Difference between revisions of "Financial approaches"

Revision as of 17:39, 12 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

Micro credit for private sector

Full capital investments by donor funds or government

Franchising

Franchised water treatment and sales

Improving financial efficiency

Innovative financing mechanisms

Loans/credits/guarantees

Innovative financing mechanisms

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

Revolving funds

Revenue financed expansion

Self-financing

Build Own Operate and Transfer (BOOT)

Social development funds