Difference between revisions of "Financial planning"

Latest revision as of 02:53, 23 November 2013

To achieve sustainable services all life-cycle costs need to be planned for and adequately funded. If funding streams are not sustainable, or if responsibilities for financing are not clearly defined, it is unlikely that all costs will be covered. Few countries specify the financing requirements for the critical components of: large-scale capital and maintenance expenditures (CapManEx), replacement expenditures and expenditure on direct and indirect costs (ExpDS and ExpIDS), including the vital function of post-construction support and monitoring.

Capital expenditures include hardware and software costs

In new or upgraded water supply systems capital costs are generally financed through taxes or transfers from government’s own resources or through transfers from donors, including NGOs.

The policies in most countries recognise that capital expenditure investments have both an infrastructure and a software component, including the costs of community mobilisation, demand creation and the facilitation of the implementation process. There may be rules on how both components are budgeted. In Uganda, a maximum of 12% of the conditional grant, which is the funding channelled from central government to local government to spend on water and sanitation, should be dedicated to software activities.

Operation and maintenance expenditures

Almost universally, consumers are expected to cover operations and minor maintenance costs through regular payment of tariffs or ad hoc contributions in cash and kind, if and when these costs are needed.

Some countries, including Honduras and India, have developed detailed definitions of what constitutes minor and major repairs; whereas others have left these definitions open to interpretation. In absence of clear definitions there may be confusion between consumers, operators and the service authorities on who is supposed to maintain the asset, without anyone picking up the bill.

Capital maintenance expenditure (CapManEx)

CapManEx is the cost category that is least clearly understood, much less planned for. CapManEx includes expenditure on asset renewal, replacement and rehabilitation costs, based upon serviceability and risk criteria. CapManEx covers the work that goes beyond routine maintenance to repair and replace equipment in order to keep systems running. Accounting rules may guide or govern what is included under capital maintenance, and the extent to which broad equivalence is achieved between charges for depreciation and expenditure on capital maintenance. Capital maintenance expenditures and potential revenue streams to pay those costs are critical to avoid the failures represented by haphazard system rehabilitation.

Only a few examples were found in the study countries where communities or service providers try to address large CapManEx in a structured manner. Two examples come from Burkina Faso, which uses ‘mutualisation’ of costs within a broader service area, and the Community Development Fund (CDF) model in Ethiopia.

Expenditure on direct and indirect support costs (ExpDS and ExpIDS)

ExpDS includes expenditure on post-construction support activities direct to local level stakeholders, users or user groups. In utility management, expenditure on direct support such as overheads is usually included in OpEx. However, these costs are rarely included in rural water and sanitation estimates. The costs of ensuring that local government staff have the capacities and resources to help communities when systems break down or to monitor private sector performance are usually overlooked.

ExpIDS includes macro-level support, planning and policy making that contributes to the service environment, but is not particular to any programme or project. Indirect support costs include government macro-level planning and policy-making, developing and maintaining frameworks and institutional arrangements, and capacity-building for professionals and technicians.

In Colombia and Honduras, consumers contribute to direct and indirect support costs through membership fees. In Ghana, the Community Water and Sanitation Agency charges a management fee from project funds from some donor projects to help fund ExpDS and ExpIDS.

Sector funding required

Covering these costs cannot easily be done under a project or programme approach, but require sector funding, where finances from different streams can be pooled.

In Benin, Uganda and South Africa, there is a trend towards sector budgets and sector budget support by donors as part of a sector-wide approach (SWAp). Burkina Faso, Ethiopia, Ghana and Mozambique are all moving towards the SWAp model.

The challenge

At present, many figures for sector investment require­ments are estimates, which may not take into account all unit costs or all possible sources of financing. A key challenge ahead for the adoption of a Service Delivery Approach is for the definition of clearer financial frameworks at sector level that will allow for a much more precise under­standing of the expenditure necessary to deliver a service at scale.

Links

• Water and sanitation service models for the urban poor: Defining stakeholder relations, achieving sustainable finance. WSUP and BDP, Cranfield University, UK.

This presentation gives a short overview of challenges and strategies for the provision of water and sanitation services for the urban poor. Three case studies give examples from Mozambique (Maputo), Ghana (Kumasi) and Kenya (Kibera, Nairobi). The content was presented at a side event of the 35th WEDC Conference in July 2011 and the presentation also summarizes the output of a group-work on delegated management models amongst the participants of the event.