Do social enterprises have a role in the water sector?
India has a twin problem. On one hand, groundwater is being depleted at an alarming rate. On the other hand, farmers simply cannot make a decent living of increasingly small portions of land. Over 250,000 farmers have killed themselves in the last decade.
I have argued before that India doesn’t have a water problem, it has a jobs problem. Half of India’s farmers are rainfed marginal farmers, who do not make enough money to feed a family from a single crop grown off half an acre of rainfed land. But there simply isn’t enough water for everyone to irrigate their land and grow paddy or wheat, when even the existing scale of irrigation is resulting in groundwater being over-exploited.
The challenge is moving out of irrigated agriculture altogether where groundwater is overexploited and helping small-holders (if not marginal farmers), at least, make a decent living from rainfed agriculture (including value addition and supplementary income streams) and have access to water for drinking and hygiene. How do we solve this wicked problem — creating rural livelihoods without depleting the resource on which they depend? And what role do social enterprises play?
Limitations of social enterprises
For my friends in the private sector, the answer is often technology funded by private capital. A recent OpEd in the Wall Street Journal argued that capitalism works by creating wealth. Equality, it argued, comes best through “the creation of ever-cheaper goods and services, not handouts.” Indeed, for capitalists, the key to solving the problem is to invest in farming or water as a business.
Three conversations with “philanthrocapitalists” in recent months on how to address India’s rural water crisis made me realize that there are huge gaps in understanding of the science, business and society that each of us, including myself, has much to learn. This is sorely needed if we are to solve these problems (or at least avoid making things worse).
My first conversation was with a social enterprise investor (details hidden for confidentiality reasons), who wanted to invest in technology to accelerate deep recharge and allow farmers with deep borewells to access more water. The company would also give farmers (who were to be paid subscribers), access to information about the state of their own borewell and regional groundwater availability.
I thought it was a terrible idea. Groundwater is a public commons and is almost always a zero-sum game. Accelerating recharge to give more to some farmers more water, almost certainly means less for others. The problem is because groundwater flow paths are hidden it is hard (without a simulation model) to pinpoint exactly which farmers lose out — in this case, it was most likely farmers with shallower borewells or those located downstream. While this conversation was about a particular investment in a company, my concern equally applied to all schemes that involve giving selected farmers more water; farm ponds are another example.
Because most impact investing grants in the rural water livelihoods space measure their effectiveness by tracking the income of farmers who got more water (comparing before and after implementation), it is easy to overlook the fact that some nameless farmer somewhere else, probably lost access to water and thus earned less. These “robbing Peter to pay Paul” schemes invariably benefit farmers who can pay to access more water, so “Paul” is also likely to be way richer than “Peter”.
There is no moral judgement here. Farmers are rational beings, and even rich farmers are hardly obscenely wealthy. If farmers, can capture more of the resource in a legal way, they will probably be willing to pay for it, making the business a profitable venture — there is a clear business case for investment.
But apart from the redistribution problem, there is also a negative externality involved — acceleration of recharge increases the average depth from which water is pumped. Higher electricity use means more carbon emissions and since electricity is subsidized by the state, it also increases the burden on the taxpayer.
At the end of the day, there is only so much groundwater that gets recharged from rain every year. The only just way to allocate it is fairly in a transparent way, though not necessarily by a centralized government bureaucracy. Boosting groundwater recharge does not magically create new water it merely converts surface runoff to groundwater. While some of the recharge might be “true savings” replacing what was previously evaporative losses, it's important to justify where the harvested water is coming from.
The second conversation was with a group promoting investment in “Water ATMs”. Water ATMs are being promoted across India, as the solution for access to safe water. CSR and NRI donors love them; they are easy to understand, involve technology and are scalable. Treatment plants are set up in villages; consumers buy water in jerry cans every week. They are attractive because they represent a so-called “water as a utility service” business model.
