Drinking from your mobile phone

The water industry has a lot to learn from the mobile phone industry about reaching low-income countries. In many ways, the two services face the same challenges. Both have relatively high fixed costs with a large infrastructure component, and low variable costs. The big difference between the two businesses is that one has been dramatically more successful than the other.

In Kenya, for example, there are 20 million mobile phone connections, but just 12 million Kenyans have access to piped water (and this access is delivered via fewer than 500,000 utility connections). Most strikingly, Kenyans spend on average 16.7% of their personal income on mobile telephony (according to ResearchICT Africa), compared to around 1% for water services.

There are other reasons for this discrepancy: the mobile phone companies have hungry capitalists behind them, whereas the water sector is ruled by politicians and NGOs. Furthermore, people seem to be prepared to pay more for the things that they want than the things that they need. What I am interested in is the extent to which the discrepancy in market penetration can be explained by the difference between the two business models.

The first thing that the mobile operators discovered when they started to sell to low-income groups was that pre-paid is the only way. Long-term payment commitments – even with the offer of free handsets – were unattractive to this market. Customers needed to be able to control the money they spent, and buy airtime in very small increments (you can buy prepayment cards for as little as $0.50 in many markets). The problem with the prepay model is that it is difficult to cross-subsidise the handsets through usage charges (because prepay customers have no loyalty). This might reduce customer acquisition costs for the operators, but it means the customers have to find the money for handsets. The cost of these has fallen dramatically – five years ago, an ultra low-cost handset might have cost $50. Today, the cheapest unsubsidised new handset costs in the region of $15. For some customers, even that is too high. There are micro-credit institutions which specialise in lending money to buy handsets for those who cannot scrape together the money to buy a handset up front. Those who can’t even afford that can buy airtime from one of the numerous phone owners who rent out their handsets for calls.

Comparing this to the way the water sector works, the first thing that stands out is that water is remarkably good value. Kenyans reportedly use 46 litres per head per day. This retails at $0.52/m3, so a month’s worth of water would cost $0.72, compared to an average expenditure of $10.52 on mobile telephones per month. In that sense, the affordability of water tariffs is not a serious concern: in fact there is probably scope to load more cost onto the tariffs. The real issue is the connection charge. Anything over $20 is likely to be too expensive for a low-income user, but typically utilities are looking at hundreds of dollars – rather than tens of dollars – for connections.

Three things might bring this price down for the poor: greater cross-subsidisation of connections through higher tariffs, economies of scale in connecting whole streets at once rather than single residences at a time, and micro-credit lending.

At GWI, we are doing two things to address this issue. One is supporting Water.org, which has been developing micro-credit projects to make water connection fees affordable to low-income households. The other is to collect connection charge information from major cities around the world as part of our 2010 water tariff survey. Subscribers to the magazine will be able to read the results in the September issue. It will make for interesting reading.