Barriers:

• Policies distort pricing, lower profits, and misuse water and waste: Distortions in the water sector hide in many guises: international development assistance for disaster relief, politicians providing water as patronage, the promise of "free services" from nonprofit organizations, and subsidized agricultural and industrial water use, which are ultimately unsustainable. Subsidies hurt both consumers and the environment because they discourage water conservation, which can lead to water scarcity. Those that offer water services must compete with free, or underpriced water, which many people think of as their only option, despite poor quality and low reliability. The low cost of water, and apathy toward better services, also means that many more innovations exist for water treatment than for waste disposal, which could limit the contamination of the water. Artificially depressed water prices hurt entrepreneurs as well by limiting their profitability. Tiny profit margins can mean entrepreneurs don't commit to healthy or environmentally sound solutions unless they're guaranteed a large volume of customers. In addition, water providers that fill in the gaps in water-scarce areas are rarely accountable for water-quality standards. Small-scale water providers in water-scarce urban areas charge too much for poor quality water. Meanwhile, rural residents don't have water service or access at any price. Although all residents-rich and poor, rural and urban-are willing to pay for the convenience of a nearby tap connection, most think of water itself as a free good because of current pricing schemes. As a result, consumers tend to use water in ways that are irresponsible.

• Public information alone doesn't change behavior: The health benefits of clean water and safe sanitation practices, however clearly documented, have not persuaded many households in developing countries to change their day-to-day sanitation practices. Public health campaigns may improve knowledge, but not necessarily change behavior (consider the challenge of getting households to use bednets to prevent malaria, or other seemingly simple practices). Framing a behavior as the 'right thing to do' implicitly chastises people for the way they live. People respond far more to messages of personal economic benefit or social status.

• Limited focus on long-term impact: In vibrant business markets, companies that are first to innovate quickly contend with imitators. This early competition generates consumer demand. And to capture that demand, companies scale up the availability of their product and generate new product uses and features. But when water and sanitation projects are created or managed by non-governmental organizations, they tend to focus on opportunities for poverty reduction rather than strategies for long-term business development. As a result, NGOs may not know enough about consumer preference or focus sufficiently on profitability for their ideas to be scaled-up without reliance on subsidies. Support for pilot projects rarely leads to a permanent service. In addition, the simple act of framing water treatment technologies or sanitation products as pilot projects limits thinking and planning for long-term results and commitment.

• Lack of access to equity/credit in the sector: Lack of access to equity or credit inhibits individual entrepreneurs who want to create a service, and communities that may want to purchase new services. Financiers have not considered the income-generating opportunities in the sector for individuals. Banks may not want to lend because they consider the water and sanitation sector to be a high-cost, low-return investment, or simply because they don't have the resources to assess the risks and returns for small deals. Local entrepreneurs need services that would help them quantify these risks and document their returns. They also need services to cut through bureaucratic red tape so they can earn quicker, higher returns on their water or waste management solutions. And for communities needing funds to buy new services, finance institutions cannot assume that microcredit is the answer in all cases. For instance, urban residents may not want to be in the typical joint liability group that microfinance institutions require, because they cannot afford time away from their jobs. Thus, different financing options may need to expand to increase access but cover risks in this sector.

• Participation can limit accountability and effectiveness, rather than improve service provision: Collective ownership and management do not work in all situations. Although local governance may seem more responsive to local needs, treating communities as entrepreneurs may actually increase transaction costs and therefore decrease service levels. For instance, participants in local water cooperatives may not invest sufficient time in training and organization to deliver multiple-use water appropriately. Also, local boards may lose so much time in water access requests to regional water managers that they are slower to deliver water. Similarly, deciding that everyone will clean and maintain toilets may mean that no one takes responsibility. To this end, some development experts caution against romanticizing collective action for service provision and maintenance. Community involvement and ownership are crucial to success, but it is naive to assume that the poor have unlimited time to plan and participate, or unlimited desire to learn to manage something unwieldy. Competitive markets that provide choice, which fuels more attentive customer service, can provide better services at lower costs.

