Microsoft Word - Altruism versus Profit Case (revFINAL).doc

Altruism versus Profit: Clean Water in India

Brenda Eichelberger, Portland State University

INTRODUCTION

N. Sree Hari, Associate Partner of the Byrraju Foundation and coordinator of the SWEET

Water Project, sat in his shared office, once again staring at the computer screen and

wondering what he could possibly write. The air conditioning was turned off to save

electrical costs and a slight breeze from the open window rustled the papers on his desk.

He had reviewed the weekly village collections and had begun writing the monthly report to

Verghese Jacob, his boss, CEO of the Byrraju Foundation. Sree Hari was at a loss for words.

What could he recommend to keep his program alive and growing? The SWEET water

project had developed a successful, technological model to address the growing social

problem of clean drinking water in India. They had installed nearly sixty systems providing

access to clean water for over 150 villages and almost 1.2 million people, but now had no

funding to further scale the model by adding new systems. In fact, it was getting more and

more difficult to determine how to keep the existing program running.

Not long ago things were very different for the Foundation. It all started when Ramalinga

Raju founded Satyam Computer Services Ltd in 1987. Satyam grew to be one of the top

companies in India, employing over 30,000 people (Mahinda, 2011). In 2001 Raju founded

the Byrraju foundation in memory of his late father. Satyam and the Byrraju Foundation are

both located in Hyderabad, India to develop the foundation Raju hired Verghese Jacob, a

renowned international business man as CEO. Byrraju quickly was acknowledged for

philanthropic efforts and award-winning programs. The mission of the foundation is to “To

create a world-class platform for sustainable rural transformation”.

The accolades, the donations and the support all abruptly ended on January 7, 2009, when

Raju confessed to accounting fraud at Satyam and falsely reporting over a billion dollars in

profits. “Immediately following Raju's confession, Satyam's shareholders took a direct hit

as the company's share price crashed 77% to Rs. 30 (approximately 60 cents), a far cry

from its 52-week high of Rs. 544 ($11.35) last May”. (Scandal, 2009). In news reports

Satyam was commonly referred to as “India’s Enron”. (The Consequences, WSJ 2009).

Until that day over 90% of the Byrraju Foundation’s funding came from Raju and his family

members. Now with Raju facing a trial and prison, there would be no more family donations

and the limited corporate donors would consider the foundation a much less desirable grant

recipient. Writing on why the fraud had continued so long and for such a large amount of

money, Raju stated in his confession; “It was like riding a tiger, not knowing how to get off

without being eaten.”

Sree Hari knew that the” tiger” was still able to cause harm. The future was dependent on

Verghese and him to figure out how to continue to support the foundation that had won

numerous awards and international accolades. If not, the villages and people adopted by

the foundation could be severely hurt. The water systems they had been so successful in

developing were in danger. How could they possibly continue to deliver these critical

services year after year without the donations from the Raju family?

WATER AND HEALTH

The 2006 UN human development report on clean water states “the roots of the crisis in

water can be traced to poverty, inequality and unequal power relationships, as well as

flawed water management policies that exacerbate scarcity. Access to water for life is a

basic human need”. Clean water is critical to good health. The India Water Forum 2011 (a

joint effort of the Energy and Resources Institute and the Ministry of Water Resources of

India) declared water an integral part of economic development and ensuring livelihoods of

their people. In India, clean water demand has already outstripped supply and climate

change is further aggravating this problem (Water Forum, 2011). The Vice President of

India, Shri M. Hamid, opened the 2011 Water Forum with a speech acknowledging: ' the

essential role water plays in our life and the need for adopting better governance to tackle

the key challenges that are stemming from changing demographics, shifting geo-politics,

wide-spread poverty and under-development, climate change phenomena and shifting

weather patterns, and the elements of globalization and its attendant consequences'.

