Difference between revisions of "Financial approaches"

Revision as of 13:55, 13 November 2008

The Financial approaches portal illustrates a selection of approaches to water and sanitation service provision as well as some articles on project management.

Cost recovery for operation and maintenance

Users pay the cost for operation and maintenance

The principle that users should pay for recurrent costs has gained widespread acceptance in the last ten years, specifically for the rural sector in many countries. Urban users pay through regularised billing in many cases. However, tariffs are often set too low (sometimes for political reasons) and generally do not cover the true costs of system replacement over the long-term. Tariff structures and costing need better incentives, strategies and support to enhance efficiency (benchmarking, water metering etc.). Poor need differential tariffs. In rural Gujarat 25 water user committees have successfully started to set-up O&M funds. (http://www.wsp.org/publications/sa_indiapoor.pdf). However, most urban and rural schemes in India survive on large operating subsidies. (http://siteresources.worldbank.org/INTINDIA/Resources/Bridging_the_Gap_Exec_Sum.pdf). The most suitable model for service delivery which can even have a higher impact if also repairs and replacement can be financed.

Cost sharing for capital investment

People contribute, thus enhancing ownership and ensuring that service responds to demand

Increasingly accepted as best practice and mainstreamed into many national policies, especially in rural sector. Users contribute in cash or kind or pay connection fee. Increasingly also needed for replacement and large repairs. Poor need support through differentiation in contributions. A 1999 report of the Swajal project in UP, India claims that for the first time in India users are paying 10% of the investment cost of water supply. (http://www.wsp.org/publications/sa_indiapoor.pdf). The NGO Dustha Shasthya Kendra in Dhaka has negotiated with the water authority to locate at least 90 community water points in slum areas, providing improved water to more than 8,000 poor households. Before a site is built, the community signs an agreement with DSK that covers its obligations to run the site and the charges made to recover the costs of the water, maintenance and capital costs. (http://www.developments.org.uk/data/issue21/for-sale.htm). High potential to reach also poorer sections of the community, if properly targeted

Cross subsidies/Differential tariff systems

Differentiating tariffs based on volume or living area; Also used for connection fees

A good way to reach poorer sections, but ADB concludes that whereas it helps to sustain existing systems , current approaches do not reach the poorest (http://www.adb.org/Water/Policy/consultations/IND-2005-Consultation-Report.pdf#page=3). Tariffs based on volume are interesting, but metering is a problem and costly. Customer involvement in the process is very important. China’s Rural Water Supply program has over 90 % payment compliance in households with metered systems whereby the salaries of the operations staff are tied to monthly bill collection and raising tariffs if they do not cover operating costs (http://www.wsp.org/publications/global_wtp_china.pdf). Cross subsidies has high potential particularly for poor slum dwellers

Micro credit for private sector

Helping small enterprises without sufficient collateral to obtain credit

Improving local access to micro-credit is essential to enhance private sector involvement. Requires good regulatory framework because there is a large difference in the performance of micro-credit organizations. (http://www.microcreditsummit.org/papers/fundspaperfinal.htm#4.7). High potential as opportunities for private sector involvement in sector are growing

Fighting Corruption

Increased transparency will allow more efficient use of available funding

Corruption is a widespread phenomenon and drains part of the funding that could be used for on better salaries etc. It requires better procedures and access to information (http://www.irc.nl/content/download/21439/253860/file/How%20to%20hold%20a%20meeting%20tool%20(Stockholm).pdf ). A study comparing productivity among 21 water utilities in Africa found that nearly two-thirds of their operating costs were due to corruption (http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2002/10/25/000094946_ 02101104032679/Rendered/PDF/multi0page.pdf ). High potential because the part of the sector funds that are currently lost can be used for service improvement and expansion

Full capital investments by donor funds or government

People receive facilities as a gift; historically linked to large externally-funded projects

Significant in the past and applied by various funding agencies including national governments, foreign donors and even NGOs. Now discouraged, with a paradigm shift towards cost sharing because of overall costs involved and to enhance ownership. Leveraging public resources is seen as a key component towards increased financial sustainability (http://planningcommission.nic.in/plans/mta/mta-9702/mta-ch20.pdf).

