Module 13: Financing (cost recovery)

13.5. What are the key issues?

• Payment mechanisms
• Willingness to pay
• Financial sustainability

A. Payment mechanisms

The forming of an appropriate and feasible payment scheme is an essential part in cost recovery policy because it ensures the collection of the necessary financial amounts.

As a part of the initial, detailed poverty assessments and willingness-to-pay studies, municipalities should explore factors affecting payment and, where possible, design mechanisms to address constraints. The analysis should identify the reasons for low-cost recovery and the constraints affecting service provision and access.

The main objectives of a payment mechanism can be:

– frequency of payment (including seasonal variations in service use and payments);

– flexibility of payment conditions (including penalties and enforcement mechanisms); and

– options available in a time of crisis (buying drinking water, using natural sources for washing and so on)

Service access of poor households is frequently affected by the capacity each has to make payments in the form, at the time and at the place required by the service provider. Continued access can be threatened if there is no flexibility for poor households to take on an appropriate and feasible payment scheme.

This flexibility may be necessary to pay tariffs and consideration might be given to methods of:

– delaying/spreading payments during difficult times;

– adjusting monthly/quarterly payments to shorter timeframes, which are more applicable to the way the poor manage their money; and

– reducing the constraints and costs of making the payments themselves.

Where connection costs are passed on to users, it may be necessary to improve the capacity of the poor to pay by arranging financing options.

This might include mechanisms for:

– delaying/spreading payments by paying in instalments at affordable rates and agreed intervals;

–establishing the possibility for householders to offset some costs by providing their own labour at the household or street level; and

– establishing or linking into existing micro-credit initiatives.

B. Willingness to pay

With regard to willingness to pay, experience shows that willingness to pay only extends to what users see as a benefit or priority and that this is not usually sufficient to pay the full cost of the systems, including trunk sewers and treatment.

Complementary financing will always be necessary to ensure the sustainability of services. This may be done through a variety of taxes. However, tax collection in many developing countries is not efficient or effective and, moreover, a large part of the population does not pay taxes that can be used for sewage management (those living in low-income urban areas, for example).

The key features to success in this willingness to pay are:

1. Community members make informed choices on:
• whether to participate in the project;
• technology and service level options based on willingness to pay – these based on the principle that more expensive systems cost more;
• when and how their services are delivered;
• how funds are managed and accounted for; and
• how their services are operated and maintained.

2. An adequate flow of information is provided to the community and procedures are adopted to facilitate collective action decisions within the community and between the community and other actors.

3. Governments play a facilitative role, set clear national policies and strategies, encourage broad stakeholder consultation and facilitate capacity building and learning.

4. An enabling environment is created for the participation of a wide range of providers of goods, services and technical assistance to communities, including the private sector and NGOs.

There is a range of problem areas around financing that remain to be resolved and need to be addressed during project implementation. These include:

– Since willingness to pay does not often extend to downstream costs, what weight should be given to downstream effects in service selection and user consultations?

– How are downstream costs to be covered if beneficiaries are unwilling to meet them?

– In general, how are the economic benefits of externalities to be sustained financially?

– How can these approaches be applied when considering more than a single sector, as is necessary when planning urban environmental sanitation for a city?

– How can users’ priorities be reconciled with broader city needs and priorities, and service interactions and dependencies?

– Should the demand-based approach be the preferred method of arriving at the service levels, service mix, user contributions and so forth?

– What other alternatives exist that might be more cost-effective, sufficiently precise for the intended purpose or more appropriate to developing country institutional capacity?

C. Financial sustainability

Financial sustainability of the infrastructure remains a major concern. Too many investments and efforts fail to lead to truly functional programs because they are not viable financially. This is the main “limiting factor” in the achievement of substantial improvement.

Finance raised from water use charges or pollution fees should not be considered as taxes and entered into the national budget. Rather they should be earmarked for water quality management initiatives in the river basin or region that generated the funds, such as co-financing wastewater treatment facilities.

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