Lack of safe drinking water is a global issue. One of the United Nations Millennium goals is

to “halve, by 2015, the proportion of the population without sustainable access to safe

drinking water and basic sanitation”. As the 2015 target approaches, poor and rural

disparities have become even more evident. One of the contributing issues was determined

in 2007, when the British water group, WaterAid, began looking at the success of their

previous water projects in Africa and found that only nine of the thirty-five they had built

were still functioning. This project abandonment seemed to be a common issue, not only

with WaterAid, but other organizations that work on “providing clean water in poor countries

estimate that about half the projects fall into disrepair soon after their builders move on”

(Rosenberg, 2010). As the water projects are abandoned, not only does access to clean

water diminish, but also the trust and the initiative of the local people to try to address the

problem. In many ways by not building a sustainable system that can continue to be

operated and maintained by the local people, well intentioned projects actually left the

villagers worse off than if the venture had never been attempted. For the villagers, their

limited resources were further depleted and their faith in innovation had been diminished.

For a successful long term solution to water problems, it is important that the local people

can maintain the system, gradually take ownership, and then assume responsibility for

continued operation.

Water is needed every day, several times a day, by all people. This makes long term

sustainability critical to any water project. In 2009, 20% of the rural population of India did

not have access to clean drinking water and the average distance travelled to fetch water

from a well was one half to one kilometer (Kumar,2009). This inaccessibility continues to

be a serious health and economic issue in India and globally. “Provision of safe water supply

is one of the most effective tools to improve the health status of communities. It is

estimated that the burden of sickness in the world would be reduced by nearly 80% if it

were possible to supply safe water to people everywhere” (Kumar, 2009). According to the

World Health Organization “More people die from unsafe water annually than from all forms

of violence, including war” (World Water Day, 2010). UNICEF found that unsafe water

worldwide causes 4 billion cases of diarrhea annually and “in India alone, the single largest

cause of ill health and death among children is diarrhea, which kills nearly half a million

children each year.” (World Water Day 2010).

In India, one of the solutions for their water problems includes retail for-profit water sales

and buying from mobile suppliers. Both Coke and Pepsi bottled waters are present in shops

and restaurants in India, through their Dasani and Aquafina brands, as are a variety of local

providers, all part of the $100 billion global bottled water industry. The World Resources

Institute report (2007) finds bottled water comes at a significant price penalty compared to

surface or piped water systems. Studies show mobile distributors charge up to 10x more

than public utilities (Kariuki and Schwartz , 2005). An Asia Times article quotes research

from for-profit companies stating “consumers are readily paying for bottled water typically

costing a thousand times more per liter than high-quality municipal tap water” and the lack

of water access is failure of the government to provide basic services (Raja M, 2008).

Unfortunately, India faces many “basic service” issues and a fully functioning water system

is very costly.

There are several socially responsible companies exploring the market in India, one example

is WaterHealth International. They were profiled in Inc. Magazine as the “Do Good

Capitalist of the Year” in 2007. WaterHealth installs a water filtration system and offers

financing to local villages to purchase their water center packages. The villages then repay

their loans with the profits of the water sales. Many critics express concern at the expense

of the Water Health Systems. The Byrraju Foundation is quoted as saying “WaterHealth has

good intentions, but unless they can bring the costs down it’s really not sustainable”.

WaterHealth responded, “the model adopted by Byrraju Foundation was not sustainable as

it depended on subsidies” (Faheem, 2010). Initial cost and financing issues are challenges

for rural India and many areas trying to expand access to clean water.

Another developing for-profit enterprise is Hyderabad’s Waterlife. It is a franchise

opportunity that offers a franchisee the ability to pay Rs. 30,000 (approximately 45 Rs. per

US dollar) for the right to sell water at Rs. 5 per 20 liters, and the franchisee keep Rs. 2 per

20 liters for themselves and pay Rs. 3 to Waterlife. Gaurav Dwivedi, author of Public-

Private Partnerships in the Water Sector; Partnerships or Privatization, writes that these for-

profit enterprises “are being designed to enhance private profits without taking any serious

responsibilities for extending coverage, or improving efficiency” (Dwivedi, 2010). One

concern in letting the market decide water access is that large areas of rural India will be

left without coverage and continue to face poor health and continued poverty. According to

a KPMG study, rural access to safe water in India is at 32% of the population and in large

cities 73% of the population has access (Gauri 2010). The challenge of assuming the

private market will respond is that it is not lucrative enough to help the poor and the rural

areas; the challenge in waiting for governmental response is that the priorities of the Indian

government are overwhelmed by even more urgent social and economic issues. Could there

be another option?