Principles of Innovation: Efficient services delivered to the consumer, and earned income for the entrepreneur

• Value-added services mean additional business income (Individual and business level*): Entrepreneurs can create profitable businesses based on water and sanitation provision services as long as they are seen by customers to directly improve wellbeing by raising earned incomes, improving health, or dramatically saving time. Entrepreneurs can add value by delivering services, such as providing water that is safe for drinking so that households do not need to buy point-of-use filters or other household-based treatments, or use valuable firewood for boiling water. When those services increase income significantly for entrepreneurs, they can scale-up their businesses and demonstrate new models for water and sanitation provision. In this way, both the consumer and entrepreneur graduate to more convenient, cost-effective, and sustainable solutions.

• Move people up the water & sanitation ladder (Individual level*): Although constructing a pit latrine is not a long-term solution, it can be an important first step in a coordinated effort to introduce new sanitation practices, especially if the latrines are built ecologically and are regularly emptied and maintained. Consider how a businessperson could earn income by delivering new sanitation options to communities, just as salespeople graduate users of consumer products to more sophisticated, sometimes healthier options. In this case, it may be easier to shift a neighborhood, rather than just an individual household, from pit latrines to urine-diverting toilets to septic systems. And it doesn't end with household solutions. Entrepreneurs need to generate demand for investment in a networked sewage system. This means coordinating small-scale sanitation or water providers with the government to move neighborhoods up the ladder. In addition, sanitation solutions should fit with the local setting. For instance, a small, enclosed toilet may make sense in a dense urban area, but seem unsanitary to a rural farmer in a village with ample space. Total Sanitation programs, whereby communities mount active monitoring campaigns against open defecation, tend to work in more hierarchical societies, where everyone knows each other's roles and responsibilities.

• Increase accountability through design for the long-term (Sector level*): The current public sector approach that disconnects water delivery from sanitation has actually undermined public sector investments in water. Many more people have access to a tap than do to a toilet, as sewerage investments lag far behind water pipes. Broken water pipes that run next to pit latrines and overflowing septic tanks carry contaminated water into homes. But a solution may be emerging out of necessity. Communities with limited resources have a strong incentive to make their water system design as good as possible, so that they have to devote only minimal resources to operating and maintaining the system. Designs that divert sanitation disposal to points outside residential areas, and that provide easy access to water at multiple points within the community are more likely to remain in use over the next 5-10 years. Investors who help develop a complete system - from design to construction to system management - can claim the full value of the system. They can claim not just the financial return on investment, but also the economic benefit of bringing long-term savings and efficiency to a community.

• Connect solutions to the finance and housing sectors (Sector level*): People who don't have enough space in their home to install a latrine won't do so. And people who have insecure ownership rights over their home will invest in it even less (and neither will the government for sewerage or water connections). Housing and sanitation entrepreneurs could work together to find low-cost ways for the urban poor to own or rent land, or to build low-cost housing with a small-scale sanitation option as part of the design. Coordination is already emerging in select communities, by connecting vulnerable residential areas with water and sanitation products. Financial entrepreneurs should consider how opportunities in rural areas differ from urban ones. In dense urban dwellings, microfinance institutions may be willing to lend for housing stock improvements that add a toilet and a sustainable water connection, which could also earn the dweller income. In rural areas, other financiers may offer loans to create multiple-use water systems that provide both agricultural and household water access.

• Financing for the new consumer (Individual, business and sector level*): Expanding the range of investment options in water and sanitation could shift the water market away from a quasi-monopoly, and in turn cultivate new customers. Consider how the financing itself can help develop customers, by making them stakeholders in the service. Water co-operatives could dedicate a portion of user fees to upgrading services; or small monthly payments could ensure continued usage of toilets in a way that fee-for-service payments may not. Financiers can also think beyond microcredit toward savings products and other options that tap consumers' willingness to pay.

  *: Individual level indicates changes that target individual consumers and their behavior. Business level involves the creation of a robust market of products and services, either with a new kind of market-based financing. Sector level involves solutions that will systematically change the way water and sanitation services are delivered globally.