1. Local Financing Mechanisms
for WASH Services
Chapter 9
Economic and Financial Instruments for
IWRM
Training Manual
Prepared by: C. Fonseca, R. Cardone & D. Casella
IRC International Water and Sanitation Centre, Delft
Slides edited by Meine Pieter van Dijk UNESCO-IHE
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Learning Objectives
At the end of this session, the participant will be:
• Aware of the importance of, and constraints to,
the development of local financing
mechanisms for sustainable, pro-poor WASH
services
• Conversant with role of different actors to
access local financing mechanisms
• Able to identify the elements of an enabling
environment required for effective financing
mechanisms
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Part I: Introduction
Why do financing mechanisms
and cost recovery matter for local
WASH services?
The big picture
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Local Finance Mechanisms for WASH
Services
The goals of local finance mechanisms in the
WASH services sector are to ensure:
– Sufficient revenue to deliver services in long-term
– Sufficient revenue to support improved quality of
services
– Sufficient revenue to extend service coverage,
particularly to low-income consumers
– Better use of scarce water resources and
management of waste water disposal to conserve
the natural environment
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Elements of Local Finance Mechanisms
Financial and administrative steps required for establishment of
equitable, financially viable and sustainable WASH services as
part of the process of assessing, planning, implementing,
monitoring and adjusting services delivery means:
• Setting cost recovery targets
• Analysing ability and willingness to pay
• Calculating affordability
• Setting service objectives
• Calculating the basis for charging
• Tariff setting
• Billing and collection
• Book keeping
• Financial control and monitoring
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What is meant by “cost recovery” ?
A simple definition: recovery of all costs associated
with a water system, programme or service to
ensure long-term sustainability
BUT, cost recovery is more than money for capital costs and
O&M. It is also about institutions and processes:
• Considering the costs to maintain the institutions and support
services for service sustainability and increased coverage
over time and space (scaling up)
• Institutional arrangements and development of capacities to
put into practice strategy adapted to the needs of the poorest
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II – Some actors for Financing
of Local WASH Services
• Funds: Pooled resources and revolving funds
slide 12
• Microfinance institutions for water and sanitation
slides 13 + 14
• Small towns and innovative finance slides 15 -16
• Domestic private sector slide 17
• Utilities slide 18
• and a summary slide 19
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Financing options for Local WASH Services
• a revolving fund is a pool
of capital created and
reserved for specific
activities, e.g. latrine
construction, water system
rehabilitation
• money borrowed is
returned to the fund for
reuse in similar activities
by other fund contributors.
Pooled resources and revolving funds
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Financing options for Local WASH Services
• Mainly for financing small
individual activities, such
as rainwater harvesting,
maintenance materials,
and help the poor to afford
a connection.
• Financing important
capital investments
through micro credit is
difficult due to the small
amount of money and the
short term nature of the
credit provided.
Micro-credit is the principle of giving small loans to the very
poor to help them generate an income of their own
(Wheat, 1997).
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• microfinance for household connections
• micro-project finance for community-led or larger investments
Options for local WASH services: micro finance
Microfinance means literally that the amount of finance
provided is small, and it has been defined as the provision of
diverse financial services, including savings and insurances as
well as credit, to low-income people
“building inclusive financial systems for the poor” is
increasingly used as financial institutions providing financial
services to the poor become more diversified and cannot be
described solely as Microfinance institutions (MFIs).
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Small Towns and innovative WASH finance
Mechanisms at the Municipal & Utility Level
Utility a dept of municipality,
with low expectations
for cost recovery
How can utilities become
commercially viable ?
Municipality
relations with utility
Partial credit guarantee
Debt/equity swap
Municipal bond
Municipality
Credit enhancement
Tariffs
Public-private partnership
Municipal credit pool
Focus on consumers/citizens,
not the needs or interests of
customers
How to address coverage for
the poorest in slum areas
and small towns?
Utility relations with
customers
Non-existent
How to leverage
local liquidity?
Utility relations with
local cap markets
Fiscal intercept
Partial risk guarantee
Connection subsidy
Technical assistance
Microfinance
Sinking fund
Revolving fund
Lease
Working capital loan
Traditional approach
Innovations in the
Urban Setting
Finance
Mechanisms
Utility a dept of municipality,
with low expectations
for cost recovery
How can utilities become
commercially viable ?
Municipality
relations with utility
Partial credit guarantee
Debt/equity swap
Municipal bond
Municipality
Credit enhancement
Tariffs
Public-private partnership
Municipal credit pool
Focus on consumers/citizens,
not the needs or interests of
customers
How to address coverage for
the poorest in slum areas
and small towns?
