requires higher product pricing. Therefore, it is recommended that
a Safe Water System project plan some sort of partial cost recovery. To improve
the success of any cost recovery scheme, the project needs to plan for:
•
a well-implemented behavior change strategy to make the home water treatment system
a priority household expenditure
•
creative financing schemes to help poorer families purchase the products (see
8.3 below)
•
diligent collection of sales revenues to achieve sustainability
8.2
Set the prices of water storage vessels and disinfectant
Issues to be considered include:
•
the amount people are able and willing to pay (depends on availability of cash,
seasonality of income in agricultural economies, seasonality of disease, and also
factors such as peoples' priority for expenditures, perceptions about diarrhea
and water safety, local practices, and effective promotion and education)
• the proportion
of costs that needs to be recovered from sales
•
the price needed to balance coverage with cost recovery in line with the project's
health and financial objectives. If prices are set too low, high coverage may
be achieved but less revenue will be generated. If prices are set high, coverage
may be low initially but effective promotion can usually increase demand. Also,
most projects find that it is easier to lower prices than raise them; rising prices
can cause resentment and drop out.
•
any changes expected in the local market in the future
Balancing
affordability and incentive
Set
low prices that most families can afford. Market research determines consumers'
ability and willingness to pay for special vessels and disinfectant solution.
Where products will be sold through the private sector, they must be priced so
that distributors and sellers are motivated to distribute, promote and sell them.
Prices should allow sales persons (such as health promoters) to earn a small commission
for sales. Health centers and commercial outlets should receive income from sales.
These incentives can be extremely effective to stimulate sales. As a guide to
an appropriate profit margin, look at margins on products of a similar price and
life span.
Pricing
special vessels
For
specially designed water storage vessels, the price objective may be to recover
as much as possible of the manufacturing costs (and the cost of shipping, if significant),
plus a distribution margin (some projects have used 25%). If this price is too
high for consumers, a pricing option such as price subsidies (for example, through
the use of coupons) or credit terms may be established to lower the price or cash
outlay.
Options
include:
•
sale at full price
•
sale at subsidized price
•
sales on credit
•
barter
•
payment in kind (e.g., vessel in exchange for work, see Figure
10).
One
method to estimate a feasible price for the special vessels is to determine what
people pay for the vessels they currently use, or other similar household items
such as plastic washbasins. If the special vessel has a price like other commonly-used
containers, people will be more likely to purchase it.
Because
a vessel is a high-priced item in comparison with disinfectant and can be too
expensive for some consumers, some successful projects have sold vessels at a
subsidized price and disinfectant at a break-even price.
Pricing
disinfectant
For
disinfectant, the price objective may be to recover manufacturing and bottling
costs, plus a profit margin. It is best to sell disinfectant at a break-even price
with perhaps a slight profit, depending on local packaging costs. The break-even
price may not include support for sale and distribution.
To
set a price for disinfectant, first calculate the cost to produce one bottle of
the disinfectant, including salt, electricity, operator and bottler, bottle, label,
and transportation. Add a percentage markup, depending on your project's plans
for distribution, such as a margin to cover costs of transportation, a profit
for retailers, or an incentive for volunteers involved in promotion and sales.
To determine
if this price will be reasonable, calculate what the cost would be per household
per year. Then compare this with annual household income. (However, data on average
household income is often difficult or impossible to obtain.)
For
example:
Price
of one bottle of disinfectant = cost to produce and bottle plus 30% retail markup
= _______
Annual
cost per household = Price of one bottle X (number of bottles needed by average
household per year) = ___________
Average
annual household income = per capita average annual income X average household
size = _____________
Annual
cost of disinfectant per household / Average annual household income = _______%
In
Zambia, the cost to produce one bottle of disinfectant is $0.20. There is
a 25% retail markup, so the price of one bottle is $0.25.
Annual
cost per household = $0.25 X 12 bottles = $3.00
Average
annual household income = $370 X 6 persons in the household = $2220
Annual
cost of disinfectant per household/average annual household income = 3/2220 =
0.1%
It
is unlikely families will buy disinfectant if its cost exceeds 2% of the average
annual household income.
One
method to estimate a feasible price for the disinfectant is to determine what
people currently pay for household products they currently use for cooking fuel
or hygiene, such as charcoal, wood, soap, or laundry detergent. If the disinfectant
is priced like other commonly-used household products, people will be more likely
to purchase it.
If
it is possible to sell disinfectant in returnable bottles, the unit cost of disinfectant
may be lowered substantially. The pricing of returnable bottles and bulk disinfectant
will need to include a much higher profit to compensate disinfectant vendors who
purchase in bulk and then refill containers returned by consumers. Alternatively,
empty bottles can be collected by vendors and returned to the manufacturing location
to be cleaned, relabeled and refilled.