Most water ATMs apply reverse osmosis treatment (RO) to water abstracted from borewells. And this is perfectly appropriate in regions, where groundwater is severely polluted and surface water is scarce. But ATM projects are often implemented in conjunction with groundwater recharge to prevent failure of the borewells themselves and this makes much less sense.
For some historical perspective, drilling of drinking water borewells began in the 1970s to address waterborne illnesses, because surface water sources were considered contaminated. Borewells were considered to be “improved” sources, free from microbiological contamination, compared with surface water. It only emerged later that borewells brought with them a whole slew of new problems; groundwater in many places contains arsenic and fluoride, naturally occurring contaminants that are much harder and more expensive to remove.
The problem is that a narrow focus on a specific technology approach misses the bigger question of whether energy-intensive, costly RO systems based on deep borewells are even appropriate to solve the original problem. Why do we think it is worth allowing it to percolate to 500 ft, get contaminated, pump it out and then waste massive amounts of energy and water to remove the contaminants through reverse osmosis, then dispose of the contaminated wastewater, further contaminating the shallow aquifer. If rainwater is available for recharge, why not just store it in the village tank and UV-treat it for direct use?
But there is little leeway to customise solutions to geography when the pressure is to scale nationally.
Meeting a basic human right through a private provider
Further, once scaled, “Water ATMs” can create perverse incentives. Having invested in these systems, there tends to be resistance or at least less motivation to demand drinking water projects that pipe safe water to the home. What then happens to the very poor cannot afford to pay? Is the abdication of the state from meeting a basic human right acceptable?
Water ATMs would be perfectly sensible as a short-term solution to prevent diarrheal deaths in the next 5–10 years. But many in the development sector, funded by social sector investors, are pushing for Water ATMs as a long-term solution and that’s a problem. Nowhere in the developed world, would a solution where people can only get safe water from jerry cans at a cost be considered acceptable.
I do not know how water ATMs compare with high-quality public infrastructure when the full costs of both (including manually carrying the water to every home every week) are compared. Perhaps it makes perfect sense to treat only a fraction of the water to drinking water quality, instead of all of it. And market enthusiasts would argue that direct benefit transfers or water stamps would take care of the poor. This too is a possibility, but none of these are being openly discussed at the moment or the proper place of water ATMs in the long term.
Profit maximization vs. risk minimization
The third conversation was with a philanthropic organisation interested in funding regenerative agriculture. They argued that agriculture in India was a massive employment scheme that is never going to economically viable ( indeed farming is rarely economically viable entirely on its own anywhere in the world). State governments in India subsidise fertilisers and electricity on a massive scale, to ensure food security.
Around Bangalore, many farmers drill borewells to 1000 ft to grow irrigated vegetables for the urban market. But agriculture here is a perpetual game of Russian Roulette. Farmers turn a large profit every third or fourth crop but incur a loss the rest of the time. Sometimes, the price of vegetables is too low to even to transport to the market. For a groundwater researcher like me, the sight of vegetables being grown from groundwater drilled from 1000 ft, being left to compost, is gut-wrenching.
Market efficiency drives economies of scale. This requires farmers — Indian farmers have small landholdings — to grow only one or two crops. Except mono-cropping violates basic ecological and portfolio management principles. Having one type of crop on a large parcel of land, allows pests to proliferate, necessitating ever more pesticide use. Having only one source of income that is highly vulnerable to weather, pests and markets is clearly risky.
In contrast, many regenerative farming approaches involve multi-cropped farms that more closely resemble natural ecosystems. Within these, some crops harbour beneficial bacteria that fix nitrogen, others provide root structures that boost soil moisture and or mulch for soil organic carbon. These multi-cropped approaches are lower risk — if the lemon gets affected by blight or prices crash, they might earn from medicinal plants or livestock. But such farms are also more labour intensive and less profitable.
