Reaching the poor through targeted subsidies

By mid-2018, latrine businesses trained and supported by iDE had successfully sold more than 300,000 latrines to rural Cambodians at market price, 20% to the poorest Cambodians. Because of our market-based approach, iDE avoids overly-broad subsidies which can distort the market and favors financing options that provide poor households to purchase at rates that aren’t usurous. However, in Cambodia, microfinance for sanitation has become increasingly unavailable due to new lending regulations and total loan indebtedness by poor households would make it an unattractive option even if loans could be obtained.

iDE remains even more dedicated to reaching the poorer segments in order to accelerate progress towards full coverage and has investigated an innovative approach combining financing and targeted subsidies while aiming to minimize market distortion.

In November 2015, iDE launched a Targeted Subsidy Pilot in three districts in Kandal province. In collaboration with Amplify Markets and Causal Design, the program looked at an innovative delivery mechanism for targeted subsidy through a micro-credit scheme. Government-identified poor households were targeted through regular sales events and were able to purchase latrines at a discounted price. Instead of creating a standalone subsidy program, which can be inefficient and costly to administer, the pilot offered discounted latrines alongside market-priced latrines with the option of financing for all approved purchasers.

The Targeted Subsidy Pilot leveraged the existing iDE sales agents, supply chain, and micro-financing partner (from our financing pilot). Through this pilot, iDE hoped to build on best practices and develop a scalable strategy to serve the rural poor with targeted subsidies and loans while ensuring long-term engagement of the private sector.

The study found uptake rates among poor households that were offered subsidies increased by 14 to 16 percentage points compared to the control group, while there was no significant effect on non-poor households. Additional analyses show that lower baseline coverage rates may be associated with lower non-poor latrine sales, suggesting that implementers should delay the introduction of subsidies until markets have matured in order to minimize distortions. Interestingly, cost effectiveness of the program (measured in cost to program per latrine sold) was actually higher because more latrine sales (with subsidies) occurred in the target areas.

Implications for policy and implementation

Well-targeted latrine subsidies have the potential to increase sanitation coverage more efficiently than unsubsidized efforts and may do so without adversely affecting sales to non-poor customers. But care should be exercised when making policy and implementing subsidies, including:

• Timing is key: ​While subsidies proved to have a clearly positive impact on sanitation uptake by the poor, the analysis also showed that lower baseline coverage rates are weakly associated with lower uptake by non-poor households. This finding suggests that implementers should avoid introducing subsidies into a market too early to avoid unintended market distortions. When setting national policy, governments and regulatory agencies should also consider at what point
  local markets are best able to handle targeted subsidies.
• Familiarity with the local market matters: iDE conducted this study in a geographic area where we have maintained a sanitation marketing presence over several years. Our network of experienced local sales agents and management team were invaluable to ensuring we understood the local market and were able to address operational challenges associated with administering subsidies.
• Subsidies must be well-targeted, but targeting can be a challenge: ​The ID Poor system in Cambodia represents an almost ideal system for targeting subsidies. While iDE recognizes that the system isn’t perfect and registration of households is sometimes outdated, the general population trusts it, and iDE staff and sales agents were able to use it to quickly confirm household eligibility for targeted subsidies. Such systems are not common in the developing world, so others attempting to imitate this approach will need to proceed cautiously when designing their subsidy verification and study protocols.
• Subsidies offer operational efficiencies when compared to financing:​ Much of the sector’s energy has been focused on strategies for unlocking capital to provide financing to consumers of WASH products such as latrines. During this pilot and in iDE’s experience more generally, slow loan processing times and high rejection rates have made it difficult to operationalize sanitation financing at scale. In contrast, well-targeted subsidies can be simple and inexpensive to administer, making them an attractive alternative to financing as a means of reaching the poorest and most vulnerable.