Financial approaches

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.

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).