Improving sustainability: Developing a business model for operation and maintenance of drinking facilities in the Afar region (zone 3) in Ethiopia.

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Improving sustainability: Developing a business model for operation and

maintenance of drinking facilities in the Afar region (zone 3) in Ethiopia.

Master thesis, MSc Business Administration Small Business & Entrepreneurship

University of Groningen, Faculty of Economics and Business November, 2014

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With joy shall ye draw water out of the wells of

salvation

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Abstract

In the past decades, many efforts have been made to accomplish Millennium Development Goal 7c: Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. Rural water supply is especially off track in Sub-Saharan Africa. This research investigates drinking facilities in pastoralists communities in Afar, zone 3, Ethiopia. Business model theory serves as the foundation of finding the most sustainable source of water supply in the region. Case study research is used to investigate multiple technologies including handpumps, motorized pumps, a solar pump and extension works. 16 interviews with multiple stakeholders (government, community and NGO) are executed, followed by 6 interviews with industry-experts to check the data and analysis.

The main focus of this research is on the operation and maintenance of the drinking facility. Where implementation of a drinking facility is relatively easy, subsequent operation and maintenance suffers from many problems. Community management provides a promising option for the region since community participation is high, but financial and institutional factors in particular need improvements. Bad financial administration and bookkeeping by the community caused that total income each month was not achieved. Furthermore, the financial system of monthly tariffs led to low tariffs, generally not enough to cover for operation and maintenance costs. Especially motorized facilities with their accompanying costs for fuel had a low cost-effectiveness. Water is regarded to much as a social good, a human right, and not enough as an economic good, a scarce good following the laws of supply and demand.

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4 Handpumps seems the most promising option for the region because of their low costs (both initial costs and operation and maintenance costs). Motorized facilities are probably only cost-effective for relatively populous communities and should not be built for small communities. The solar pump, a pilot project, seems a promising option for the region. However, this is still unproven. Expertise in solar power is low, both at the NGO and the government. Besides, operation and maintenance costs are supposed to be very low but the future still has to prove this.

Financial sustainability can only be achieved when all stakeholders realize that water is an economic good. Good research and clear calculations upfront, regarding the size of the community, the chosen technology and subsequent operation and maintenance costs should be the starting point. The paper ends with practical recommendations for the NGO to improve this situation and limitations of this research.

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Acknowledgements

This master thesis project was the best part of my study. It was a very nice experience to complete my thesis in a totally different country where so many people and situations amazed me. I liked the practical relevance, AMREF has always been very interested in my research. This report is my graduation project and I would like to thank some people who contributed to this project.

First and foremost my two supervisors, Dr. Clemens Lutz and Matthias Olthaar MSc, who supported me and dedicated a lot of time, more than usual, to this special project. Their views and comments shaped this research in a very positive way.

The staff from AMREF was very helpful and provided me with input, help and support. The NGO guided my research, many made efforts to answer my questions or helped me with the research in the field. Of course, my special thanks to the pastoralists communities where I was welcomed to do the interviews. It was very interesting to meet them and observe their lifestyle.

I would also like to thank my friend Barthold who provided me with valuable feedback during various stages of the research. His comments certainly improved the thesis. The industry-experts commented on my data and analysis and improved the quality of the thesis. I want to thank IFPRI for hosting me during my stay. God provided me with the wisdom to complete the project and He was always close during my stay in Ethiopia. They all deserve my gratitude.

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List of tables

Table I Requirements for an alternative handpump management model (Practica Foundation, 2013)

Table II Overview of interviews per location Table III Variables and indicators

Table IV Score per criterion

Table V Consulted industry-experts Table VI Overview of cases

Table VII Scores of value proposition Table VIII Scores of financial design

Table IX Costs per technology (100 ETB = 5.05 USD) Table X Scores of operation and maintenance

Table XI Scores of external support Table XII Scores of governance

Table XIII Requirements for a sustainable business model

List of figures

Figure I Ethiopia, Afar and zone 3

Figure II Annual rainfall in Ethiopia (Nassef & Belayhun, 2012)

Figure III Typical handpump maintenance schedule (Elson, Franceys & Shaw, 1999) Figure IV O&M requirements for a diesel engine (Brikké, 2000)

Figure V Segregated aspects of ‘participation’ and ‘management’ (Harvey & Reed, 2006)

Figure VI The nine business model building blocks (Osterwalder, 2004) Figure VII Costs and revenues (Fonseca, 2003)

Figure VIII Sustainability framework for RWS (WaterAid, 2011) Figure IX Key items of a sustainable business model

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List of abbreviations

AfDB African Development Bank

AMREF African Medical and Research Foundation CBO Community Based Organization

CIA Central Intelligence Agency CSA Central Statistical Agency DWO District Water Office ETB Ethiopian Birr

FDRE Federal Democratic Republic of Ethiopia

FIETS Financial, Institutional, Environmental, Technological, Social

HP Handpump

HPM Handpump Mechanic

HPMA Handpump Mechanic Association

IFPRI International Food Policy Research Institute NGO Non-Governmental Organization

O&M Operation & Maintenance RFID Radio Frequency Identification RWS Rural Water Supply

RWSN Rural Water Supply Network SNV Stichting Nederlandse Vrijwilligers TAF Technology Applicability Framework TCE Transaction Cost Economics

UN United Nations

UNICEF United Nations International Children’s Emergency Fund USD United States Dollar

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10 WIF WASH Implementation Framework

WIPO World Intellectual Property Organization WUA Water User Association

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1. Introduction

1.1 Research background

Water is critical for humans to survive. It is a basic human, physiological need (Maslow, 1943). Drinking facilities are a necessary tool. Access to safe water is very unequally distributed around the globe and especially Sub-Saharan Africa is lagging behind. This is why so much effort has been made to meet Millennium Development Goal 7c: Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. This research will investigate the current organization of drinking facilities in the Afar region, zone 3, in Ethiopia and recommends options to increase its sustainability.

