USAID Transform WASH

Ethiopia’s Business Environment and

How it Influences WASH Market
Development

Learning Note, September 2020

Table of Contents

Copyright and Publisher....................................................................................................................... ii

Abbreviations ....................................................................................................................................... iii

1. Introduction ....................................................................................................................................... 1
1.1. Background ............................................................................................................................ 1
1.2. Methodology .......................................................................................................................... 2

2. Economic Situation in Ethiopia ........................................................................................................ 2

3. Business Environment ....................................................................................................................... 3

3.1 Access to foreign exchange ................................................................................................. 4
3.2. Repatriation of profit .............................................................................................................. 5
3.3. Import tariffs and taxes .......................................................................................................... 5
3.4. Value added tax .................................................................................................................... 6
3.5. Intellectual property rights and protection ......................................................................... 7
3.6. Business start-up requirements .............................................................................................. 8
3.7. Business knowledge and skills ............................................................................................. 10
3.8. Manufacturing challenges and production choices ...................................................... 10
3.9. Financing for enterprises and businesses .......................................................................... 11
3.10. Financing for consumers ................................................................................................... 11

4. Conclusions and Recommendations ........................................................................................... 13

References ........................................................................................................................................... 16

i
Copyright and Publisher
USAID Transform WASH aims to improve water, sanitation and hygiene (WASH) outcomes in
Ethiopia by increasing market access to and sustained use of a broader spectrum of afforda-
ble WASH products and services, with a substantial focus on sanitation.

Transform WASH achieves this by transforming the market for low-cost quality WASH products
and services: stimulating demand at the community level, strengthening supply chains, and
improving the enabling environment for a vibrant private market.

USAID Transform WASH is a USAID-funded activity implemented by PSI in collaboration with

SNV, Plan International, and IRC WASH. The consortium is working closely with government
agencies, including the Ministry of Health, the Ministry of Water, Irrigation and Electricity, the
One WASH National Program, and regional and sub-regional governments.

© 2020, USAID Transform WASH

Permission is hereby granted for sharing and adaptation of this material, in whole or in part, for
non-commercial use, educational, scientific or development-related purposes, provided that
the appropriate and full citation is given.

This learning note explores the challenges to the business environment in Ethiopia and high-
lights opportunities for growth and investment into WASH products and services.

Authors:
Eline Bakker and Peter Feldman, IRC WASH

Research Contributors:
Ephraim Mebrate, Tsegaye Yeshiwas and Bret McSpadden, IRC WASH

Reviewers:
Monte Achenbach, Chief of Party, USAID Transform WASH, PSI
Dr. Jane Bevan, Rural WASH Manager, UNICEF Ethiopia
Salfiso Kitabo, Country Director Ethiopia, water.org
Dr. Yonas Alem, University of Gothenburg
Lars Osterwalder, IRC WASH

Design and layout:

Tsegaye Yeshiwas, IRC WASH

Cite this publication as follows: Bakker, E. and Feldman, P., 2020. Ethiopia’s Business Environ-
ment and How it Influences WASH Market Development. Addis Ababa: USAID Transform WASH.

ii
Abbreviations
ACSO Agency for Civil Society Organizations
CBE Central Bank of Ethiopia
CBO Community Based Organizations
CLTSH Community-Led Total Sanitation
EFDA Ethiopian Food and Drug Authority
ETB Ethiopian Birr
FDRE Federal Democratic Republic of Ethiopia
FMOH Federal Ministry of Health
Forex Foreign Exchange
GDP Gross Domestic Product
GTP Growth and Transformation Plan
IGA Income Generating Activity
IP Intellectual Property
MDG Millennium Development Goals
MFI Microfinance Institution
MSE Micro or Small Enterprise
NGO Non-governmental Organization
ODF Open Defecation Free
PSNP Productive Safety Net Program
SACCO Savings and Credit Cooperatives
SDG Sustainable Development Goal
SEE Social Enterprise Ethiopia
SILC Savings and Internal Lending Community
TSEDU Total Sanitation to End Open Defecation and Urination
TVET Technical and Vocational Education and Training in Ethiopia
UNICEF United Nations Children’s Fund
VAT Value Added Tax
VSLA Village Savings and Loan Association
WASH Water, Sanitation and Hygiene
WHO World Health Organization

iii
1. Introduction and private sector partners, is helping es-
tablish a strong enabling environment for
businesses which provide affordable water,
1.1. Background sanitation and hygiene (WASH) products
and services. Transform WASH is active in 41
Ethiopia has greatly reduced the propor-
woredas located in eight regions of the
tion of its population who practice “open
country (plus the Dire Dawa municipality)
defecation” from nearly 80 percent in 2000
and is now in its fourth year of a five-year
to less than 23 percent in 2017. However,
lifespan.
much of this improvement involved installa-
tion of unimproved household toilets, Strengthening private sector enterprises
meaning that fecal waste is still open to the and establishing effective business models
environment and is a potential source of is a key focus of the project. Owing to the
disease-causing pathogens. Diarrheal dis- country’s challenging sanitation situation,
eases are Ethiopia’s third leading cause of Transform WASH has a strong focus on that
under-five mortality, causing around 70,000 sector, including production, distribution,
deaths per year (JMP, 2017). sales, and installation of affordable sanita-
tion products and services. Creating con-
Unimproved toilets also frequently degrade
sumer demand for sanitation is another
and do not constitute a sustainable solu-
principal component, carried out using a
tion, nor do they meet the standard of
combination of Community-Led Total Sani-
“basic sanitation” service which is incorpo-
tation and Hygiene (CLTSH), promotional
rated in the Sustainable Development
efforts by the Health Extension Program, lo-
Goals (SDGs). Only about seven percent of
cal sales agents, and actions taken by the
Ethiopia’s population of over 100 million
business entrepreneurs themselves.
currently has access to basic sanitation – a
situation that impacts health, safety, fi- Though much progress has been made in
nances, and living conditions (JMP, 2017). improving access to WASH products so far,
key challenges remain such as access to
To meet the ambitious targets of the Sus-
foreign exchange currency, import of raw
tainable Development Goals (2030) and
and finished goods, intellectual property
the National Open Defecation Free (ODF)
protection, business start-up costs, and oth-
campaign (2024),1 the Government of Ethi-
ers - which are discussed in the following
opia has called for active participation of
sections.
public sector, non-governmental organiza-
tions (NGOs), community-based organiza- The purpose of this Learning Note is to ex-
tions (CBOs), private sector companies, plore these challenges in the private sector
and others to provide support and services. enabling environment, as well as to high-
light opportunities for growth and invest-
The USAID Transform WASH Activity aims to
ment in the WASH sector. A strong private
help Ethiopia reach universal access to
sector will not only help expand access to
basic sanitation and hygiene services, as
critical WASH products and services – but
outlined in the country’s 2nd Growth and
also will help Ethiopia to realize its ODF goal
Transformation Plan (GTP II), the National
and to achieve GTP II and SDG targets.
ODF Campaign, and consistent with SDG
Goal 6.2. This activity, which is being carried
out in partnership with the Federal Ministry
of Health (FMOH) and other government

