FS - Introduction
Financial Sustainability means that continuity in the delivery of products and services related to water, sanitation and hygiene is assured, because the activities are locally financed (e.g. taxes, local fees, local financing) and do not depend on external (foreign) subsidies.
Providing sustainable WASH services requires sound strategic financial planning and budgeting that covers the full life-cycle costs of these services: from construction of new systems to short-term and long-term maintenance, district-level and national-level administration and planning, extension and improvement of services and eventual replacement of the infrastructure.
All of these costs, taken together, form the total cost of providing a sustainable level of service. By monitoring how each cost component affects the overall costs of the service, governments, investors, donors, service providers and service authorities can plan for sustainable and appropriate levels of service and keep service levels high.
The main financing sources to recover the costs of WASH service delivery are (a combination of) taxes levied by national or regional governments, transfers made by development partners, and tariffs or own contributions paid by users of a service. Establishing a WASH sector on a financially sustainable basis requires finding the right mix between these three financing sources, often referred to as the three ‘T’s’. Less common in the WASH sector are forms of repayable financing from commercial lenders, including micro-finance institutions.
Sufficient structural, local financial resources to invest in improving WASH services and to finance the operation and maintenance of existing WASH services are available through: the local financial sector, the local business sector, improved local (and national) government spending on WASH, and improved targeting of this spending within the sector.
There is growing awareness that effective WASH service provision can be driven by market forces, whether these services are provided by government, civil society or private sector participants. People realise that free services do not exist; costs have to be covered one way or another if the service is to be durable. Providing grants as a single tool for poverty alleviation has not worked, as they fail to create incentives for people, businesses and governments to use their own resources and creativity.
Furthermore people, companies and governments are starting to appreciate that investment costs are covered as much as possible through local funding sources e.g. household contributions, recurrent tax revenue, fee systems and loans from local banks and micro-finance institutes. Proven successes in using instruments such as micro finance, guarantees, or cross-cutting subsidies provide examples and inspiration to rely more on local finance and the ability of people to become customers instead of recipients of support. There is a growing recognition of the crucial role of the informal sector and small enterprises in the provision of WASH services. Water and nutrient resource recycling is slowly but steadily gaining economic momentum, the next stage will be to convert the recycled resource into a source of income.
The ongoing decentralisation through which the process of dispersing decision-making governance closer to the people (from national to more local level) provides opportunities for local communities and consumer groups to be more engaged in decision making by the local authorities, including influencing budget allocations.
The continuity and up scaling of WASH services pose a serious challenge in developing countries: governments lack funding and donor funding is not sufficient to serve all communities and is decreasing. Governments, civil society and communities are struggling with issues such as decentralisation or inadequate fund allocation to invest, operate and maintain and with cost recovery. Few countries have realistic, operational policies and strategies to enable sustainable financing for increased WASH service coverage, particularly for the poor.
However, local resources are available, e.g. local financing and local labour (entrepreneurs), but involvement of the financial sector in the WASH service provision is minimal. Local banks and micro finance institutes hardly provide loans for WASH to the poor. The involvement of the local sector and small enterprises is often informal, not regulated. Financial products to support and improve these local enterprises’ involvement in the sector are rare.
WASH not only suffers from a lack of funding, but also from a lack of attention from governments. Often the focus is on WASH coverage in urban areas, with little attention for rural and peri-urban areas. Most rural communities lack resources to invest in drinking water supply, and do not always see the importance of investment in sanitation and hygiene improvements. Revenues of existing systems in the urban areas are rarely used for reinvestments in the extension of WASH coverage to non-urban areas or for maintenance.
In short: in government policies and budgets, sanitation has a low priority, water interventions focus mostly on “easy to serve” geographical areas, and the integration of WASH is lacking.
It is effective to build a financial approach on a variety of strategies to promote mechanisms and introduce models that create incentives for various stakeholders to contribute to the financing of WASH improvements.