SOCIAL ENTREPRENEURSHIP

As in the India example, often the government of a developing nation is overburdened and

unable to address basic needs. What can be done to attract businesses to provide basic

services for the poorest of people? Is it possible to make “profit for good”? The Financial

Times describes social entrepreneurship as a potential “big driver of India’s growth but

achieving scale at speed remains a challenge” (Murray, 2009). According to Sushimita

Ghosh, senior advisor to Ashoka, “The biggest driver in India is its vast potential market of

low end clients. India is home to 1/3 of the world’s poorest people, according to the World

Bank, which estimates that 42% of the country’s population lives below the poverty line.”

The density of the population and the great need of one of the most populous and poorest

nations offer an excellent opportunity for both achieving social missions and addressing

market demand. While India is making progress on reducing poverty per the World Bank

estimates, “The estimated poverty rates correspond to 267 million people living below a

dollar a day in 2005, down from 296 million in 1981. However, the number of poor under

$1.25 a day has increased from 421 million in 1981 to 456 million in 2005.” (Mozumdber,

2008).

The Skoll Foundation defines a social entrepreneur (Martin, 2007) in the following way;

“The social entrepreneur should be understood as someone who targets an unfortunate but

stable equilibrium that causes the neglect, marginalization, or suffering of a segment of

humanity; who brings to bear on this situation his or her inspiration, direct action,

creativity, courage, and fortitude; and who aims for and ultimately affects the establishment

of a new stable equilibrium that secures permanent benefit for the targeted group and

society at large. This definition helps distinguish social entrepreneurship from social service

provision and social activism.”

The definition of social entrepreneurship is still evolving and includes a hybrid approach of

not for-profit and for-profit enterprises that focus on a social mission. As discussed by R.

Scott Marshall, founder of the Center for Global Leadership in Sustainability, there is “an

emerging debate that SE manifests in multiple forms – not for-profit, for-profit, and

‘‘hybrid’’ or cross-sector.” (Marshall 2011) The hybrid spectrum, as described in work of Kim

Alter, managing director of Virtue Ventures and founding member of the Social Enterprise

Alliance, shows a continuum incorporating four sections between the traditional nonprofit

and the traditional for-profit model: nonprofit with income generating activities, social

enterprise, socially responsible business and corporations practicing social responsibilities.

(Exhibit 1). It is in this hybrid spectrum that the Byrraju foundation is trying to define itself.

It no longer has the continuous support of its primary donors as a nonprofit, and its

commitment to mission and adopted villages limit Byrraju’s ability to increase income

options for the SWEET water project as a for-profit enterprise.

BYRRAJU AND THE SWEET WATER PROJECT

The Byrraju SWEET (Safe Water for Everyone using Effective Technology) water project was

started in 2004. As of 2011 they currently have nearly 60 water plants serving 1.2 million

people (Byrraju, 2011). The water goes through a seven step filtration process designed

specifically for the Byrraju foundation. (Exhibit 2). The filtered water is 99.7% pure. Each

plant can produce 1000-2000 liters per hour, providing clean drinking water at “2-3

litres…per person, per day at a nominal charge of 16 paise” (100 paise per rupee equals

approximate cost of Rs.0.064 per liter). The overall user charge of Rs.2.5 for 12 liters meets

operational and maintenance costs of the system (price per liter Rs. 0.208). Delivery is

available for a small additional price. A sample system presented by the Byrraju

Foundation in 2009 at a rural development panel (Raju, 2009) showed the initial capital cost

of the system at 1,000,000 Rs./$21,000 USD (capital expense) and the operational costs at

30,000 Rs./ $630 USD per month for the first six months. The projection made at six

months was that the water sales would cover operational costs and a surplus would be

available for the village. The model called for the community to provide 250,000 Rs./$5,250

USD, the government to provide free land and access to water, and the donor (Byrraju) to

provide 750,000 Rs./$15,750 USD initial capital and the first six months of operational

expenses. This system not only provides affordable access to clean water for communities

but also provides livelihoods for three or more villagers.