Sustainability is defined as “the maintenance of an acceptable level of services throughout the design life of the water supply system” (Sara & Katz, 1998:30). Brikké (2000:41) goes even further and claims that sustainability covers “a prolonged period of time (which goes beyond the life-cycle of the equipment)”. The most profound definition is provided by Harvey and Reed (2004:7): “A water service is sustainable if the water sources are not over-exploited but naturally replenished, facilities are maintained in a condition which ensures a reliable and adequate water supply, the benefits of the supply continue to be realized by all users indefinitely, and the service delivery process demonstrates a cost-effective use of resources that can be replicated”.

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1.2 Problem description

The current business model of drinking facilities in Afar is not optimal. Maintenance of the drinking facilities appears to be quite difficult to organize. This is a common problem for many sub-Saharan countries (Harvey & Reed, 2004; Sara & Katz, 1998; Brikké, 2000). The aim of this research is to study business model literature and find the optimal business model for the Afar region, zone 3, in order to increase the post-construction sustainability of drinking facilities in that region. Although much literature deals with the problem of sustainability of drinking facilities, this research focuses specifically on the Afar region, zone 3. Ethiopia is considered as one of the least developed countries (UNICEF, 2013). The Afar region is home to pastoralist communities and the Ethiopian Constitution recognizes these communities as vulnerable groups just like national minorities. These vulnerable groups are especially in need of help. Afar is further characterized by a low and erratic rainfall, increasing the urgency of solving water-supply problems (Nassef & Belayhun, 2012)

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The research will be conducted with support of African Medical and Research Foundation (AMREF). It is part of the Water, Sanitation and Hygiene (WASH) program for nomadic pastoralists in Afar (zone 3), Ethiopia. This program has a duration from February 2011 till December 2015 with an overall budget of €1.245.000.

1.3 Relevance

This thesis connects the business model literature to the rural water supply management literature. The research investigates the maintenance problem of drinking facilities from a managerial perspective by applying business model theory. Generally, the application of rural water supply literature places less emphasis on business models. It is argued that the combination of the two fields can lead to the a better business model. Business model theory thus supplements rural water supply literature. This research applies insights from both fields to a specific case and by doing so, delivers an extra insight to the literature.

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13 available drinking facilities is in their interest. Since Ethiopia is one of the least urbanized countries in the world, rural water supply is especially relevant (CIA, 2014). Pastoralist regions in Ethiopia further experience a relatively lower level of access to drinking facilities, both at the community level and the district level (WIF, 2011).

1.4 Objective and research question

This research tries to improve the current business model of drinking facilities in Afar, zone 3. It takes a broad focus and aims for a holistic perspective on rural water supply in Afar, zone 3. All relevant factors and stakeholders will be included in the research. There is a need for accessible, sustainable, affordable and demand-driven services (Harvey & Reed, 2004). External donors and the implementing NGO approach water supply traditionally as a project with a finite life span. This may be conflicting with the principle of sustainability since water supply is about much more than the provision of a physical infrastructure. It is also about support, coordination, regulation and evaluation (Harvey & Reed, 2004). Ethiopia, is an example of a country that is lagging behind when it comes to access to sustainable sources of safe drinking water. Improving this situation is the aim of this research. The research question is therefore:

What business model results in the sustainable supply of clean drinking water?

Sub questions for this research include:

 Which business models are available for clean drinking water distribution and what

are their advantages and disadvantages?

 How is collective action used to manage the operation and maintenance of the

drinking facilities?

 How is private action used to manage the operation and maintenance of the drinking

facilities? 1.5 Structure overview

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2. Background information

2.1 Afar region, zone 3

The Federal Democratic Republic of Ethiopia (FDRE) is located in the Horn of Africa. It’s capital is Addis Abeba. The landlocked country covers 1.104.300 square kilometers which makes it the 27th largest country in the world. Ethiopia has a population of more than 96 million people. The economy is based on agriculture although the government is pushing to diversify (CIA, 2014). The country is divided in nine ethnically-based regions and two chartered cities, Addis Abeba and Dire Dawa.

Ethiopia is one of the poorest countries in the world. It is ranked 173 out of 187 countries in the UN’s Human Development Index (UNDP, 2013). The majority of the population (83%) lives in rural areas, making Ethiopia one of the least urbanised countries in the world (CIA, 2014).

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16 The Afar region is located in the northeast of the country. The capital is Semera and rural population accounts for around 92% of the region. Afar is characterized by pastoralists communities, rearing camels, cattle, goats, sheep and donkeys. Agriculture such as production of maize, beans, sorghum, papaya, banana, and orange is also practiced. Cotton production is also typical to the region. Commerce, especially of salt, is another area of occupation (FDRE, 2014). In Afar, zone 3, many families partially settle in communities although even here most houses are semi-permanent. Among the pastoralists the men and boys follow the cattle to the pastures. Depending on the season and the pasture conditions, they move to attractive districts. Most females stay behind in semi-permanent communities (AMREF, 2011).

Pastoralists have historically been sidelined by development policies and are unable to participate in public policy making. In Afar, the majority of the population of the region has no access to potable water. About 35,7% of the households get drinking water from rivers and lakes, 15,7% from unprotected wells and springs, 4,2% from protected wells and springs, 36,8% from public taps and only 7,6% from their own tap (AMREF, 2011). The erratic and unreliable rainfall results in drought almost every year.

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2.2 Sources of water supply

Ethiopia’s constitution states that policies should aim to provide access to clean water, given the countries resources (WIPO, 2014). In Afar, zone 3, different water supply technologies can be identified. These include, rainwater harvesting, surface water, hand dug wells, wells/boreholes with a handpump, wells/boreholes with a motorized pump, extension works and solar pumping technologies. In case of community management, drinking facilities are under the supervision of a water committee that is chosen by the community. The committee usually consists of seven persons, including a chairman, a secretary, a caretaker and a treasurer (Mtisi & Nicol, 2003).

2.2.1 Rainwater harvesting

Rainwater harvesting is mostly done by rooftop water harvesting or catchment and storage dams (Brikké, 2000). Since Afar, zone 3, suffers from an unreliable and erratic rainfall, this type of rural water supply is not sufficient. During the rainy season, rainwater is collected, but additional sources are necessary during dry seasons.

2.2.2 Surface water

Water is collected from rivers, lakes and streams. Afar, zone 3, is located in the Awash basin, one of the 12 river basins of Ethiopia. The Awash river runs through Afar (FDRE, 2014). In rural areas, the collection of surface water is mostly done by jerry cans. To prevent contamination and diseases, the only O&M activity is the cleaning of the jerry cans (Adams, 2012).