1 Ethiopia’s National Open Defecation Free Cam- End Open Defecation and Urination – 2024”
paign, which is also known as “Total Sanitation to (TSEDU).

1
1.2. Methodology reduction. Nearly one quarter of the popu-
lation lives below the international poverty
Information used to formulate this paper
line, and proportionately more of the poor
was gathered from document research
live in rural areas (World Bank, 2016).
and augmented by in-depth interviews
with more than twenty key informants in
Achieving universal access to basic WASH
Ethiopia and the East Africa region. Inform-
services in Ethiopia will likely require further
ants included individuals in government
development of the country’s private sec-
agencies responsible for managing the
tor. At present, sectors such as banking, tel-
WASH sector; companies that manufac-
ecommunications and transportation are
ture, import or market safe water and sani-
dominated by government-owned enter-
tation products; international NGOs in-
prises. A lack of competitors constrains de-
volved with sanitation and financing inter-
velopment of manufacturing, job creation
ventions; and international organizations
and growth of exports. Ultimately, this limits
supporting the WASH sector and promoting
the country’s trade competitiveness, con-
private sector initiatives.
tributes to the trade imbalance, and re-
duces the country’s resilience to economic
Questions posed to these experts included:
shocks. The Government of Ethiopia is
• How would you describe the business therefore strengthening its focus on ex-
environment in Ethiopia, and how does panding the private sector by encouraging
it affect WASH businesses and their abil- more foreign investment, establishing in-
ity to get products to market? dustrial parks, and pursuing other market-
driven initiatives (World Bank, 2019).
• What are the key challenges businesses
face in starting or expanding WASH With almost 50 percent of Ethiopia’s popu-
businesses, and getting products to lation under the age of 18, thousands of
market? new jobs must be generated every year just
• What strategies could be employed to to keep up with population growth. A key
more rapidly expand the WASH market- economic policy of the government, there-
place, and encourage the growth of fore, is to transform Ethiopia into a manu-
enterprises in that market? facturing hub in order to create more em-
ployment opportunities. And although rela-
tively modest in scope, Transform WASH
2. Economic Situation in (and similar private sector WASH initiatives)
Ethiopia align with and support this national eco-
nomic agenda.
Ethiopia is Africa’s second most populous
nation (after Nigeria) with a population of There are a number of government agen-
112 million people, and its economy is the cies that support and regulate the coun-
fastest growing in the sub-Saharan region - try’s economy. These include:
(nine percent annual growth during the
decade leading up to 2018). Despite these • Ministry of Finance: Responsible for
gains, the country still ranks as one of the general financial management and
world’s poorest countries, with an average setting national economic policy.
per capita income of US $790 (World Bank, • Ministry of Trade and Industry: Responsi-
2019). And although Ethiopia’s economy ble for managing the country’s trade
has been growing faster than other econo- system and for increasing foreign ex-
mies in the region, the growth in (Gross Do- change earnings.
mestic Product) GDP has not translated di-
rectly to corresponding levels of poverty

2
• Ethiopian Revenues and Customs Au- to land. Such incentive schemes are justi-
thority: The agency within the Ministry of fied based on expected earnings of hard
Revenues which is responsible for rais- currency from exports. However, to qualify
ing funds through customs duties and for an exemption from customs duties and
domestic taxation. other taxes on imported equipment, an in-
• Ethiopian Investment Commission: Re- vestment needs to be valued at more than
sponsible for promoting investment in $200,000, and the company must employ a
Ethiopian industries and enterprises as permanent staff of at least 50 Ethiopian na-
well as setting regulations governing tionals.2 This kind of incentive fails to reduce
how foreign and domestic investors prices in a nascent, price-sensitive con-
can operate. sumer market like the one that exists for
• Ministry of Urban Development and WASH products in Ethiopia.
Construction: Responsible for promot-
ing urban development, and as a pov- Ethiopia’s WASH market potential is exten-
sive. The country met its Millennium Devel-
erty reduction mechanism is also re-
opment Goal (MDG) for drinking water sup-
sponsible for the registration and ad-
ministration of micro and small enter- ply, yet only 63 percent of urban residents
and four percent of rural residents have ac-
prises (MSEs).
cess to safely managed water supplies.3
• Civil Society Organizations Agency: Re-
Ethiopia did not meet its MDG for sanitation
sponsible for overseeing the registration
and has a long road ahead to meet the
and reporting of all civil society organi-
even more ambitious sanitation and hy-
zations (CSOs). Formerly known as the
giene SDGs. Only about seven percent of
Charities and Societies Agency.
Ethiopians currently have access to basic
• Ethiopian Intellectual Property Office: sanitation service, and over 20 percent of
Facilitates issuing and legal protection the country still practices open defecation
of patents, trademarks, and other intel- (JMP, 2017).
lectual property.
• Ethiopian Food and Drug Authority: Re- The sections which follow below present
sponsible for certifying certain WASH the key findings from document research
products, like water quality testing and and consultations with a wide range of
treatment technologies. business experts. These sources identified
the following as the principal challenges
3. Business Environment facing WASH businesses in Ethiopia:

• Access to foreign exchange4

The Ethiopian government has ambitious
• Taxes and tariffs
economic and development goals and is
• Intellectual property protection
actively encouraging investment (foreign
• Business registration and start-up re-
and local) into specific sectors. For exam-
quirements
ple, industries such as manufacturing of
• Business knowledge and skills
plastic products have been granted ex-
• Import challenges and uncertain
emption from customs duties on imported
demand
equipment as well as favorable tax treat-
• Business and consumers financing
ment and other incentives, such as access

2 Ethiopian Investment Commission website 4 Accessto Forex is also linked to a range of other
(www.investethiopia.gov.et, retrieved in Aug 2020) challenges, including profit repatriation, royalty
3 Safely managed water supply is drinking water from payments, import of raw and finished goods, and
an improved water source located on premises and others which are reviewed further in Section 3.
available when needed and free of fecal and prior-
ity contamination.

3
3.1 Access to foreign exchange transferred to the Central Bank of Ethiopia
(CBE), which earmarks it for purchase of
The national currency, the Ethiopian Birr
strategic materials such as fossil fuels. The
(ETB), must be converted to a “hard cur-
remaining Forex is then allocated to busi-
rency”5 through the foreign exchange mar-
nesses requesting it, according to prioritiza-
ket during any international transaction,
tion rules. Banks have “allocation commit-
such as purchase and import of raw mate-
tees” that are responsible for matching
rials or goods from outside of Ethiopia. The
available Forex with submitted applica-
country imports significantly more goods
tions. Prioritization tends to follow a basic
than it exports ($15 billion in imports vs. $2
system:
billion in exports in 2018). The trade deficit,
which has hovered around $12-13 billion
1. Priority allocations, including external
per year since 2014, means that Forex (For-
debt repayments (closely monitored by
eign Exchange) is generally in high de-
CBE) and payment of foreign employ-
mand and in very short supply, and is exac-
ees.
erbated by below-market exchange rates
(World Bank, 2018). 2. Materials considered “essential im-
ports”, such as fuel and pharmaceuti-
The Birr was devalued by 15 percent in 2017 cals, agriculture and manufacturing in-
and has continued to depreciate; analysts puts, equipment and spare parts, profit
predict that the currency will now undergo and dividend transfers, nutritional foods
a “managed devaluation” to encourage for infants, and educational materials.
more foreign investment and address the
3. Other “non-essential” requests (Lloyd
country’s trade imbalance (World Bank,
and Teshome, 2018).
2017b). Devaluation of the Birr requires pur-
chasers of imports to use an ever-increas-
Forex requests from non-strategic busi-
ing amount of ETB to obtain the same
nesses or for “non-essential” purposes must,
amount of hard currency, effectively in-
therefore, be queued and wait their turn for
creasing the cost of all imports and de-
available funds. Businesses often wait many
creasing the price of exports.
months for Forex and may not have a clear
idea when or how much will become avail-
For Ethiopia-based businesses that require
able. When businesses do receive an allo-
imported goods or materials, accessing
cation, they may be required to use it
hard currency through the Ethiopian bank-
quickly (i.e. within a 14-day window), and
ing system is often identified as their biggest
they may not receive the full requested
challenge, as some sectors and businesses
amount. These Forex access challenges af-
are prioritized over others. “All transactions
fect a business’s ability to respond to or-
requiring foreign exchange are not cre-
ders, expand operations, maintain positive
ated equal,” describes a contributor to the
business relationships (e.g. making pay-
Ethiopian Business Review.
ments on time) and to remain competitive.
Forex is tightly controlled in the banking sys- Some businesses operate at a fraction of
tem. A major portion of available Forex is their production capacity due to Forex
earmarked for national infrastructure pro- challenges.
jects, such as the Renaissance Dam and
other national priorities. Thirty percent of
Forex coming into commercial banks is

5 A “hard currency” is money issued by a nation or the British pound, the U.S. dollar, the Euro, the Japa-
group of nations that is seen as politically and eco- nese Yen, etc.
nomically stable, and which is globally traded, like

4
3.2. Repatriation of profit Ethiopian entity as well as on the non-resi-
dent entity who is receiving them (Haile, et
Repatriation of profit refers to the transfer of
al., 2018).
profit earned in Ethiopia and sending it in
hard currency back to a business’s home
Apart from the taxes levied, Ethiopian law
country. Under Ethiopian law, foreign inves-
does not seem to place any restrictions on
tors have the right to repatriate:
royalty payments to foreign patent holders
and allows for such payments to be made
• profits and dividends accruing from an
in Forex. Specifically, the National Bank
(approved) investment;
considers royalty fees as “invisible pay-
• principal and interest payments on ex- ments” that are allowed on demand.8 In
ternal loans; practice, this means that foreign-owned
• payments related to technology trans- businesses are likely to experience chal-
fer or management agreements; lenges receiving royalty payments due to
the chronic Forex shortage in the country.
• proceeds from sale or liquidation of an
enterprise;
3.3. Import tariffs and taxes
• proceeds from sale or transfer of shares
or of partial ownership of an enterprise To promote domestic manufacturing, the
to a domestic investor; government follows an “import substitu-
tion” model, using import tariffs (duties) to
• compensation paid to a foreign inves-
raise the cost of imported finished goods;
tor.6
and selectively reducing duties on imports
Officially, there are no restrictions on the of raw materials used to manufacture
amount of profit that can be repatriated, goods domestically.
but in practical terms business owners ex-
Goods imported into Ethiopia are subject
pressed concerns regarding limits resulting
to up to five different types of tariffs and
from the shortage of hard currency, and
taxes, including customs duties, value
the relatively low priority placed on this
added tax, surtax, excise tax, and withhold-
type of Forex allocation. Given that Forex is
ing tax – all of which generally are added
closely scrutinized, businesses also must
into the retail sales price paid by consum-
carefully comply with regulations regarding
ers.
registration, permitting, periodic auditing,
payment of taxes and other obligations
Customs duties applied to an imported
(Ibex Frontier, 2017).
good can range from zero to 35 percent,
depending on how government classifies
Royalty payments the item – and whether it’s considered a
Royalties are payments made by one busi- material or raw input, which will be further
ness to another in exchange for the right to developed locally, or a finished product to
use that business’s intellectual property be sold directly.
(such as a copyright, trademark or pa-
Excise tax is typically levied on items con-
tented design). Ethiopian law permits roy-
sidered “luxuries,” (e.g., perfumes), goods
alty payments for the right to use a patent,
that are hazardous to health (tobacco
invention, design, or a secret formula or
products), or goods that cause social prob-
process.7 A five percent tax is levied by the
lems (alcoholic beverages).
government on royalties paid by an

