CLEARING THE WAY

HELPING WASH ENTERPRISES GET AN EASIER START IN ETHIOPIA.

Currently, only nine percent of Ethiopians have access to basic sanitation services — a serious situation that affects public health, education, and many other aspects of the country’s economic and social well-being (JMP, 2020). Achieving universal access to basic WASH facilities cannot be accomplished by governments or NGOs alone; it will require a strong contribution from the country’s private sector. The Government of Ethiopia recognizes this and is working to strengthen private sector businesses that offer WASH products and services as critical elements of its greater focus on market-based sanitation (FMoH, 2016). These measures are necessary because the current market only meets a small fraction of the country’s enormous needs.

To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts — including business owners, government officials, and technical specialists in Ethiopia and other East African countries — to get their advice and recommendations on how to develop and expand Ethiopia’s WASH market. This article is based on these experts’ reflections.

BUSINESS START-UP REQUIREMENTS

Starting a business in Ethiopia entails a wide range of administrative, financial, and legal steps. As a result, some entrepreneurs raised concerns that this process can be overly time-consuming, complex, and costly and creates a disincentive to opening a business, especially in a new commercial market, such as for affordable WASH products and services. There is a range of concerns cited by businesses involved in the start-up or early phases of operation, including:

• The complex and costly process of importing raw materials or finished goods.
• Increasingly strict and constantly changing regulatory environment; some complaint of an ‘anti-business’ climate (government mistrust of businesses’ motives)
• Difficulty accessing hard currency (foreign exchange, or ‘forex’) for procurement and importation and other international transactions
• High tax and duty rates are passed on through higher prices to consumers, thus lowering demand.

These and other challenges are significant contributors to the World Bank’s ranking of Ethiopia as one of the most challenging countries in the world to do business. However, when federal or regional agencies are supportive of a particular project or business, they can pave the way toward rapid progress. The experiences of individual companies in the start-up phase can vary considerably.

Business start-up requires that several administrative applications be filed with the appropriate regional and federal government agencies, followed by their sign-off or approval. For certain types of operations, like manufacturing, additional steps may be required, such as preparing an environmental and social impact assessment (ESIA) for the Environment, Forest, and Climate Change Commission. If a full ESIA is required, the preparation process typically requires several types of technical experts and can involve a significant investment of funds by the applicant. ESIAs serve a vital national purpose of protecting Ethiopia’s environment and local livelihoods, but smaller business start-ups may struggle with this application requirement. These processes also require an investment of time, which entails additional costs that start-ups may find difficult or impossible to afford. Initial government review of ESIAs is intended to be rapid (around three weeks), but in practice, the entire process of review, revision (as requested by authorities), and approval can take longer. During that time, progress on the specific operation under review will be put on hold. One business noted that their ESIA process took more than one year. A significant issue for foreign enterprises trying to establish an Ethiopian operation is the requirement that they make an initial deposit equivalent of at least $200,000 in an Ethiopian bank (joint ventures between a foreign company and a local partner have a slightly lower requirement of $150,000). While these funds can later be spent once the business is established, the size of this initial deposit can present a significant hurdle for many investors and small- to medium-sized enterprises. In some countries, including the UK and South Africa, a separate classification has been created and designed for businesses that address social issues.

These are called “social enterprises” (SEs), which are deemed to support the government in meeting economic growth, public health, or other societal objectives. SEs are businesses that have a welldefined social purpose but operate using commercial business principles. The SE classification confers tax incentives, streamlined registration processes, and other benefits. This allows such enterprises to combine the mission typically associated with a non-profit agency with the focus and efficiency of a for-profit company (and, in the process, generate revenue to finance a portion of its operations). By encouraging the emergence of SEs as a formally established business structure, governments can expand and speed up access to critical services, such as education, energy, health, and water and sanitation, especially in poor communities or regions where it is often most challenging to extend those services. The challenges of starting a new business in the country will impact entrepreneurs in many sectors and certainly affect companies serving the WASH sector. Encouraging constructive reforms to streamline the registration process and lower barriers to entry will help expand the ability of the private sector to offer solutions to a wide range of consumer needs related to household and institutional sanitation facilities, water supply, and water treatment, and many other aspects of WASH. Some of the ways this can be accomplished are summarized below.

RECOMMENDATIONS

• Review and sensibly reform start-up capital investment requirements to encourage more rapid growth of the WASH market by incentivizing foreign business investment and foreign/ domestic partnerships in the WASH sector.
• Promote streamlining and fast-tracking of the product certification process for MSEs, especially for WASH manufacturing enterprises, including coordination and harmonization between the Ethiopian Food and Drug Authority and the Ethiopian Conformity Assessment Enterprise.
• Streamline business licensing and financial auditing processes, especially for enterprises that have social objectives. Consider establishing a separate classification for such businesses (as social enterprises) to help grow this sector of the economy. Engage with Social Enterprise Ethiopia and other relevant groups to help promote this.
• Encourage Social Enterprise Ethiopia or other business groups to support SEs to efficiently navigate and comply with regulatory requirements, including those potentially technically complex, such as product certification and ESIAs.
• Strengthen the IGA mechanism for registered NGOs, including providing tax and other relevant forms of relief to encourage greater use of this option by WASH-focused non-profit organizations.
• Review policies focused on reducing unemployment and encouraging the expansion of technical and vocational education and training (TVET) and other platforms to train young people to join or start WASH-related businesses.
• Advocate with the Ethiopian Environment, Forest, and Climate Change Commission to promote streamlined requirements and fast-tracking of ESIAs for socially oriented businesses focused on extending critical services to lower-income populations, including WASH products and services.
• Seek corporate engagement, including foreign corporate interests, in promoting private sector engagement in the WASH sector in Ethiopia. This could be through direct advocacy with the government or by establishing a formal publicprivate partnership initiative. Enlist the support of banking and finance institutions and Ethiopian business groups to help promote the goals of such an initiative.