2.2.3 Hand dug well

Hand dug wells are not very common anymore in Afar due to the salinity nature of the soil and the consequent quality of water (WaterAid, 2001). The depth is usually not more than 15 meters. A rope and bucket technology is often used, the rope and bucket may last, depending upon the quality, for about 1-2 years (Brikké, 2000).

2.2.4 Well/borehole with handpump

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18 handpump can drill to a depth of 100 meters, but a range of 15-45 meters is more common. The life expectancy goes up to 12 years (Brikké, 2000).

Figure III: Typical handpump maintenance schedule (Elson, Franceys & Shaw, 1999)

2.2.5 Well/borehole with motorized pump

Wells and boreholes can be equipped with motorized pumps. The major advantage is that this technology can reach groundwater at a deep level. Operation and maintenance is more complicated compared to the handpump. The technology is more expensive, both the initial costs and the O&M costs. Limitations include difficulties to access and pay for fuel, the need for specialist mechanics and availability and accessibility of specialized spare parts (Brikké, 2000). Motorized pumps can reach depths of more than 250 meters. The life expectancy depends on the quality of the engine, the installation and O&M with an average of 20.000 hours of operation (Brikké, 2000).

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2.2.6 Extension works

AMREF provides communities with water through distribution pipelines. These extension works refer to the case where a borehole is owned by the government and AMREF installed pipelines to water points to the center of the community. These pipelines should be able to convey quality water reliably and efficiently to the users and keep it from contamination along the way (World Bank, 2012). O&M costs are usually low since the water committee is only responsible for the distribution pipes. The life expectancy depends on the quality and the maintenance but can last over 25 years (Brikké, 2000).

2.2.7 Solar pump

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3. Literature review

3.1 Rural water supply management

Rural water supply throughout Sub-Saharan Africa has been studied by many authors including Harvey and Reed (2006). They claim that community management is the dominant governance model for rural water supply. Community management is defined as “a strategy of community development whereby a service or project is managed and controlled by a group of people who are its consumers and/or constituents; that is, members of the defined community which the service or project targets” (Henry, Land & Roach, 1990:3). Community management is “a bottom-up development approach whereby community members have a say in their own development and the community assumes control – managerial, operation, and maintenance responsibility – for the water system” (Doe & Khan, 2004:362).

The main alternative governance model is private ownership. Other options are handpumps under responsibility of piped scheme operator in the area, maintenance contracts between community and company, maintenance contracts between local government, Water Users’ Associations (WUA’s) and a private enterprise, Handpump Mechanics Associations (HPMA’s) and all services combined in one central company plus using mobile payments (Practica Foundation, 2013). An overview of the advantages and disadvantages can be found in appendix A.

Potential substitution products for groundwater that is pumped up are surface water and rain water (Brikké, 2000). Water-lifting technologies vary broadly and include bucket pumps, rope pumps, centrifugal pumps and hydraulic rams. Different power systems can be used including human power, animal traction, windmills and diesel engines (Brikké, 2000).

3.1.1 Community management

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21 Figure V: Segregated aspects of ‘participation’ and ‘management’ (Harvey & Reed, 2006)

Community management is thus part of community participation. A lack of ownership can be a problem, since the users must feel responsible for the facility (World Bank, 2012; Harvey & Reed, 2004). Prevailing wisdom supports the view that ownership will lead to responsibility and that this in turn will lead to a willingness to manage the facility and a willingness to pay for the O&M costs. Harvey and Reed (2004) prove that this is not automatically true. A sustainable business model requires more than just ownership, it requires ongoing support from an overseeing institution to provide encouragement and motivation, monitoring, participatory planning, capacity building and specialist technical assistance.

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22 ownership of the handpump (Carter, Tyrrel & Howsam, 1999). Third, the community organization charged with managing the water supply loses the trust and respect of the general community. This may be related to a lack of transparency and accountability, and lack of regulation by a supporting institution (e.g. local government). Fourth, failure by community members to contribute maintenance fees leads to disillusionment among committee members who abandon their roles. This may be due to a lack of legal status and authority of the water committee or lack of community cohesion. Fifth, communities have no contact with local government (or the implementing agency) and feel that they have abrogated responsibility for service provision; they therefore feel abandoned and become demotivated. Finally, communities are too poor to replace major capital items when they break down.

Savina, Valfrey and Vézina (2002) identified the following advantages of community management: Proximity to users and local capacity to manage conflicts, flexibility in dealing with those who are in arrears with their payments, the permanent structure (members come and go, but the committee stays) and the fact that users have a better mechanism for expressing their demands and their concerns.

Most community management models rely on external support from NGO’s, national and regional authorities (WaterAid, 2011; Fonseca, 2003: Harvey & Reed, 2004). Districts provide assistance when the system breaks down and pay for rehabilitation. Governments are responsible for regulation and monitoring. Insufficient resources, knowledge and expertise in local government institutions, corruption and lack of central government funding are constraints (Harvey & Reed, 2004). Woreda1 staff provides direct support to WASH committees, but in practice they have very limited resources. Support is based on ad hoc arrangements and mainly on a demand basis (Lockwood & Smits, 2011).

3.1.2 Private management

Foster (2012) calls for a paradigm shift from the dominant community based management system to a private sector management system. Private management is the main alternative to community management. Foster (2012) acknowledges that this is still an unproven solution. With private management, the drinking facility is owned by a private entity. Users pay this person for the water and the owner is responsible for O&M.

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23 A major advantage of this management approach is that the owner has a high incentive to repair the pump when it is out of order (Harvey & Reed, 2004). The main problem is the high initial cost of establishing the facility. Privatization of drinking facilities has some constraints. Harvey and Reed (2004:20) identify the following downsides: “(T)he local private sector is often underdeveloped and lacks required expertise, especially in 'software' areas, private sector organizations may lack the capacity and skills needed to enter into and manage contracts, private companies may be less likely to relate positively to communities, tendering for contracts locally increases potential for corruption at this level and the prioritization of profits over services may lead to social exclusion, especially affecting the poorest in society”.