6 Investment Proclamation No. 1180/2020. 8 Directive No. FXD/46/2017.

7 Income Tax Proclamation No. 979/2016.

5
Value added tax (VAT) of 15 percent is lev- them as a new market entry in Ethiopia) the
ied on imported goods, as well as on all do- government has permitted the first few
mestic sales transactions when products rounds of bulk imports to be exempt from
are sold and change hands. customs duties; however, a long-term solu-
tion is not yet in place.
Surtax is a flat 10 percent fee used to raise
additional revenue on certain products. It is The government is presently engaged with
based upon the sum of customs value, cus- interested parties in proposals to reduce or
toms duty, excise tax, and VAT. Some prod- eliminate customs duties on certain im-
ucts have been exempted from surtax, incl. ported WASH and menstrual hygiene prod-
fertilizer and petroleum (Kebede, 2019). ucts as well to reduce or eliminate certain
taxes on a range of domestically-pro-
Withholding tax of three percent is applied duced WASH products, such as menstrual
on the customs value of imported items, pads and household water treatment
and a tax of two percent on goods and ser- products.11 The proposed products for tariff
vices purchased locally.9 and tax relief are relatively low-cost items
aimed at base-of-pyramid consumers.
Tariff and tax relief and reform
A long-term solution to the tariff and tax is-
An example of how taxes and tariffs affect
sues on WASH products will require that the
the sanitation sector is provided by the
Ethiopian Revenues and Customs Authority
SATO pan, which is currently imported into
and Ministry of Finance get involved and,
Ethiopia at a price of around 100 ETB from
for example, re-classify certain products as
a manufacturer in Kenya.10 SATO pans are
“priority” items and take other relevant
classified as “finished products” so they are
steps to help keep the cost of these prod-
subject to the following tariffs and taxes:
ucts as low as possible.
• Customs duty of 30 percent
• VAT of 15 percent (at each point of
sale) 3.4. Value added tax
• Surtax of 10 percent Value added tax (VAT) accounts for 41 per-
• Withholding tax of three percent. cent of total federal revenue from domes-
tic sources, thus is a very important income
With all relevant tariffs and taxes applied to source for government. VAT is applied on
this product (and no credits applied for pre- imports and all subsequent product sales
vious VAT payments) as well as profit mar- transactions.12 Some outlets and retailers
gins, the pan’s price rises from around 100 may be exempt from charging VAT (when
to nearly 400 ETB full retail price to the final annual turnover is less than ETB 1 million),13
purchaser (Kebede, 2019). and instead pay a turnover tax (similar to a
sales tax) of two to 10 percent.14
In the interest of keeping the price of SATO
pans as low as possible (to help establish

9 Income Tax Proclamation No. 979/2016. the value chain. However, in practice this proce-
10 The SATO (Safe Toilet) pan is a low-cost molded dure, which requires accurate receipting and re-
plastic toilet pan which has a self-sealing trap lid to porting, is not always adhered to.
13 In February 2018, a Directive was issued by the Min-
shut out flies, other insects, and odors. The pan re-
quires very little water for flushing and cleaning. ister of Ethiopian Revenue and Customs Authority
11 In 2019, a draft submission document requesting for that raised the threshold for businesses to register for
tax removal on sanitary products has been submit- VAT payments from ETB 500,000 to ETB 1 million.
14 Turnover Tax is assessed on gross receipts, as per
ted to the Ministry of Finance by the Ministry of
Women and Children Affairs and Ministry of Health. the Turnover Tax Proclamation No. 308/2002 and
12 In principle, it should be possible to deduct VAT Amendment No. 611/2008.
charges paid in previous transactions throughout

6
Although there are procedures for adjust- year - and pay relevant maintenance fees.
ing VAT payments based on prior amounts For some patent owners, the annual re-
paid, many businesses likely do not follow newal process may be perceived as a risk
these procedures due to a lack of under- and threat to their IP protection. For exam-
standing on how the process is adminis- ple, in the United States, depending on the
tered (Kebede, 2019). The consumer ulti- patent, protection is granted for 14 to 20
mately covers the cost of VAT and all other years (with periodic fees) (STOPfakes.gov,
applied taxes. 2016).

