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Strengthening WASH businesses in Ethiopia: Start-up requirements and their impact on WASH market development

Published on: 18/10/2021

Clearing the way – helping WASH enterprises get an easier start in Ethiopia.

In a series of posts, we will present the main challenges that businesses face when expanding the range of WASH products and services available to households in Ethiopia. After describing these challenges, we will recommend a series of regulatory changes and policy actions designed to address these issues and improve the overall business climate so that enterprises can more easily start up, grow, and serve their communities sustainably. 

This is the fifth of eight planned articles, and it addresses the challenges that enterprises face when starting up WASH-related businesses in Ethiopia.

Woman at an WASH enterprise in Ethiopia

Why does this matter?

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 done by government or NGOs alone; it will require a strong contribution from the country’s private sector. The Government of Ethiopia recognises this and is working to strengthen private sector businesses that offer WASH products and services, as key element 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. The post that follows is largely based on these experts’ reflections.

To learn more, follow this link to the Learning Note.

Business start-up requirements

Starting up a business in Ethiopia entails a wide range of administrative, financial, and legal steps. 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 relatively new commercial market, such as for affordable WASH products and services. 

There are range of concerns cited by businesses involved in the start-up or early phases of operation, including:

  • Complex and costly process to import raw materials or finished goods
  • Increasingly strict and constantly changing regulatory environment; some complain 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, which 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 difficult countries in the world in which to do business. On the other hand, when federal or regional agencies are supportive of a particular project or business, they can pave the way toward rapid progress, so the experiences of individual businesses 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 large 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 among others. 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 relatively rapid (around three weeks), but in practice the entire process of review, revision (as requested by authorities), and approval can take considerably longer. During that time, progress on the specific operation under review will likely 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 US$ 200,000 in an Ethiopian bank (joint ventures between a foreign company and a local partner have a slightly lower requirement of US$ 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 referred to as “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 well-defined 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.

In Ethiopia, the SE registration option does not yet exist. However, a registered non-profit or non-governmental organisation (NGO) can apply to the Agency for Civil Society Organisations (ACSO) to undertake an income-generating activity (IGA). This allows an NGO to generate revenue under its IGA wing, separately registered, which can be used to cover some of the NGO’s administrative and operational costs while continuing to receive grants and donations. However, relatively few NGOs have sought an IGA classification (British Council, 2017). The British Council study found that most socially-minded businesses in Ethiopia either register as a micro or small enterprise (MSE) or as a sole proprietorship. Another finding was that, regardless of their registration as for-profit businesses, these companies continued to regard themselves as SEs.  

The fact that many socially minded businesses choose to register as MSEs fits with the government’s policy, which states that encouraging the expansion of the MSE sector is part of its strategy to reduce unemployment. MSE registration is carried out by the Ministry of Urban Development and Construction and is considered to be relatively straightforward with low barriers to entry. The MSE classification does carry with it certain limits to capital and human resources, such as a maximum of 30 employees. However, in the overall scheme of the government’s national drive to grow the economy and provide more jobs, larger businesses and industrial interests (which have the capacity to employ a greater number of people) often take precedence over smaller enterprises, such as MSEs and start-ups.   

The challenges of starting a new business in the country are likely impacting entrepreneurs in many sectors and are certainly having a major effect on businesses serving the WASH sector. Encouraging constructive reforms to streamline the registration process and to 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 incentivising foreign business investment and foreign/domestic partnerships in the WASH sector.
  • Promote streamlining and fast-tracking of the product certification process for MSEs and especially for WASH manufacturing enterprises, including coordination and harmonisation between the Ethiopian Food and Drug Authority and the Ethiopian Conformity Assessment Enterprise.
  • Streamline business licensing and financial auditing processes, especially for enterprises that demonstrate poverty reduction, public health, environmental, or other social objective. 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 offer support for SEs to efficiently navigate and comply with regulatory requirements, including those which are 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 organisations.
  • Review policies focused on reducing unemployment and encourage expansion of technical and vocational education and training (TVET) and other platforms, which can 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 government or possibly by establishing a formal public-private partnership initiative. Enlist the support of banking and finance institutions, as well as Ethiopian business groups, to help promote the goals of such an initiative.

Resources