The main financial principle of the WASH alliance, for instance, is Local Finance First. The alliance will work towards models in which WASH investment costs are covered as much as possible through local funding sources e.g. from consumers, public sector and private investors, through household contributions, recurrent tax revenue, fee systems, decentralized funds and loans from local finance institutions like banks and micro finance institutes. Operation and maintenance of WASH services are always paid through local financing instruments.
Market forces will be recognised and stimulated. Small local enterprises will have the opportunity to flourish by properly addressing water and sanitation in a locally-regulated business sector.
The WASH alliance will use a rights-based approach. Through local lobby, advocacy and budget tracking, communities will be empowered to express their needs and demands to their local, regional and national authorities for adequate budget allocation and use. Civil society organizations will be supported to translate needs and demands at grass roots level into advocacy messages to influence government policies and budget allocations, and function as a watchdog to hold WASH authorities and the business sector accountable.
|Three levels of WASH service interventions have 3 different approaches:
Household level WASH services are solutions that are part of the assets of a household. Examples are household latrines, household water filters, soak-away pits, or individual rainwater harvesting systems. For these investments, a social marketing approach will be promoted, aimed at three aspects:
Community level WASH investments are solutions that are owned and managed by communal management structures and accessible to, as well as used by, all community members. Examples are public boreholes, hand dug wells, spring capitations and storage tanks (with possible distribution systems and taps / standpipes) or community managed public toilet and bathroom facilities. “Institutional” systems for schools and rural clinics are included in this category.
For hardware investments in such systems, especially in rural areas, it is foreseen that local funds will be inadequate. Communities will be capacitated, facilitated and empowered to enhance adequate budget allocations and use. Advocacy, local lobby and budget tracking is used for increased fund allocation and better targeting by the government, together with strategies for creating local fund mechanisms. Initial hardware investments can be subsidized but always in collaboration with local contributions.
Under private service WASH we understand a large variety of WASH services for which clients have to pay to use the service. Examples are water kiosks, toilets at markets and bus stations, water trucks, and latrine pit emptying services. They are owned and managed privately, as a business, and investment costs need to be recovered from revenues. This type of service provision is usually found in urban and peri-urban areas.
By means of a business support programme, private initiatives of individuals and businesses are stimulated that combine social goals (increasing access to proper WASH services) and financial goals (earning revenues that will create financial sustainability of the business while providing returns on investment). Support can include strengthening and expansion of a network of independent local business developers and local financers, development of financial instruments (e.g. loan guarantee funding), training and legal advice.
Criteria for sustainability
- Projects are substantially and progressively co-financed by local stakeholders. Especially the share from (local) private investors is valued positively but also financing through tax revenues is seen as sustainable.
- Local entrepreneurs and companies take up an increasing and serious role in the provision of WASH services.
- Project and initiatives are based on a business (plan) approach, including operation, maintenance and depreciation, preferably with positive financial results within the project period. Payments by the end user are based on market research on paying ability and life cycle costs.
- After the project period WASH service provision can be sustained based on local finance, meaning based on payment for services by the end-users or tax revenues.
- Smart Finance Solutions This booklet on Smart Finance Solutions, like its equivalents on water and sanitation, gives examples of how different financial mechanisms are being used to finance water, sanitation projects and small local businesses that contribute to reaching MDG-7.
- Akvopedia – Finance Portal
- Dutch WASH Alliance – Financial Sustainability
- Aublet, A.S. and Schmid, R., 2012. Financial sustainability of WASH services. (28th AGUSAN Workshop (2012). Briefing note). SDC, Eawag/Sandec, Helvetas, Skat.
The Dutch WASH Alliance: An alliance of six NGOs
The Dutch WASH Alliance (DWA) is a consortium of six Dutch NGOs (Simavi, Akvo, AMREF Flying Doctors, ICCO, RAIN and WASTE) working together towards a society in which everybody has access to sustainable water, sanitation and hygiene in developing countries. In this alliance, we intensify our already ongoing cooperation and coordination in order to further increase effectiveness and efficiency and learn from each other.