Most locally registered businesses inter-

3.5. Intellectual property rights and viewed for this study found the application
protection process for patents to be relatively straight-
forward. The application process requires a
Intellectual property (IP) rights are granted
certificate of incorporation, suggesting it is
to persons or companies for creating a de-
advantageous to be a locally registered
sign, invention, process, or work of art or
business or joint venture, the latter being a
music. IP rights are awarded through a le-
foreign business with a local counterpart.
gal process, and generally give the appli-
cant exclusive rights over use of the crea-
For a joint venture, both the patent owner
tion for a specified period of time. Patents,
and the local partner are listed on the reg-
copyrights, and trademarks are examples
istration, implying that the local partner also
of legal mechanisms that codify IP rights.
would acquire the patent rights. Some pa-
tent owners have cited the joint venture
IP rights for industrial designs enable com-
modality as high risk in terms of IP protec-
panies to earn recognition and/or financial
tion.
benefit from their inventions or creations.
The Ethiopian Intellectual Property Office
There also were concerns raised regarding
registers intellectual property protections
whether IP rights are adequately protected
under the Patent Act.15
or enforced, once granted. However,
some experts say that IP rights provide less
Two types of IP protection are most com-
protection than expected, since nearly any
mon with respect to WASH products:
product can be copied with minor varia-
Patent of Invention: This patent applies to a tions to circumvent patent protection. In
first registration of a piece of intellectual practical terms, even if a product gener-
property invented in Ethiopia or for IP that is ates copycats (imitations), the original
registered in Ethiopia within 12 months from product may have years of advantage
successful first registration in another coun- over its competitors. Nevertheless, busi-
try. A patent of invention is granted an ini- nesses that have invested extensively in de-
tial period of protection of 15 years and sign innovations and their “brand” need to
can be extended for another five years. be able to protect those designs and
brand names and will continue to rely upon
Patent of Introduction: This is used for pro- patents and royalty payments to maintain
tected inventions from abroad that will be their ability to operate competitively in the
introduced to Ethiopia. A patent of intro- market.
duction is valid for a maximum of 10 years.
However, patent owners must file to extend
this protection every year - after the third

15 Patent Act is also known as the Proclamation con-

cerning Inventions, Minor Inventions, Industrial De-
sign No. 123/1995.

7
Use of patents in licensed production perceived as deterrents by potential inves-
tors, adding to the risk factors which could
Licensed production is the authorized pro-
inhibit companies from exploring local
duction (in Ethiopia) of a product using
manufacturing of new (WASH) products in
technology developed elsewhere. This in-
Ethiopia.
volves obtaining permission from a com-
pany (licensor) to manufacture and sell its
products. The company in Ethiopia that ob- Product certification
tains these rights (the licensee) usually Though currently not applicable to sanita-
agrees to pay royalty fees to the owner or tion, other WASH products may be required
licensor (Haile, 2018). to receive a seal of approval prior to use by
the Ethiopian Food and Drug Authority
For example, Lixil Corporation’s SATO Divi-
(EFDA). Like the World Health Organization,
sion has established licensed manufactur-
EFDA rates household water treatment
ing and distribution contracts with local
technologies as 3-star, 2-star, 1-star or “fail”,
(usually plastic) manufacturers in the re-
based on the product’s pathogen removal
gion, including in Kenya and Tanzania. IP
efficiency (i.e., bacteria, viruses, and proto-
rights (patent protection) play a crucial role
zoa).
by protecting the licensor’s technology,
and also gives the licensee (local manu- Ethiopian-made household water treat-
facturer) a market advantage. ment technologies require EFDA product
safety certification. However, EFDA does
In Ethiopia, Lixil’s SATO Division has experi-
not currently have a laboratory to test
enced some challenges licensing a local
pathogen removal efficiency, and the
manufacturing company for production of
agency has not authorized any other do-
the SATO pan. If a licensor does not have a
mestic laboratories for these tests. Also,
valid Ethiopian manufacturing license, Ethi-
there are no labs in the country that can
opian law does not permit the licensor to
conduct tests for viruses and protozoa re-
import and own a mold. Injection molds are
moval, so these have to be conducted out-
the main capital investment required to
side of Ethiopia.
start manufacturing plastic products.
Therefore, a manufacturing licensee would There are Ethiopian labs that can test mi-
purchase and import the mold, and would crobial efficiency, but these have not yet
consequently fully own it. Such a transac- been authorized by EFDA. For example, a
tion would be permanent, in other words it lab run by the Ethiopian Conformity Assess-
would not allow the licensor to subse- ment Enterprise (supervised by the Ministry
quently change the local manufacturer by of Trade and Industry) is authorized by EFDA
giving the mold to a new licensee if they to conduct water quality testing for bottled
felt this was required. water, but it has not been authorized to
conduct similar tests for household water
These licensing challenges can be avoid-
treatment technologies.
ed if an enterprise obtains an Ethiopian
manufacturing license. Other options in-
clude establishing a joint venture with a lo- 3.6. Business start-up requirements
cal manufacturing company, possibly with
Starting up a business in Ethiopia can re-
specific contractual arrangements be-
quire a significant up-front cash investment.
tween the licensor and licensee, to miti-
A foreign company setting up on its own is
gate the risks discussed above. However,
required to deposit a minimum of $200,000,
the financial and administrative hurdles as-
and a joint venture between a foreign
sociated with these approaches may be
company and a local partner requires that