Franchising

Franchised water treatment and sales

Improving financial efficiency

Reducing unaccounted for water by leakage control and improved billing

A considerable source of funding is in fact available within existing systems by reducing leakage, optimizing consumption (through water metering, making it possible to extend systems to more users) and by reducing back-logs in payment by users. This approach is successfully followed in large systems, but much less in smaller ones. It includes both savings in the systems by repairs and adjustments and in households by repairing leakages, and introducing water saving devices and meters. Good facilitation and promotion is needed (http://www.irc.nl/content/download/11496/168599/file/Uso_Efficiente_2004.pdf ). High potential as it can lead to expanded coverage and better use of water resources at low cost

Innovative financing mechanisms

Loans/credits/guarantees

Different models are available for people, water providers and private sector to obtain funding from banks or others, including guarantees from enterprises with too little collateral.

Funding of water sector loans is not very attractive because of relatively high risk, unfair competition from grant money. Procedures are often very complex, particularly for smaller settlements. Requires support to simplify procedures, guarantees and better local credits. In Cambodia, GRET, an international NGO has a Rural Infrastructure Fund, with a public development bank. This provides medium-term loans to local commercial banks, to finance investors of piped water systems, providing a 30% guarantee in case of default. The private sector has installed 10 water systems, representing coverage of up to 85%. (http://www.lboro.ac.uk/well/resources/Publications/Briefing%20Notes/BN16%20Local%20financing.htm) High potential because people and WPs may have to take expensive loans from local money lenders

Innovative financing mechanisms

Issuing bonds, equity mechanisms, pooling resources, etc.

Experiments with innovative financing are ongoing in different locations. These often involve considerable transaction costs that may not be attractive for donors. Further testing is needed and interesting (http://www.euwi.net/download_monitoring.php?id=209).

Output based aid (OBA)

Using explicit performance-based subsidies to support basic services where conditions justify public funding to complement or replace user-fees.

Experience with OBA is new, but growing and interesting. The difference with other subsidies is that OBAs are targeted for example to the poorest families (Cambodia) or to the poorest neighbourhoods (Paraguay) clarifying why subsidy is given and they are performance-based. The provider largely self-finances the service, receiving reimbursement mostly after the verification of successful delivery. The latter may reduce possibilities for small providers with limited capital. A bonus-malus approach might be more feasible, perhaps linked to longer-term system performance. (http://www.gpoba.org/documents/OBApproaches_What_is_OBA.pdf).

Revenue financed expansion

Expansion of piped system based on revenues

Common practice in utility water supply, but much less in developing countries, where often no or negative profit margins exist. It is applied in some places benefiting from increased efficiency, but insufficient to quickly speed up coverage.

Revolving funds

Funds established often by NGOs and managed by a community group; Repayments become loans for others

Interesting approach in the absence of financial institutions, sometimes even in kind (chickens etc.). Current funds often do not include interest, so capital diminishes. Revolving funds have been widely used in Kenya for example, usually by church based NGOs providing financial resources to women's groups. As a result thousands of rainwater tanks have been built. (http://www.dams.org/docs/kbase/contrib/opt163.pdf). Provision of small-scale loans for investment in water supply systems has also been successfully implemented in peri-urban areas of Cochabamba in Bolivia, where the micro-credit agency CIDRE has joined forces with a private sector company, the municipal government, the utility and community organizations to expand infrastructure (http://www.aguatuya.com/html/our_partners.html ). High potential for rural areas without banking facilities and areas with good social cohesion

Revenue financed expansion

Self-financing

people investing individually or jointly in water supply

Widely used, but often substandard performance. Could benefit enormously from proper support (advice, materials, innovation). Legalisation of property rights is key. Poorest need support. In Baroda (India) a 1999 study showed that households invested, on average, at least 70 USD in their own facilities such as rainwater tanks, underground tanks, lift pumps etc. (http://www.wsp.org/publications/sa_indiapoor.pdf). The World Bank estimated that half of the investments (totalling 1.8 billion USD) made in rural China between 1990 and 1995, were made by the users themselves. (http://www.chinadevelopmentbrief.com/node/248). High potential because of growing access also of poorer groups to credits and remittances of overseas workers

Build Own Operate and Transfer (BOOT)

Social development funds

Donor funding to mitigate effect of structural adjustment; Often linked to income generation and employment targets

These funds have improved over the years, but the problem remains that they are typically project based with arrangement that are in parallel with existing structures and having their own rules. In Tanzania, regional development funds are now financing community identified projects (http://www.iadb.org/sds/doc/sgc-GN1930-2-E.pdf and http://www.wsp.org/publications/af_socialfunds.pdf). A recent report carried out by the World Bank's evaluations department found that social funds do not always reach the poorest sections of society and can be subject to political influence. Impact in the WS&H sector has varied and sustainability issues have not been well addressed (http://www1.worldbank.org/publications/pdfs/15141overview.pdf).