Economic and Financial

Instruments for IWRM

Local Financing Mechanisms for WASH Services

Goal and objectives of the session

At the end of this session, participants 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

Outline presentation

Introduction: the big picture on water needs

Local Finance Mechanisms for WASH Services

Actors for Financing of Local WASH Services

Key elements for an enabling environment for increased flows of local finance

Introduction

Local governments, development agencies and communities in different parts of the world are struggling with the issue of decentralisation and cost recovery for public services such water and sanitation.

Few countries have realistic policies, operational strategies or plans for cost recovery and sustainable financing for increased service coverage, particularly for the poor.

This chapter explores local mechanisms as an innovative solution to be considered.

Need to increase water coverage (i)

Need to increase water coverage (ii)

Need to increase sanitation coverage (i)

Need to increase sanitation coverage (ii)

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

Elements of Local Finance Mechanisms

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

What is meant by “cost recovery” ?

Recovery of all costs associated in a water system, programme or service to ensure long-term sustainability.

Cost recovery is more than money for capital costs and O&M. It is also about institutional continuity, and strengthening (including capacity building)

Some actors for Financing of Local WASH Services

Funds: Pooled resources and revolving funds.

Microfinance institutions for water and sanitation.

Small towns and innovative finance.

Domestic private sector.

Utilities.

Financing options for Local WASH Services (1)

Pooled resources and revolving funds.

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.

Financing options for Local WASH Services (2)

Micro-credit is the principle of giving small loans to the very poor to help them generate an income of their own

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.

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

microfinance for household connections.

micro-project finance for community-led or larger investments

Small Towns and innovative WASH finance

Mechanisms at the Municipal & Utility Level

Features of innovation in financing mechanisms at the municipal 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

Mu

nic

ipal

ity 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-existentHow to leverage

local liquidity?Utility relations with local cap markets

Fiscal intercept

Partial risk guaranteeConnection subsidy

Technical assistanceMicrofinanceSinking fund

Revolving fund

LeaseWorking capital loan

Traditional approach Innovations in the Urban Setting

FinanceMechanisms

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

Mu

nic

ipal

ity 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-existentHow to leverage

local liquidity?Utility relations with local cap markets

Fiscal intercept

Partial risk guaranteeConnection subsidy

Technical assistanceMicrofinanceSinking fund

Revolving fund

LeaseWorking capital loan

Traditional approach Innovations in the Urban Setting

FinanceMechanisms

Innovative WASH Finance in Small Towns

How to extend coverage in slum areas and small towns? Features of innovation in financing mechanisms by (poor) users

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?

Key elements for an enabling environment for increased flows of local finance

Level Element

Policy level Political supportInstitutional & Legal frameworksRegulation Transparent processes and practices

Intermediate level

Decentralization of fiscal revenuesSupport for local priority identification through transparent, pro-poor participatory processesCapacity building for good local governance Support for local supply chains & market developmentFlexibility in technology options and management & financing arrangements

Community level

User awareness raising on savings, funds management Systems based on social capital, mutual trust & social pressureCollaboration with and support for NGOs, local champions to reach the poorest clientsTransparent fund management processes and practices

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

Macro aspects • Longer timeframes, combination of supply-side & demand-side approaches • New risks require holistic interventions

Meso level • Long route from approval to disbursement, to impact• Making finance more accessible

Opportunities for local financing

• Opportunities for leveraging resources

• Strategic partnerships to develop scalable solutions

• From charity to business

• Increased competition

• Attracting private finance

• Diversification

• Development of sanitation supply chains

Think about it

In your country are there examples of microfinance for local WASH services? If not, can you give examples of microfinance schemes, and how they are structured, connected to initiatives in other sectors?

End

Well done! You have gone through the training manual.

Just remember a few things: IWRM is a process which requires that we are aware of our fellow beings; and water is life.

Everything we do needs our entire responsibility and deep exploration of these two key ideas.

'Water is life' by Alique van Nes