8
the foreign entity deposit $150,000.16 While must then be operated in accordance with
these funds can later be spent once the applicable commercial and tax laws.18
business is established, the size of this initial
deposit can present a significant hurdle for A British Council’s 2017 study of socially-ori-
small to medium-sized investors, especially ented businesses in Ethiopia found that rel-
new businesses. atively few had chosen this classification –
often eager to differentiate themselves
Another part of the start-up process re- from NGOs (British Council, 2017). The study
quires Environmental and Social Impact As- found that most of these socially-inclined
sessments be filed and approved, which re- businesses either registered as a micro or
portedly can take up to several years. small enterprise (MSE), or as a sole proprie-
torship. Table 1 below illustrates the findings.
In many countries, governments have cre-
ated a separate classification for busi- The study also found that regardless of their
nesses that are created and designed to legal registration, these businesses contin-
address a social problem. These are re- ued to regard themselves as social enter-
ferred to as “social enterprises”17 and can prises. (British Council, 2017)
support the government in meeting eco-
nomic growth, public health, and other so- Table 1: Legal status selected by businesses identifying
cietal objectives. The aim of a social enter- themselves as “social enterprises” in Ethiopia
(adapted from British Council, 2017)
prise is not to maximize profits (although
they must generate enough profit to be
No. of Percent of
self-sustaining) – but rather to achieve and Legal status
respond- respond-
selected
increase social impact (Yunus, 2009). ents ents
Micro and small
41 31%
The social enterprise classification typically Enterprise (MSE)
confers tax incentives, streamlined registra- Sole proprietorship 30 22%
tion processes, and other benefits. This al-
Cooperative 12 9%
lows such enterprises to combine the mis-
sion of a non-profit agency with the effi- Partnership 11 8%
ciency of a for-profit company.
Charity or society 9 7%
In Ethiopia, a registered NGO can apply to
the Agency for Civil Society Organizations Limited partnership 8 6%
(ACSO) to undertake an income generat- Private limited
8 6%
ing activity (IGA), a form of social enter- company
prise. This allows the IGA wing of the NGO, NGO / non-profit 6 4%
which operates as its own entity with sepa-
NGO with income
rate accounts, offices, and staff, to gener- 5 4%
generating activity
ate income (revenues) from which the
Share company 2 1%
NGO can cover some costs while still re-
ceiving grants and donations. There are a Joint venture 2 1%
number of requirements to meet in order to
register an IGA, including that the NGO General partnership 0 0%
opens a separate bank account and
Total 134
keeps separate books for the IGA, which

16 Investment Proclamation No. 1180/2020. 18 Organizations of Civil Societies Proclamation

17 In the United Kingdom, these are called community 1113/2019.
interest companies, and in South Africa, non-profit
companies.

9
MSEs are an important element of the gov- Although entrepreneurs running businesses
ernment’s efforts to boost employment. in Ethiopia recognize the challenge of an
Registration of MSEs is done through the under-skilled workforce, many accept it as
Ministry of Urban Development and Con- part of the mission of socially motivated in-
struction and reportedly is fairly straightfor- dustries. Their products as well as their busi-
ward with low barriers to entry. However, ness model seek to contribute construc-
there are limits to capital and human re- tively to the Ethiopian workforce and econ-
sources (e.g., a maximum of 30 employees omy.
for small enterprises).
The government has recognized the im-
If a socially minded business registers as a portance of strengthening technical skills,
commercial company with the Ministry of investing in technical training institutes such
Trade and Industry, that business will be in as the Adama Technical University. How-
competition with mainstream for-profit ever, additional steps will be required to en-
companies and is subject to the same rig- sure that needed machinery and equip-
orous investment and tax regulations. ment can be imported so that local manu-
facturing can more rapidly expand.
The Social Enterprise Ethiopia (SEE) organi-
zation, a relatively new network of social
entrepreneurs, seeks to expand this sector 3.8. Manufacturing challenges and
of the Ethiopian economy. A key SEE focus production choices
is to achieve separate legal recognition for
Businesses in Ethiopia face a variety of chal-
social enterprises in the country (Patton,
lenges with respect to acquiring needed
2018).
manufacturing inputs. It can take six to nine
months to complete a material import pro-
The use of a separate “social enterprise”
cess or to receive an order from a distribu-
business registration system has taken root
tor. And after receiving a container of raw
in other countries to encourage start-up
materials following a months-long process,
and expansion of organizations focused on
the materials may get used up within the
assisting governments to achieve their so-
first month of production.
cial welfare targets. A similar classification
approach in Ethiopia might help systema-
A consequence of this inefficiency is that
tize and simplify the current registration sit-
manufacturers often choose to produce
uation and serve to expand the number
well-known products with strong existing
and scale of organizations devoted to
demand (requiring little to no marketing),
these objectives.
rather than take a risk on a new product
line with unproven demand or profit mar-
3.7. Business knowledge and skills gins (e.g., low-cost sanitation products).

Some investors raise concerns about limita- There are other aspects of the imports pro-
tions of the industrial infrastructure in the cess that can cause further complications.
country and the general capacity of the Some businesses reported that government
manufacturing workforce. Businesses may classification of products to be imported
feel they are in a bind; wanting to buy parts can change from one round to the next,
and components locally, but, due to limits leading to increases in fees, delays from re-
of equipment, workforce capability, and view and dispute resolution processes, and
other constraints, they resort to the cumber- additional expenses such as demurrage
some and costly import process. (storage charges) accrued while disputes
are being resolved. Some businesses re-
ported requests for non-mandatory