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3.2 The economic perspective

The nature of water as a basic human need implies that the product ideally should be available for everybody (Rogers, de Silva & Bhatia, 2002). All sorts of philanthropic initiatives follow this line of reasoning. Water as a commodity is then viewed as a social good; every human being needs water to survive and everyone is supposed to have access to it, regardless of their qualifications (Brei & Böhm, 2011). Provision by the private market is, however, inadequate for social goods (Tiebout & Houston, 1962).

In contrast, the economic approach views the supply of clean water as an economic good (Rogers, de Silva & Bhatia, 2002). This perspective views the supply of clean water as a scarce resource, following the law of supply and demand (Perry, Rock & Seckler, 1997). The principle that clean water should be paid for is much easier to accept for those who view water as an economic good (AfDB, 2010). According to Rogers, Bhatia and Huber (1998) water is both a social and an economic good. Closely related are merit goods: Goods that the society wishes to encourage (Eecke, 2007).

The Ethiopian constitution focuses on policies that aim to provide all Ethiopians with clean water, to the extent the country’s resources permit that (WIPO, 2014). The importance of clean water is thus recognized but the statement is weakened because the government is ‘aiming’ for it and acknowledges the limitation of resources. The Ethiopian government thus does not view water as a social good. If they would, the government would also be responsible to provide it to its citizens and also for subsequent problems.

A central concept to the price of a product/service is the willingness-to-pay. Willingness-to-pay is defined as the maximum price a given consumer accepts to Willingness-to-pay for a product or service (Le Gall-Ely, 2009). The rich field of willingness-to-pay for water services in low-income countries was reviewed by Merrett (2002). Conditions that contributed to a low willingness-to-pay include:

1. Economic life is hard so that households need to take the greatest care over their domestic expenditure

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25 5. The government is so manifestly corrupt that payments for public services are known

to line the pockets of the power elite

6. Neither the government nor the public water utility is willing to exercise sanctions against non-payment because of the likely political and/or public health consequences

3.2.1 Club goods

Buchanan (1965) addressed the gap between private and public goods. The former are excludable and rivalrous, the latter are non-excludable and non-rivalrous. “A good is considered as non-rival, or indivisible, when a unit can be consumed by an individual without reducing the consumption opportunities of the other agents” (Torre, 2006:60). “If the benefits of a good are available to all once the good is supplied, then its benefits are nonexcludable” (Sandler, 2013:265). Along the continuum are club goods: “These goods share the exclusion attribute of private goods but they are consumed jointly similar to public goods” (Bushouse 2011:106).

The organization of a club good requires an exclusion mechanism so that non-paying individuals can be excluded from the club and do not receive the good’s benefits (Sandler, 2013). The difficulty of exclusion will increase individual incentives to free-ride (Gorton, Sauer, Peshesvski, Bosev, Shekerinov & Quarrie, 2009). The exclusion mechanism punishes free-riding. Merit goods also suffer from the free-rider problem (Cornes & Sandler, 1996).

Olson (1965) addresses the logic of collective action. Rational and self-interested individuals will contribute only if the benefits exceeds the costs. For a collective good, like a drinking facility, incentives must be organized in such a way that individual benefits exceeds individual costs. Olson (1965) argues that the larger the group, the larger the free-rider problem. For large groups, more members will have to share the benefits and it becomes less likely that this small portion of the benefits can cover individual costs. Besides, for larger groups, the organization costs are higher.

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26 incentives, solidarity incentives and expressive incentives. Material incentives include access to potable water and reduction in illnesses. Solidarity incentives include self-confidence and an improved network. Expressive incentives include the satisfaction of voluntary work and altruistic behavior. The collective benefits are accessible for the whole community and are thus prone to the free-rider problem (Prokopy, 2009).

The objective of water committees is to seek the business model that can serve the maximum number of people with clean drinking water. Since club goods have an exclusion mechanism, the free-riding problem is partially solved. Private management may solve the free-riding problem more easily. Community management, however, usually does not exclude participants and follows the logic of water as a social good. Free-riding is then a major problem. Private management follows the logic of water as an economic good and does not serve the whole population. Monopolistic behavior is a potential danger.

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3.3 The managerial perspective

Drinking facilities are usually financed by external donors and implemented by NGO’s (Harvey & Reed, 2004). The implementing NGO provides assistance in setting up a water committee (in the case of community management) and provides training. The local government is usually also involved. Once the drinking facility is operational, the potential customers are welcome. O&M should be handled and financed by the local community, with help of the government. The strength of the underlying business model determines the sustainability of the facility.

Water as a human right is further operationalized and specified by the WHO. According to the WHO Guidelines for Drinking Water Quality (WHO, 2011) the adequacy of a water supply is determined by:

 Quality: The supply has regularly veriﬁed water quality. This can be measured with chemical parameters (e.g. hardness, pH, metals, chlorides, etc.).

 Quantity (service level): The proportion of the population with access to different levels of drinking-water supply (e.g. no access, basic access, intermediate access and optimal access). Besides drinking, the water can be used for laundry, cooking an personal hygiene.

 Accessibility: The percentage of the population that has reasonable access to an improved drinking-water supply.

 Affordability: The tariff paid by domestic consumers.

 Continuity/reliability: The percentage of the time during which drinking-water is available (daily, weekly and seasonally). Interruptions are caused by power failure, excessive demands, leakages and seasonal variations.

Interestingly, the economic perspective on water supply is totally missing. Sustainable access to clean water can only be achieved when the supply of this clean water is organized in an economic justifiable way. Economic benefits have to cover for operation and maintenance costs. Without this, sustainability cannot be achieved.

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FIETS Lockwood et al. (2003)

 Financial sustainability Financial sustainability

 Institutional sustainability Institutional and policy sustainability

 Environmental sustainability Environmental sustainability

 Technological sustainability Technical sustainability

 Social sustainability Community and social sustainability

Again, the economic perspective on water supply is not taken specifically into account. This categorization is widely applicable due to its broad definitions but therefore also not very specific. It is widely used in rural water supply literature but a good discussion needs to be more explicit. Lockwood et al. (2003) further identify two main limitations. First, limitations within the community and second, constraints which are external to the community. The first category include problems with community dynamics, political and social conflicts, lack of capacity, lack of financial resources etc. The second category include lack of spare parts supply, lack of supportive policies, lack of long-term support etc.