The Customers:

Research has determined that 53% of the Byrraju customers “have household incomes of

less than 2,000 Rs. /$40 USD per month, indicating that the price charged is affordable

even to those earning as little as Rs.60-70 ($1.30) per day.” (Monitor, 2009). However, the

research showed that the price was not the only issue. 32% of those surveyed said they

would not purchase it even if the price was lower. They cited concerns with taste, and

preferred their unfiltered tap or other water sources. At the villages with access to the

water, adoption rates typically range between 20-45% and according to Monitors research

“all users of Byrraju water had begun use in the first three months of operation”. Research

done by a visiting college group through Virtue Ventures showed an apparent difference in

adoption rate skewed towards higher income and education levels. It can be very difficult

to market and educate a potential consumer that is accustomed to getting a need met for

“free” despite what that “free source” is costing them in latent health issues. Another

student group (Gita, 2009) quotes local villagers as saying “they would rather spend their

money on new clothes or to save for a television than for Byrraju water. We were surprised

people chose to spend on what were essentially luxury goods for them instead of such a

basic necessity as clean water. Many villagers here expressed skepticism about the health

benefits of Byrraju Foundation water, citing the longevity of their parents and grandparents

who drank only well water”. Serving the lower income, lower educated market requires

education about adoption of a product that does not have the immediate gratification of

other purchases.

The Process:

To build a water treatment plant a village will contact the Byrraju Foundation and submit an

application, Residents are then asked to raise (donate) 75% of the total plant, building and

equipment costs (approximately $15,000). Byrraju adds the remaining funds (25% loan)

and provides expertise, supervision, and quality control. The village hires at least two

residents to run the facility and offers a delivery route to enterprising entrepreneurs who

earn a commission with each delivery. This system is scalable, efficient, provides safe

drinking water and job opportunities. The water treatment plant is a “shared investment”

between the foundation and the village. The village pays a percentage of sales to Byrraju

for the 25% initial cost and for continued maintenance and water quality testing. This

allows the “loan” to be paid back and villagers to have continued access to technological

resources. The entire plan that had worked so well for the last several years was now in

jeopardy due to Raju’s confession.

THE DECISION

Sree Hari paced in his office, thinking about this process. Originally, following repayment of

the initial costs, Byrraju would reduce the percentage charged to the villages. With these

new financial issues there was a need to consider renegotiation of the contracts. The

foundations only stable income comes from the village water sales.

He had spoken to many people about a variety of options. These were some of the

suggestions:

1. Do a cost/benefit analysis, and then determine whether to raise prices or lower costs

(a standard business response). However, he felt that approach may conflict with the

foundation’s mission.

2. Sell the existing systems to competitors or merge with their more profitable systems.

3. Work to increase market share in the villages that had systems, although with

limited resources he would not be able to hire any new people.

4. Meet with government officials and apply for local and international grants.

5. Close down the operation and explain to the villages the problems and find another

job for himself. Almost any form of employment would be easier than this!

Sree Hari had some choices he needed to make. What should he put in his report to

Verghese? Not only was he trying to keep the SWEET water project alive, his

recommendations would impact the health and well being of Indian families trying to gain

access to clean water, and for the youngest members of the village it could become a

matter of life or death.

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10!

Exhibit!1:!“Hybrid!Spectrum/!the!Four!Lenses!Strategic!Framework”!

Source:(Alter,(Kim(www.4lenses.org(!

11!

Exhibit!2:!!Filtration!System!

3.#Sand#

filtration

4.##Carbon#

Filter

5.#Micron#Filters

6.#Ultra#

Violet#

Tank

2.#

Chlorination#

tank

Surface#Water

1.#

Coagulation#

to#settle#

sediment

7.#

Ozonation

Drinking#Water

7#Step#Byrraju#Water#Purification#System

Source:(Based(on(ByrrajuFoundation.org/(Delivery(Modules(