10
certificates and additional stamps of ap- For larger-scale operations such as manu-
proval, which further delayed the process facturing, financing will likely need to be se-
and increased demurrage charges. cured through commercial banks (or
brought in by foreign joint-venture part-
ners). Credit institutions may struggle with
3.9. Financing for enterprises and providing loans to a relatively new type of
businesses industry client.
The credit market for businesses offering
A related problem is that investors may per-
sanitation and other WASH products and
ceive these WASH products as high-risk, as
services is still quite new and under devel-
they are being introduced in a relatively
opment. High commercial interest rates
new and untested Ethiopian market. Some
and uncertain consumer demand are key
businesses have expressed a desire to have
disincentives for potential borrowers. Pri-
“demand guarantees” provided to them
vate sector businesses in Ethiopia often
by government or development agencies
mention the lack of access to affordable fi-
– to ensure that at least a certain number
nancing as one of their top challenges (Ah-
of the products they produce (or import)
med, 2019). The range of WASH businesses
will be purchased at a known price level.
is quite broad and includes small-scale arti-
sans manufacturing or installing latrine pans
It will require a concerted effort by govern-
and slabs, retail shops selling household-ori-
ment and support agencies to establish
ented products, importers, wholesale dis-
more widespread credit options for the
tributors, and commercial manufacturing
emerging market for WASH products and
operations. There are several financing op-
services.
tions available, depending on the type of
business. For local enterprises, borrowing
from Savings and Credit Cooperatives 3.10. Financing for consumers
(SACCOs) or Microfinance Institutions (MFIs)
are options. However, although such lend- Affordability of WASH products and ser-
ers are familiar with the agricultural sector, vices remains a significant concern for
most know relatively little about WASH en- many Ethiopian households and for the
terprises. businesses that sell them. Income, espe-
cially for families involved in agriculture,
As borrowers, WASH businesses generally tends to be seasonal.
have a good repayment reputation, but
evidence suggests that sanitation busi- There currently are a range of credit
nesses can have problems with late pay- schemes and agencies that target low- to
ments – possibly due to the seasonality of middle-income households. For example,
their customers’ income (Aboma, 2020). iqub and iddir are home-grown mecha-
nisms designed for infrequent or emer-
Financial support for WASH businesses is of- gency expenditures, such as funerals or so-
fered by some NGOs, either for start-ups or cial celebrations. These mechanisms do
to expand existing operations. Interventions not charge interest, but they have limited
may be in the form of dedicated program- capital and would require adaptation and
matic funds, as well as in-kind support such more capital to reach scale. Another pop-
as marketing and advocacy to build de- ular local financing system is community-
mand for products and services. Other based health insurance, through which
NGOs have provided capital directly to members make payments into a collective
MFIs for specific WASH loan products. fund, which can be accessed to cover
health care costs when a member falls ill.

11
Transform WASH has been working to es- MFIs and voluntary savings and loan
tablish Village Savings and Loan Associa- schemes are generally unable to reach
tions (VSLAs) for household sanitation-re- consumers at the lowest end of the eco-
lated loans. The VSLA mechanism is a po- nomic spectrum. Since many of these
tentially viable consumer financing mech- households are also food-insecure, the Min-
anism and has the advantage of also help- istry of Agriculture established the “Produc-
ing households save money. Scaling this up tive Safety Net Program” (PSNP), which as-
for large-scale sanitation financing would sists an estimated 8 million people (World
likely require much more supervision, train- Bank, 2017a). The Ministry of Health and de-
ing, and support. velopment partners are advocating with
the Ministry of Agriculture to explore options
Community-based initiatives, such as for including sanitation as part of the PSNP
VSLAs, Savings and Internal Lending Com- program as a way of reaching the very
munities (SILCs), and SACCOs offer the ad- poor.20
vantage of local credibility and relatively
low interest or service charges. Evidence Gender issues also come into play regard-
suggests that their sanitation loans have ing uptake of WASH products and services,
high repayment rates. However, these and financing. A study of cookstove pur-
mechanisms require extensive training, chases in northern Ethiopia found that
management and supervisory systems women are far more interested and willing
which typically rely on NGO or other exter- to pay for those products (Alem et al.,
nal resources for support. 2018). Similarly, women are often responsi-
ble for household water and are often
Public and private MFIs are more profes- more conscious of water supply problems -
sionally run with greater resources, but they and more willing to pay for improved ser-
tend to charge higher interest rates and be vices (Bogale et al., 2012). The burden of
geographically limited to the highlands. not having access to improved sanitation
Water.org has successfully worked with sev- or adequate hygiene facilities also tends to
eral MFIs to develop affordable household be felt more by women (and girls). It may
loans for WASH product purchases.19 The therefore be advantageous to tailor WASH
loans have proven very popular - in less loan products and financing drives towards
than one year, these MFIs disbursed loans female consumers.
totaling nearly ETB 19 million ($560,000),
reaching around 22,500 individuals. The FMOH also acknowledges the need for af-
loan repayment rate was 99.9% (Getnet, fordable household financing for WASH
2019). and is working with commercial lending in-
stitutions to establish a class of bank loans
WASH organizations working with banks targeting household sanitation, similar to
and MFIs can now cite evidence from this what was done to increase the availability
successful microfinance effort to support of credit for fertilizer purchases.
their drive to increase the availability of suit-
able loan products. Yet financial institutions There are a wide range of consumer credit
operating in the WASH sector mechanisms in Ethiopia, and with support
acknowledge that there is still a lack of from WASH sector agencies there are MFIs
loanable funds from which WASH busi- which are now strengthening their focus on
nesses can borrow. WASH. However, there is still a large, unmet
need in this area.

19 Metemamen, Vision Fund, and Specialized Finan- 20 The fifth Productive Safety Net Program begins in
cial and Promotional Institution. 2021.

12
4. Conclusions and Access to foreign exchange currency. The
relative scarcity of Forex in Ethiopia makes
Recommendations acquiring it for importing raw and finished
materials one of the most important chal-
Private sector sanitation and other WASH lenges for many WASH businesses.
enterprises in Ethiopia have made exciting
inroads in the past several years. They have Recommendations:
introduced new household sanitation, safe • Review foreign exchange operating
water, and hygiene products to consum- guidelines and consider ways of mak-
ers, as well as starting new businesses and ing the application, queueing, and liq-
expanded existing ones. In so doing, they uidation processes more accessible,
have created more employment opportu- accommodating and transparent.
nities and helped move the country toward • Encourage policy reforms that raise the
universal access to basic WASH services. priority of Forex access for socially ori-
However, the size of most of these opera- ented businesses in emerging markets
tions is still relatively small compared to the such as WASH.
scale of the challenge. Businesses still face • Advocate for WASH products to be
a number of market hurdles that can limit added to the list of “essential or priority
the growth and profitability of their opera- goods,” so that Forex is more readily al-
tions, and which increase pricing and re- located to businesses importing or
duce availability for consumers. manufacturing WASH goods.