Maintenance is a broad concept. Harvey and Reed (2004) distinguish between three types of maintenance; preventive maintenance, reactive/corrective maintenance and rehabilitation. “Preventive maintenance refers to systematic pre-scheduled activities or programmes of inspections and maintenance activities aimed at the early detection of defects and implementation of actions to avoid breakdowns or deterioration” (Harvey & Reed, 2004:165). Such maintenance activities are conducted before a defect occurs. “Corrective maintenance refers to activities conducted or repairs carried out as a result of breakdowns or noticeable infrastructure deterioration” (Harvey & Reed, 2004:165). Corrective maintenance is reactive since these maintenance activities are carried out after a defect has occurred. Rehabilitation refers to correcting major defects (Harvey & Reed, 2004).

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29 In order to increase the willingness-to-pay, people need to be convinced of the concept of paying for water. The widely held view that water should be free available to all should be questioned since it is hindering sustainability (Harvey, 2007).

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3.4 Business model theory

“A business model articulates the logic and provides data and other evidence that demonstrates how a business creates and delivers value to customers” (Teece, 2010:173). A business model is thus more than just activity system design. It also outlines the architecture of revenues, costs, and proﬁts associated with the business enterprise delivering that value (Teece, 2010). The elements are thus how to create value for the customers, how to entice payments and how to convert these payments into profits (Teece, 2010). The business model is “the heuristic logic that connects technical potential with the realization of economic value” (Chesbrough & Rosenbloom, 2002:529).

Osterwalder (2004) provides an ontology that describes the business model of a firm. Influenced by the Balanced Scorecard (Kaplan & Norton, 1992), nine building blocks are identified.

Figure VI: The nine business model building blocks (Osterwalder, 2004)

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31 water should be understood by customers. Literature suggests that especially Sub-Saharan Africa must be made aware of this to improve hygiene and prevent waterborne diseases (Gbadegesin & Olorunfemi, 2011; Sharma, Dambaug, Gilbert-Hunt, Grey, Okaru & Robberg, ,1996; WHO, 2012).

“The customer relationship element refers to the way a firm goes to market, how it actually reaches its customers and how it interacts with them” (Osterwalder, 2004:59). To get the customers to use the drinking facility, the location is of utmost importance. To avoid abandoned facilities, insufficient yield, pollution, re-drilling and unnecessary costs, the facility must be sited appropriately in relation to environmental and hydrogeological conditions, on-site sanitation, community preferences and land ownership (Harvey & Reed, 2004).

Infrastructure management addresses how a company creates value. To provide the value to its customers, capabilities are needed. Capabilities “refer to a firm’s capacity to deploy (r)esources, usually in combination, using organizational processes, to effect a desired end” (Amit & Schoemaker, 1993:35, emphasis removed). The drinking facility must be operated and maintained. The water committee needs to possess the necessary skills to perform these tasks. Many problems of community management are related to missing capabilities, for instance when trained individuals move away (Harvey & Reed, 2007).

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32 Institutional factors relate to governance. Governance is “the art or manner of governing, by favouring an original method of managing affairs in an environment characterised by a multiplicity of actors (firms, states, local authorities, NGOs, international associations or bodies) each of which have, to varying degrees and in a more or less formal manner, decision-making powers” (Baron, 2003:329). Beyond the technical solutions for water supply in developing countries the main issue is a good governance model (Renou, 2010).

Financial aspects refer to the cost structure and the revenue model of the business. A prerequisite for sustainability is that the revenues can cover the costs. Revenues are obtained by tariffs and/or fees. Costs include direct and indirect O&M costs and rehabilitation and expansion costs (Harvey, 2007). Indirect O&M costs consists of institutional support costs. Related to financial sustainability are the concepts of ‘willingness-to-pay’ and ‘ability-to-pay’. “Willingness to pay … is the maximum amount the user is willing to pay toward the provision of drinking water rather than going without the service. Ability to pay is the maximum amount the user can afford to pay for the service” (Reddy, 1996:102).

Collecting revenues and taking care of them is an important task of the water committee. Since banks are usually a long distance away, trust in the treasurer and self-discipline of the treasurer is needed. Harvey (2007) sums up the three most common funding systems:

1. Reactive financing 2. Monthly tariffs 3. Pay-as-you-fetch

Reactive financing means that after the system has broken down, the community pay for the repair. Monthly tariffs refer to the case that every household has to contribute a given amount each month. The last funding system is the case where users pay a the caretaker immediately for the water they are picking up. In this case, the amount a user pays is dependent upon the quantity of water he is buying, in contrast to monthly tariffs. Besides financial contributions, contributions in kind are also an option.

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33 contributions from their side is a logical consequence. The different sources of funding are stated by Fonseca (2003).

All costs should be matched to all sources of funding, otherwise sustainability cannot be achieved (Fonseca, 2003). A financially stable business model must balance all these financial streams (figure VII). All involved parties should be aware of their roles and responsibilities and act on it in a timely manner. The water committee has to monitor these financial streams constantly. If contributions in kind are an option, the committee has to manage these as well.

The perspective of water as a club good requires non-payment behaviour to be punished. A community should therefore adopt an exclusion mechanism. Ability to pay can vary across community members. Harvey and Reed (2004) demonstrate that it is not necessary to choose a price that is affordable for every user. Governments and water committees can offer (secret) subsidies to the poorest households. These subsidies are in line with the perspective of water as both a social and a merit good.

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3.5Improving the business model

Chatterjee (2013) found that firms often have difficulties with switching to an improved business model. When the current business model is not applicable anymore, a firm needs to make a successful transition to an improved business model. A sustainable business model is able to balance three responsibilities: managerial responsibility, operation responsibility and maintenance responsibilities (Doe & Khan, 2004). The optimum sustainability of systems depends also upon the lack of alternative water sources (Breslin, 2003; Harvey & Skinner, 2002; Sutton, 2002). These include rainwater harvesting and river water.

The Practica Foundation (2013) formulated requirements that must be met in order to develop a viable business model for organizing water supply according to the FIETS-strategy. The focus is on handpumps, but the requirements also apply for motorized pumps.