8.3
Plan any subsidies or special payment methods
Discuss
with community representatives as early as possible the projected costs of vessels
and disinfectant. Also discuss their perceptions of the costs and whether subsidies
or special payment methods are needed. Ask them which payment methods are most
promising in the target communities.
Subsidy
Subsidy
is one way to increase the affordability of products, but it may be a short-term
option because it relies on external donor support. Subsidy can make vessels affordable
to poorer members of the community and increase demand. However, it may result
in increased purchases only in the short term, with demand falling if and when
the subsidy is removed.
Subsidies
may target particular groups or areas. The issues to consider include who should
benefit and how to ensure that the target group receives the benefit and not others.
For example, the project may target homes with children and sell them the vessel
at a reduced price. A potential problem with subsidized projects is that poor
households may purchase the vessel at the subsidized price and then resell it
at the regular price to earn the difference. This possibility defeats the purpose
of the subsidy, which is to increase access to the poor.
Another
approach is to sell a basic vessel for a low price and a more expensive vessel
with special features, such as insulation, for families who want and can afford
it. Profit from the more expensive vessel can help cover the costs of producing
the basic vessel, thereby keeping its price low for the neediest families.
Payment Methods
Cash
purchase of a water storage vessel is too expensive for some people. Spreading
the cost is one way to make vessels more affordable. Possible payment schemes
include:
•
sale for a single payment 
•
sale with installment payments
•
payment in kind (for example, water vessel for work project)
•
employer or community credit schemes.
To
date, water projects have all sold vessels for a single payment. One project sponsored
a "Water Vessel for Work" project in which some individuals worked on
a community improvement project, such as building a health post or community center,
digging drainage ditches to remove standing water, or planting a community garden.
When the project was completed, participants were "paid" a vessel and
disinfectant. This approach allowed families to obtain a vessel with no cash outlay,
but the vessel had value because it was earned. (See Figure 10.)
Administration
of credit schemes is not easy and can be time-consuming, but may be considered
where the infrastructure is already in place and operational.
Figure
10: Steps of a Water Vessel for Work Project
1.
Meet with the community to •
introduce products, •
determine interest and motivation, and •
define community improvement projects in which many can participate.
2. Obtain funding
from local government, NGOs: •
for vessels and disinfectant, and •
for project materials.
3.
Define work day. Purchase products and materials. 4.
On work day, register participants, assign tasks, and verify participation for
entire work day. 5.
Upon project completion, distribute vessels and solution. Suggested
projects: •
Build or improve health posts, community centers, or schools •
Dig drainage ditches to remove standing water •
Prepare, plant, weed, and cultivate a community garden •
Build desks and chairs for school or community center
|
8.4
Plan How Funds Will Be Managed
Important
decisions include whether the project or other institutions within the community
will manage the money and how it will be handled. Management needs to ensure accountability
for funds and supplies. Financial controls are required to prevent misuse or theft.
To achieve sustainability, management of funds must include diligent collection
of sales revenues. Lenient payment policies will lower cost recovery and sustainability.
Issues
to consider include:
•
capacity of different organizations, groups or individuals for management of funds
• sustainability
of the procedures
•
security of funds and supplies
Project
management of funds _ Some projects have established their own system
of collecting funds generated from product sales to community members or retail
outlets or through health facilities. Experience shows that allowing health facilities
to retain some revenue can improve staff motivation and service quality.
Project management
of funds has several potential drawbacks:
•
The project may not have the capacity for the work created by managing funds.
• The
community is not involved.
•
The system is only as sustainable as the project.
•
The project may not be able to receive payment for supplies at the time of hand-over
if outlets or individuals do not have funds to pay up front. Collecting money
in arrears can be difficult.
Project
managers also need to consider the safety and security of project staff, who may
be expected to transport funds generated from product sales.
Community
management of funds _ Some projects work with community organizations,
such as women's groups, neighborhood health committees, and community pharmacies,
that can buy and sell products, bank funds generated, and use the funds for resupply.
The ability of local health centers or neighborhood committees to manage inventories
and collect and manage funds will vary widely. Commercial retail stores and shops
will have these abilities. Although community involvement can potentially increase
sustainability, any project considering this approach needs to consider carefully
the experience of community committees:
•
Policies must be clearly defined, written down and understood by all members of
the committee, project and community to avoid misunderstandings.
•
Procedures to control money handling, banking and access to banked funds must
be established to prevent theft.
•
In anticipation of the end of external support, systems must be created to enable
the community to use funds generated to procure and distribute new supplies.
The most important
policies to define are the roles and responsibilities of the project, the committee
and its individual members, and how the income generated will be used.
Procedures to control
money handling can reduce the risk of theft of community funds. Procedures can
be quite complex and time-consuming, and outside regulation of village committees
may sometimes be required. But they can also be quite straightforward, such as
requiring signature of both a neighborhood health committee member and an appointed
health worker to withdraw funds from the bank. Some projects have found that women
are more trustworthy in handling revenue and managing funds.