Utility relations with
customers
Non-existent
How to leverage
local liquidity?
Utility relations with
local cap markets
Fiscal intercept
Partial risk guarantee
Connection subsidy
Technical assistance
Microfinance
Sinking fund
Revolving fund
Lease
Working capital loan
Traditional approach
Innovations in the
Urban Setting
Finance
Mechanisms
Features of innovation in financing mechanisms at the municipal level
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Innovative WASH Finance in Small Towns
Internal and external factors to support utility transformation
How can utilities become commercially viable?
External factors Internal factors
Government support Financial and credit management
Autonomy Management quality/capacity
Understanding of external risks Operational performance
Understanding of economic base Strategic planning and internal
transformation
Human resources and utilisation of private
sector
Customer relations
Source: WSP-Af, forthcoming report on market based mechanisms for urban utilities.
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Innovative WASH Finance in Small Towns
Mechanisms used by the domestic private sector
Features of innovation in financing mechanisms by the domestic private sector
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Utilities and innovative finance in small towns
How to extend coverage in slum areas and small towns?
Features of innovation in financing mechanisms by (poor) users
Also, municipalities and utilities can leverage local liquidity through:
• municipal & utility bonds
• household & community savings pools and self-investment
• utility bill surcharges and cross subsidies for pro-poor services
funds
See: Orangi Case Study, page 11, Chapter 10
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Innovative WASH Finance in Small Towns
Service Level availability at an affordable cost:
Service Levels provided by user fees (tariffs), community-led schemes, connection
subsidies, output based aid & microfinance depends on a range of factors:
• initial water quality
• location of sanitation relative to water supply points
• type of technology adopted by the community
Demand-led approaches can reduce the unit cost of providing a services and unit
costs charged to consumers.
Ways to support this:
• Develop effective supply chains for sanitation products and promote demand
(more effective than household subsidies)
• Microfinance to start up activities required to provide sanitation services, such as
providing construction materials, emptying pits and treating sludge
• Small scale private sector has ability to tap markets for sanitation or hygiene-
related products such as soap, toilet construction, toilet parts, toilet cleaning and
faecal sludge management
• Start-up activities require credit – but service providers can make a decent profit
so there is incentive to create demand and ensure supply
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Guiding Questions for Finance Mechanisms for
Community Managed Systems
Key issues to discuss
Which costs must be covered?
Which funds should be used?
Which tariffs should be used?
How to collect contributions?
When is appropriate to collect
contributions?
What to do with ‘bad’ payers?
Where should money be deposited?
What should be taken into consideration
to administer the funds?
Who should administer the funds?
How to pay staff responsible for O&M?
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III Key elements for an enabling environment
for increased flows of local finance
Level Element
Policy level •Political support
•Institutional & Legal frameworks
•Regulation
•Transparent processes and practices
Intermediate level •Decentralisation of fiscal revenues
•Support for local priority identification through transparent, pro-poor
participatory processes
•Capacity building for good local governance
•Support for local supply chains & market development
•Flexibility in technology options and management & financing
arrangements
Community level •User awareness raising on savings, funds management
•Systems based on social capital, mutual trust & social pressure
•Collaboration with and support for (I)NGOs, local champions to
reach the poorest clients
•Transparent fund management processes and practices
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Main constraints to innovative local financing
Micro level
• Additional finance is not always
the solution
• Limited outreach
• Limited product diversification
• Financial sustainability of MFIs
• Role & capacity of intermediate
level in scaling up community
innovations
Macro aspects
• Longer timeframes, combination of supply-side & demand-side
approaches required
• New risks require holistic interventions
• Innovative financing mechanisms still anecdotal, context specific
• Innovation is not the same as pro-poor
Meso level
• Long route from approval
to disbursement, to impact
• Integrate facilitation skills &
support throughout pilot
programmes to avoid creating
islands of success
• Making finance more
accessible
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Opportunities
• Opportunities for leveraging resources
• Strategic partnerships to develop scalable solutions
• From charity to business
• Increased competition
• Attracting private finance
• Diversification
• Better urban operating environment for service
provision via SSIPs
• The development of sanitation supply chains
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Lessons Learnt
• Promote flexible arrangement & structures (management,
service delivery, payment, etc) and service levels for
consumers - calculate an appropriate and equitable tariff
and billing structure.
• As part of the design and implementation process, establish
& promote sources of local finance to help users pay for
improved levels of service.
• Willingness and ability to pay for water services should be
assessed, not assumed.
• Subsidies can be more effective if used to increase access
to water supply and sanitation - for example subsidising
connection fees.