Requirements

Financial Water is not for free. Users pay at least for the maintenance costs and preferably also for the

initial costs and depreciation.

Costs for the water should not exceed the economic resources of the users (including guaranteed long term external contributions).

Entrepreneurs must have access to suitable (micro-) finance options with reasonable interest rates in order to invest in hand pumped water supplies. This money can be paid back from the income from the users.

Sustaining the water supply is not dependent on volunteers. All involved people earn money from their activities.

Institutional Agreements regarding tasks and sanctions need to be officially established.

A pump is only installed if agreements regarding maintenance, finances and sanctions are established.

Users who do not pay are excluded from the water supply.

If a responsible person does not fulfil his tasks, he does not receive income.

The government is not the service provider. The government is only regulating, controlling and facilitating.

Planning and implementation is a gradual expansion from a central (geographical) starting point. This facilitates also the maintenance (including spare parts supply).

Environmental Regular water quality monitoring is part of the established tasks and responsibilities.

Technical The water point density should be such that the user amount does not exceed the pump and

well capacity.

Per situation the requirements for preventive maintenance should be assessed (depending on pump type, water depth, user intensity and water quality).

Maintenance should be done by an entrepreneur with experience in comparable activities. Maintenance should only be conducted by skilled mechanics.

Spare parts must be available within less than 24 hours.

Spare part are not bought by the users or community committees. A supplier prefers 20 regional mechanics to 2000 committees coming for spare parts.

The water supply system must be able to develop into a higher service level (e.g. with a motorized pump, storage tanks, extra extensions, kiosks and/or house connections).

Social The implementation of improved water supplies goes along with awareness raising regarding

the importance of clean water.

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35 The Practica Foundation views water as an economic good and defaulters should be excluded to keep the system sustainable. The option of a government who is fully subsidizing is thus not sustainable according to the Practica Foundation. Costs should not be higher than the ability to pay but it should cover for maintenance costs. This can be a problem when the ability to pay is not sufficient to cover for maintenance costs. Voluntary contributions are also not sustainable according to the Practica Foundation. Involved people should be paid if persons act on their roles and responsibilities. Getting involved because of altruism or prestige is thus not a sustainable option. The Practica Foundation also foregoes the option of contributions in kind and labor contributions and only considers financial contributions.

The government has the role of regulating, controlling and facilitating. This is not further specified. Does facilitating for instance mean that the government supplies spare parts? Further, maintenance should be executed by skilled mechanics who have access to spare parts within 24 hours? Does that rule out the possibility of water committee members as mechanics? The difference between ‘skilled mechanics’ and ‘entrepreneurs with experience in comparable activities’ is also not clear.

WaterAid (2011) developed a framework for sustainable supply of drinking water in rural areas (figure VIII).

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36 First and foremost, the framework agrees with the business model notion that without a real need and demand, the drinking facility will not be sustainable. True demand cannot be manufactured and is affected, primarily, by the distance to the source, the quality and the perceptions surrounding the source (Harvey & Reed, 2003). Second, the community management model relies on external support. In between are the design and implementation issues.

Combining rural water supply literature with business model literature is essential to capture the most important and relevant issues of both fields in a single framework (figure IX). In accordance with the Practica Foundation and business model literature, the supply of clean drinking water is viewed as an economic good. The starting point is the need for a real demand of safe drinking water. Both the rural water supply literature and the business model literature agree on this. Community participation starts with an expression of demand for water (Harvey & Reed, 2006). The value proposition is the first building block of a business model (Osterwalder, 2004).

The value proposition indicates the value of the product to its users. If this is in place, there is a willingness-to-pay for the product. If people value safe drinking water they will be willing to pay for it. Osterwalder (2004) refers to this as the revenue model; it describes the way how money is obtained through variable revenue flows. These revenues have to cover for the costs. The cost structure refers to the representation in money of all means employed in the business model (Osterwalder, 2004). Fonseca (2003) claims that a financially stable business model must balance all these financial streams. Different costs (initial costs, O&M costs) and revenues (fees, tariffs, contributions in kind) are discussed by Harvey and Reed (2004, 2006, 2007) and Fonseca (2003). The financial design is the second key item for the framework.

The focus of this research is on the operation and maintenance of the drinking facility. Where construction of a drinking facility is relatively easy, subsequent O&M suffers from many (potential) problems (Harvey & Reed, 2004; Sara & Katz, 1998; Brikké, 2000). This is the major theme in the rural water supply literature. Finding the optimal business model for O&M is the ultimate goal. Therefore, operation and maintenance is the third key item.

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37 Africa. Merrett (2002) concurs and Fonseca (2003) adds that some costs are seldom or never recovered. Besides the financial resources to manage, operate and maintain (Doe & Khan, 2004) the drinking facility, communities might also lack the necessary capabilities to perform those roles. Osterwalder (2004) indicates that these capabilities are necessary to create the value for the customer. The WaterAid (2011) framework highlight the need for external support. Technical assistance, financial contributions, spare parts supply and support around externalities is needed. The two most common partners of the communities are NGO’s and the government. They have to provide the necessary external support to communities. External support is therefore the fourth key item for the framework.

A business model requires good governance in order to be sustainable (Osterwalder, 2004). Since multiple parties engage in a partnership, roles and responsibilities have to be clearly defined. The governance model ensures that parties act upon their roles and responsibilities. In developing countries the main issue, probably the single greatest challenge is a good governance model (Renou, 2010; Lockwood et al. 2003). Governance is therefore the final key item for the framework that combines rural water supply literature with business model literature.

Sustainable business model

Value proposition The value proposition is an overall view of the community’s bundle of products and services that are of value to the customer Financial design The financial designs refers to the revenue model and the cost

structure of the water scheme Operation and

maintenance

Operation and maintenance refer to all the necessary activities to run a drinking facility

External support External support refers to assistance from outside the community to help the community to be successful

Governance Governance is the manner of governing, by favouring an original method of managing affairs in an environment characterised by a multiplicity of actors each of which have, to varying degrees and in a more or less formal manner, decision-making powers

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4. Methodology

4.1 Research design

This research focuses on finding the optimal business model for the sustainable supply of clean drinking water. Because of context-dependency, the situation in Afar is leading in finding the optimal business model (Mbari, 2013).