Some of the challenges facing the WASH Taxes and tariffs. Steep import tariffs and a
market are more general and affect the range of domestic taxes can greatly in-
entire economy, and although they are be- crease the cost of sanitation and other crit-
yond the scope of this study, nevertheless ical WASH products. This will lower overall
they are important and worth mentioning: demand – and place additional economic
burdens on poor households.
• Unreliable power supplies
• Unstable and costly internet and mo- Recommendations:
bile phone network service • Complete ongoing research to under-
• Security concerns and road closures in stand the effects of lowering tariffs and
some areas taxes on sanitation products, including
• Inflation and depreciation of the Ethio- influence on consumer demand and on
pian Birr. government revenues.21
• Review and revise classification of im-
Experience with Transform WASH and other ported WASH products to ensure critical
market-focused projects has revealed sev- items can readily be imported.
eral more specific issues that, if addressed, • Review and revise import tariff and do-
could help strengthen and expand the pri- mestic tax rates and policies to ensure
vate sector WASH market in the country. critical WASH products remain as af-
These are summarized below, along with fordable as possible.22
regulatory and policy actions which might
help address the issues.

21 Additional research has been planned by the Fed- 22 This may require special attention to how VAT and
eral Ministry of Health and USAID Transform WASH to withholding tax are applied, and whether small
confirm the actual extent of this effect; however, it businesses are aware of the correct administrative
has been delayed by the 2020 COVID-19 pandemic processes related to these taxes.
response.

13
Encourage large-scale local production of service targets to accelerate the pro-
key WASH products through favorable cess.
start-up and related operating business • Review the range of household financ-
regulatory reforms, to help encourage in- ing options and establish training, tech-
vestment. nical support, and capital financing
programs to help scale up the most ef-
Recommendations: fective approaches.
• Review Intellectual Property (IP) protec- • Encourage commercial and develop-
tion policies and enforcement mecha- ment banks to allocate dedicated cap-
nisms and enact reforms which encour- ital for MFIs to establish loan products
age local manufacturing and introduc- and programs tailored towards house-
tion of new (patented) products to the hold WASH products and services.
Ethiopian market. • Advocate for the establishment of loan
• Review importation policies for manu- guarantee facilities that encourage fi-
facturing equipment and reform (if nancial institutions to provide WASH
needed) to simplify licensed produc- loans.
tion of WASH products in Ethiopia. • Expand the PSNP or related poverty al-
• Review (and reform as needed) start- leviation efforts to provide financial
up business investment requirements to support or other incentives for econom-
encourage more rapid growth of sani- ically-challenged households to ac-
tation and other WASH businesses, and quire basic WASH services.
to stimulate local manufacturing of
products which currently are imported. Address women’s needs in the WASH mar-
• Strengthen the “income-generating ketplace. Women have strong, demon-
activity” mechanism for registered strated interest in improved WASH services,
NGOs, including providing relevant tax, and can play an influential role in the mar-
investment, and other forms of relief to ket.
encourage greater use of this option by
WASH-focused organizations. Recommendations:
• Provide a “social enterprise” registra- • Encourage private sector actors and fi-
tion option for appropriately qualified nance institutions to design products,
(WASH) businesses (and provide asso- services, and financing mechanisms
ciated tax, investment, and permitting that are tailored for women.
relief) to encourage expansion of these
services to the poor. Increase Ethiopian product certification
capacity. Being able to test and certify
Limited options for affordable financing. WASH products such as water filters, water
WASH businesses and consumers lack ac- treatment chemicals, and others will elimi-
cess to affordable loans – which is holding nate the need to send such items out of
back both household and commercial in- the country for testing and should speed
vestment. up the approval process.

Recommendation:
Recommendations:
• Support the establishment of efficient
• Establish a class or classes of WASH-
in-country WASH product testing and
focused loan products at commercial
banks and MFIs – and set appropriate certification protocols and processes.23

23 The primary agencies the work with include Ethio-

pian Food and Drug Authority and the Ministry of
Trade and Industry.

14
Intellectual property rights and protection. • Promote within the private sector the
Stronger IP protection, as well as longer pro- national Open Defecation Free cam-
tection periods, could help encourage cer- paign and the business opportunities it
tain investors to introduce or innovate new presents.
WASH products and services in Ethiopia. • Tailor and expand vocational training
This type of reform also would encourage efforts (such as TVET colleges) to focus
local manufacturing of essential WASH on building critical skills for the growing
products. WASH economy.
Recommendations:
• Encourage review of trademark and Address the perceived risk of uncertain de-
patent protection systems, and to make mand for WASH products and services. Un-
any needed reforms to ensure they are certainties in consumer demand, and cer-
competitive both regionally and glob- tain entry barriers for WASH enterprises has
ally. elevated the perception of risk among
• Reforms might include issuing multi- businesses and investors. This can be allevi-
year protections, ensuring joint-venture ated in part through “guaranteed de-
partners can retain certain IP protec- mand” or an initial order placement for
tions, lengthening overall protection new products and services. The govern-
periods, and adequate enforcement. ment and its partners should consider
providing guarantees of purchase quanti-
Focus on existing entrepreneurs to expand ties and/or pricing levels to lower the start-
the sanitation market. Growth of the pri- up risks for local manufacturers or importers.
vate sanitation market will likely be faster
and more efficient if government encour- Recommendations:
ages existing businesses to expand and • Review experience and evidence re-
add WASH products to their current portfo- garding of demand guarantees in Ethi-
lio, rather than trying to start new businesses opia and the region and identify suita-
from scratch. Strengthening the skill level of ble approaches to address this con-
the workforce also will encourage invest- cern.
ment. • Establish effective business monitoring
systems to track demand, sales, pric-
Recommendations: ing, and other relevant data to help
• Review policies focused on encourag- regulatory agencies to more effectively
ing unemployed youth to start sanita- support and manage expansion of the
tion businesses. Enact appropriate re- WASH economy.
forms and incentives to encourage ex-
isting businesses to expand into the
sanitation/WASH marketplace.

15
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