If regenerative farming is to be viable livelihood proposition it may ultimately need a subsidy. Market enthusiasts might be horrified by this interference with the “invisible hand”, forgetting that the current agricultural system is highly subsidised by deliberate policy choice. So one framing of the problem might be how do we best target government subsidies to create a win-win for farmers and the environment. The answer may lie designing systems not to maximise profits in any one season, but maximise average profits over the long-term.
Limitations of livelihood programmes
My friends on the left, who have a deep suspicion of all things market and have documented many of the above problems with social enterprises, have their own blind spot. Many livelihood NGOs focus on capacity-building activities. But they forget that farming, livestock, or furniture making are ultimately businesses (“dhandha”). They focus is on what communities can sell, rather than what customers want to buy. With environmentalists, in particular, there is general discomfort with people wanting stuff and this can be at odds with creating livelihoods that involve selling “lifestyle” products.
The problem is to earn a living, people do need paying customers, and to overcome the mismatch between when they make the stuff and when consumers pay for it they need working capital and credit. Yet many NGOs, who understand farming or natural resources management, simply lack the business skills needed. As a result, Rs 10 lakh of grant funds going to an NGO each year, may end up generating only Rs 10 lakhs of annual profit for the beneficiary community. A funder might justifiably feel they would have been better off just handing the money over to the community!
Where the market can play a role
Notwithstanding the issues raised above, the private sector can play an important role but in specific areas. Many of these involve converting a waste product into something beneficial or improving the fair allocation of common-pool resources, using new technologies that were not available before.
Wastewater: Only a fifth of urban water is consumed. The rest, in the absence of sewage treatment, enters and pollutes lakes and rivers. The problem is that wastewater treatment is imperfect and expensive. Historically, technology and economies of scale dictated that wastewater had to be managed via a centralised system, piped hundreds of miles away and treated and disposed of. But emerging technologies are making in-situ treatment, resource recovery and reuse possible. While we still need to figure out details of managing emerging chemicals and antibiotics, wastewater is increasingly being seen as a resource for which we can find a win-win solution.
In what might seem like a science-fiction future, future human settlements would be pipeless, where every community might own a simply plug-and-play appliance, that fully recovers nutrients and energy from greywater and sludge, the solids and liquids having been segregated at source.
Post-harvest losses: Too much of India’s agricultural produce rots or is lost before it can reach markets. An obvious solution is an investment in low-energy use chilling facilities and more efficient supply chains to allow farmers to recover some of these losses.
Commons pool resources: The commons problem of groundwater and water pollution are harder to address by changing private behaviour alone. However, technologies can make managing the commons easier, by revealing who is using a resource or polluting and how much.
While it’s harder to make a business case for individuals or businesses to pay for transparency because the richest are also likely to be the biggest polluters or resources users, who have the most to lose. But the community as a whole does benefit from better management of commons, and that can be harnessed. For instance, government electricity subsidies would decrease if groundwater tables rise. Governments are therefore often are willing to finance schemes if the savings can be transparently quantified. Carbon offset funds are another option. In other words, the potential for social enterprises is in unlocking financing, by revealing hidden linkages and quantifying savings.
This blog is not intended either as a critique of free markets or a defence of them, but rather to show why sole dependence on the private sector to solve complex social problems might have unintended consequences. This is my rather simplistic attempt at explaining my thought process.
Many funders in the development space with prior experience in education or health-care fail to fully absorb why the environment sector is fundamentally different. The health and education sectors typically involve positive externalities. If you vaccinate a majority of the people, you create herd immunity for all. If you educate the girl-child, you have multiplier benefits in better maternal health and lower fertility rates. If you improve nutrition for the age-group 0–5 years, you improve educational attainment and income over a whole life-time. So the zero-sum games and negative externalities that accompany common-pool resources situations are a rude shock.
The question to ask is if a venture results in an impact that is profitable but bad for the environment, costs the taxpayer, and makes poor people worse off, can it merit philanthropic or “social venture” funding? What we need is better education and communication of biophysical and ecological principles to well-intentioned donors even as we NGOs gain a better understanding of how to run businesses.