Different rural water supply technologies are identified. Not all technologies are relevant for this research since hand dug wells, rainwater harvesting and surface water require a minimum of operation and maintenance activities. The remaining technologies include the handpump, the motorized pump, extensions works and the solar pump. Following Eisenhardt (1998) drinking facilities were selected from all these categories to fill conceptual categories.

The two different management models include public management (community management) and private management. There are no private drinking facilities in Afar (zone 3) under coordination of AMREF and for that reason only community managed facilities are selected.

Yin (2009:18) defined a case study as “an empirical inquiry that investigates a contemporary phenomenon within its real-life context”. Eisenhardt (1998) stresses the importance of theoretical sampling by choosing polar types of cases. Since the aim of this research is to find the business model with optimal sustainability, cases were selected based upon their functioning. A properly working drinking water facility is functioning and being used, is able to deliver an appropriate level of benefits, continues over a prolonged period of time, the management is institutionalized, O&M costs are covered and O&M can be done with limited external support (Brikké, 2000). Less properly working drinking facilities include those that fail (parts of) these criteria.

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4.2 Research method and data gathering

This research is executed in the Afar region (zone 3) in Ethiopia between June and August 2014. Qualitative research is conducted to gain better understanding of the operation and maintenance of drinking facilities in the region. Qualitative methods are selected to gain understanding and deeper insights (Aken, Berends & van der Bij, 2012).

First, the interviews with the water committee members are conducted. To increase validity and reliability, two water committee members per drinking facility are interviewed. To get a view from both males and females, at each drinking facility both sexes are interviewed. Ideally, the water committee chairman (overview and ultimate responsible) is interviewed followed by the treasurer (focus on finances). Exceptions are Boloyta and Alula, due to unavailability of water committee members. The solar pump, is also an exception. Since this is a pilot project of AMREF, the supervising AMREF officer is chosen for the interview.

Location Technology Male Female

Enda Alibete Handpump Chairman Treasurer

Wasero Handpump Chairman Storekeeper

Ouribetu Motorized pump Vice-chairman Treasurer Boloyta Motorized pump &

2 handpumps

Chairman Treasurer

Alula Motorized pump Chairman

Member

Kurkura Extension work Chairman Member

Ababerheabe Solar pump AMREF-expert

Table II: Overview of interviews per location

After the first round of interviews with the water committee members, a second round is executed. The interviews with the water committee members indicate that the government and AMREF are key stakeholders. The district water officer, the WASH project coordinator and the WASH director at AMREF are therefore also interviewed. This flexible way of data collection is common for case study research (Eisenhardt, 1998)

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41 interviews are used for this research. The interviews with the water committee members are conducted individually with two interpreters present. One translated from English to Amharic, and one from Amharic to Afar. The interview with the district water officer is also conducted individually with one interpreter, from English to Amharic. The interviews with the experts of AMREF were executed individually in English. The questionnaires which are used for the interviews can be found in appendix B. Since the majority of the interviews needed a translation, direct quotes are often not possible. Rather, paraphrasing will be used to support the results.

The interviews are conducted between 8 July 2014 and 13 August 2014. The length of the interviews with the water committee is about one hour and the interviews are conducted at a quiet place in the community. The interview with the district water officer has a length of about an hour and is executed at the AMREF office. Interviews with the AMREF-experts have a duration of approximately one and a half hour and are conducted at the office of AMREF.

Existing studies provide the input for the indicators of sustainability (Adams, 2012; WaterAid, 2011; Al Hour, 2011; Harvey & Reed, 2004). The five major topics are value proposition, financial design, operation and maintenance, external support and governance. These topics serve as the basis for the interviews with the water committee.

Sara & Katz (1998) provide two additional sub-indicators for sustainability; consumer satisfaction and willingness-to-sustain the system. Consumer satisfaction refers to the degree that users are satisfied with the drinking facility. Willingness-to-sustain measures community support for sustaining the water system (Sara & Katz, 1998). These topics are also included, the former in ‘value proposition’ and the latter in ‘governance’. Questions are added about these topics and asked to the AMREF-experts.

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Variable Criterion Indicator

Valu

e p

rop

osition

Alternative sources of water Are there any alternative sources for drinking water?

Walking distance What is the longest distance from the water source to a user?

Participation How many community members use

the drinking facility?

Quantity Are users satisfied with the quantity of

water you get for the price?

Quality Are users satisfied with the quality of

the water?

Overall satisfaction In general, what can affect consumer satisfaction? Fin an cial d esig n

Responsible person for financial management

Is there a responsible person for the management of the finances?

Payment Is money collected on a regular

basis?

Differential tariff structure Are the payments done per quantity of water?

Bank account Is the money put in a bank account?

Bookkeeping Are income and expenditures

registered?

Service cut-off for nonpayment Are defaulters excluded of the water service?

% current in payment Which percentage of the users is current with the payments? Tariff covers O&M Is the money collection enough to

cover the O&M costs?

Op er at ion & M ain te n an

ce Responsible person for daily operation, pump check and maintenance

arrangements

Is there a responsible person for daily operation, pump check and

maintenance arrangements?

Days to repair How many days does it take between a breakdown and the repair?

E xt er n al su p p or

t Spare parts supply

Are spare parts available in case of a breakdown?

Long term support Are communities helped with major repairs?

Gover

n

an

ce Policies What is AMREF’s policy in setting up

the water committee?

Roles and responsibilities

Are roles and responsibilities clearly formulated and acted upon

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43 Management and reporting structure Are flows of information, decisions

and feedback clearly present?

Sustainability

Do you think that the community will have the financial capacity to keep the system working over the next 10 years?

Willingness-to-pay How can user’s willingness-to-pay be increased?

Ability-to-pay How can user’s ability-to-pay be increased?

Table III: Variables and indicators

The 24 criteria are given scores of two and zero in case of two options and two, one or zero in case of three options. All drinking facilities are assigned scores based on the distribution in table IV.

Criterion Score = 2 Score = 1 Score = 0 Comments

Valu e p rop osition Alternative sources of water >30 km 5<km<30 km<5 Like rivers or other facilities Walking distance <0.5 km 0.5< km<1 >1km Distance to the

facility Participation >90% 50%-90% <50%

Quantity Sufficient - Insufficient

Quality Good Moderate Bad Problems with

salinity Overall satisfaction High Medium Low

Fin an cial d esig n Responsible person for financial management Yes - No Bookkeeping and collection of money

Payment Yes - No Is money

collected? Differential tariff structure Yes Only for cattle No Payment on the basis of quantity

Bank account Yes - No

Bookkeeping Yes Incomplete No

Service cut-off for

nonpayment Yes - No

% current in

payment >90% 50%-90% <50%

Tariff covers O&M Yes - No Income versus

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44 Op er at ion & M ain te n an ce Responsible person for daily operation, pump check and maintenance arrangements Yes - No Days to repair 1-3 3-10 >10 E xt er n al su p p or

t Spare parts supply 1-3 3-10 >10 Supply in days

Long term support Always Sometimes Never

Helped by the government or NGO’s Gover n an ce

Policies Formulated and

acted upon Problematic Absent Roles and

responsibilities

Formulated and

acted upon Problematic Absent Management and

reporting structure Very clear Unclear Absent

Sustainability Promising Problematic Dramatic Perspective on the future

Willingness-to-pay High Medium Low

Ability-to-pay High Medium Low

Table IV: Score per criterion

The interview questions serve as the guideline for the interviews. Based on the flow of the conversation, additional questions are asked. The purpose is to make a chain of evidence, leading to the final results. Within-case analysis is coupled with a search for cross-case patterns (Eisenhardt, 1998).

4.3 Controllability, reliability and validity

Language barriers are a potential threat to the validity and reliability of this research (Temple & Young, 2004). Some interviews need a single and some need a double translation. In the translation process, the original data is subject to the interpretation of the translator. To make up for this, at each location two different members of the water committee were interviewed. Besides, when there was doubt, the question was rephrased and asked again.

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45 questions about the depth, the initial costs, O&M costs and O&M activities. Interviews with AMREF-experts are useful since they provide the possibility to check questions regarding governance and training. The interview with the district water officer further provide information which could be used to check O&M agreements and training. The use of multiple sources of information (water committee members, the government and AMREF-experts) increased reliability and validity.

The studied drinking facilities are chose in conjunction with AMREF. It is possible that the NGO chooses the best working facilities. To make up for this, it is stressed from the beginning to include polar cases. Since there was only one solar pump, this was an automatic choice. The extension works are an exception, only one facility is chosen.

Eisenhardt (1998) suggest multiple investigators to get different perspectives. This research is, however, executed by a single investigator. To make up for this, industry-experts were approached to discuss the data, the analysis and the interpretations. There comments increase the validity and reliability. Interviews last around 45 minutes and take place at the experts’ office. They are executed between August 8, 2014 and August 15, 2014. The following persons are approached:

Name Function

Getaw Tadesse Gebreyohanes Postdoctoral Fellow at International Food Policy Research Institute (IFPRI)

Tamiru Gedefe WASH Programme Management Unit

coordinator at the Ministry of Water and Energy

Ron Tameris Private entrepreneur/water expert

Tesfaye Bekalu Wondem Senior Water & Sanitation Specialist at the World Bank

Sintayehu Mesele WASH-Pastoral community development

specialist at CARE

Bruck Aregai Senior WASH advisor at SNV

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5. Results

5.1 Sustainable business model

As described in chapter three, a sustainable business model consists of five key elements; value proposition, financial design, operation and maintenance, external support and governance. Results are described according to these elements. Each paragraph starts with an overview of the scores of the sustainability criteria. Appendix C provides an overview of the collected data per location. Appendix D provides the total scores per criterion. First, an overview is given of all cases in table VI. This table states the technology at each location. The official yield per technology is also stated and can easily be compared to the number of households at each location. Finally, the year in which the facility was constructed is given.

Location Technology Yield

(households)

Number of households

Year

Enda Alibete Handpump 50 53 2000

Wasero Handpump 50 40 2000

Ouribetu Motorized pump 500 50 2011

Boloyta Motorized pump & 2 handpumps

Motorized: 500 HP’s: 100

200 Motorized: 2011

HP’s: ±2000

Alula Motorized pump 500 100 2013

Kurkura Extension work 200 100 2010

Ababerheabe Solar pump 500 75 2013

Table VI: Overview of cases

5.1.1 Value proposition

Enda Alibete Wasero Ouribetu Boloyta Alula Kurkura Ababerheabe

Alternative sources of water 0 0 1 2 1 0 2 Walking distance 2 0 1 0 0 0 2 Participation 2 2 2 2 2 2 2 Quantity 2 2 2 2 0 2 2 Quality 1 1 2 1 2 2 2 Overall satisfaction 2 2 2 1 0 2 2 Total 9 7 10 8 5 8 12

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48 There are no major problems with the value proposition. Pastoralists valued the water very much because it was important for their households and cattle and with a drinking facility in the community, it was available closely and in significant amounts. Alternatives were often hours of walk away. Except for the motorized pump in Boloyta, at each location, every household was using the facility. Participation was high. The starting point for sustainability, a demand for clean water, is thus met except for the motorized pump in Boloyta. This is in line with the objectives from the ministry of water and energy (MoWe, 2013).

The solar power driven facility in Ababerheabe scored the maximum score. There is a lot of enthusiasm about the new technology. Alula had the worst score, the facility suffers from problems with the motorized pump, leading to insufficient quantities and therefore low satisfaction.

Before drilling a borehole, a hydro-geological survey is performed. Finding the best spot is relevant from an environmental perspective since possibilities and restraints from the environment are taken into account. The quality of the water is also checked, to avoid salty soil water the boreholes have to be drilled relatively deep. On the other hand the pastoralists don’t care about the quality of the water. Handpumps with a little saline water are not considered problematic. Multiple industry-experts warned that this can also be related to bounded rationality of the Afari pastoralists; they are unaware of negative health implications. Negative externalities for the soil, the animals and the people should be avoided. The CARE-expert: “We always comply to the WHO standards. To avoid health complications, we always

do a quality test”. Salty water is not necessarily a reason to avoid handpumps. Experience

Improving sustainability: Developing a business model for operation and maintenance of drinking facilities in the Afar region (zone 3) in Ethiopia.