Hello! Welcome to the module on institutional and financial options for sanitation service delivery. My name is Sophie Trémolet and I am a Senior Economist in the World Bank Global Water Practice. In this module, we will discuss how sanitation services are provided and how they can be financed. There is no “one-size” fits all in this area. Understanding who is in charge, where they get funding from and how they could mobilize additional financing is essential to start identifying solutions for improving services. The public sector is usually responsible for ensuring that sanitation services are provided. With this comes related responsibilities for making policy: to define what services need to be delivered, and for regulation: to ensure that those services which need to be delivered, do indeed get delivered, and are delivered at a fair price. Policy functions entail preparing policy documents, norms and standards and establishing service delivery targets, which reflect how much funding is going to be allocated to sanitation services overall, and by the public sector in particular. For example, policies need to state where funding for sanitation is going to come from and what service levels need to be provided. Economic regulation entails ensuring that tariffs are set at a level that allows service providers to be financially viable, whilst incentivizing them to deliver better services at a fair cost, including to the poor. Environmental and public health regulation is also needed to ensure compliance with standards. The public sector may also be in charge of providing the services themselves, but this will vary depending on the nature of the urban sanitation services along the sanitation value chain and on whether the public sector has the capacity to deliver such services. A common recommendation is to keep policy and regulatory functions separate, so as to maintain “checks and balances” in the system and avoid conflicts of interest. For example, if a municipal utility is providing sanitation services, it would be preferable for this utility to be corporatized and to operate under a clear service delivery contract with the municipality, so that it is not the same department that sets service delivery objectives that is also in charge of delivering on these objectives and/or in charge of verifying that these objectives have been met. Sanitation services can be provided either by public or private service providers. In developing countries where sewerage coverage is limited, which is the case in most of Sub-Saharan Africa and in much of Asia, the private sector has stepped in to provide services. This private sector includes small artisans building latrines or small latrine emptying operators, who either provide manual services or operate one or two emptying trucks. Many of these private service providers operate in a regulatory vacuum, however. To maximize the efficiency from private sector participation and ensure that services are delivered in line with public policies, structuring these markets will call for more regulation. This could entail issuing them with licenses for example to ensure that emptying trucks conform with standards or do not apply extortionate charges, or entering into public-private partnership contractual arrangements, also referred to as PPPs. The latter are particularly applicable when the private operator is requested to manage a public sector asset, as this would be the case for utilities managing a sewerage network or a wastewater treatment plant, or even for a small operator in charge of managing public toilets, for example. For such cases, different PPP contracts can be applied, ranging from a service contract which only entails minimum delegation of responsibilities to the private operator to a concession contract, where the private operator is in charge of investing in new assets, as well as operating and maintaining them during a contractual period of time, before transferring them back to the public sector. Sanitation services, as is the case for water supply services, generate a number of costs that need to be recovered. These include: the costs of operating and maintaining the services, what we refer to as O&M costs; the costs of capital maintenance, for large repairs and for asset rehabilitation; the costs of investing in new assets; the financial costs associated with borrowing for such investments, and any taxes associated with the provision of such services. To cover these costs, funding for sanitation can only ultimately come from three main sources, which are commonly referred to as “the 3 Ts”. These are: tariffs: that’s a short-hand for referring to funds that are directly generated by households. This could take the form of payments to a service provider for a service rendered, for example a sewerage tariff, or direct payments by households themselves, for example to build an on-site sanitation facility on their premises; taxes is a short-hand to refer to the funds provided by tax-payers via the government system. These can include capital investment subsidies, the provision of free-land to site, an asset, or grants used for demand-creation, as we will discuss in more detail later. Transfers is a short-hand to refer to voluntary contributions and grants, which may come from foreign governments in the form of Official Development Assistance or ODA, or local and international NGOs and philanthropic foundations, or even from migrant workers via remittances. These are three sources of what we call “funding for the sector”, meaning the money that is allocated to cover the costs of service provision. But sanitation sector investments are very lumpy; that means, quite significant in size. For example, when a household builds a latrine, the cost of this investment can be equivalent to their annual income, or even double that. Most utilities in developing countries would not generate enough cash surplus to pay for investments in sewerage networks up-front. As a result, borrowing for sanitation, i.e. mobilizing what we call repayable finance, is essential to enable these lumpy investments to take place. Such repayable financing can come from product suppliers, microfinance institutions, commercial banks that lend at market rates, or the so-called development banks that lend on concessional terms, i.e. conditions that are more advantageous than market conditions for the borrowers. How these sources of funding and financing are combined to pay for sanitation depends on government policy and on the ability of regulatory institutions to enforce those policies, by setting fair tariffs, for example. Some investments generate public good benefits: this is commonly cited as a reason to use public funding for sewerage networks and wastewater treatment. By contrast, most countries consider investments in on-site sanitation systems to be private investments, which should be made by those who directly benefit, the households themselves. Such commonly encountered policy principles can lead to misallocations, however. In Dar es Salaam, back in 2012, it was found that 99% of public sector financing was used to pay for sewerage systems and associated wastewater treatment which, at the time, served only 10% of the city’s population. The remaining 90% of the population, including of course the poorest, had to rely on their own resources to build latrines, at a cost that vastly exceeded the charge for getting a sewerage connection. However, sewerage connections were only accessible for richer people living in areas already covered by the sewerage network. The Sustainable Development Goals aim to achieve access to adequate and equitable sanitation and hygiene for all and end open defecation, paying special attention to the needs of women and girls and those in vulnerable situations. As network-based solutions are expensive, many cities will need to deploy alternative technical solutions to sewerage, such as on-site sanitation systems with provisions for the adequate management of the entire sanitation chain, as discussed in more detail in other modules of this course. Given these challenges, public funds, taxes and transfers, will need to be used in a smarter and more catalytic manner going forward. There are lots of reasons why using public funds to support sanitation adoption can be fully justified. The overarching reason is that there are significant public benefits in universal sanitation coverage. If a household builds and uses a latrine, it won’t stand to benefit fully from its investment unless everybody else around that household also uses one. So how can public funds be used better for urban sanitation? They can be used: to create demand for the service by investing in demand-creation activities and behavior change campaigns; to provide partial subsidies towards the costs of investment, such as for household investments in on-site sanitation, to support the connection of poor households to existing sewers, and/or for investments in the downstream systems that are needed to collect and treat the faecal sludge or the wastewater. To be more efficient and better targeted, these subsidies would ideally be provided based on verified actual results. Public funds can also be used to facilitate access to finance for households, small businesses or even utilities that need to borrow in order to invest but are unable to do so for a variety of reasons. For example, grants can be provided to help educate lenders and borrowers on what it means to borrow for sanitation. Concessional financing can be blended with commercial financing, to extend tenures (the length of time one borrows for), or to provide credit enhancement in the form of guarantees. If one wants to improve how financing for sanitation is allocated, it is essential to start by understanding how much is spent on sanitation services, and by whom. This is not straightforward, however, as funding and financing for sanitation are channeled in many different ways to the sector. In most cases, there is not a single budget line dedicated to sanitation. Building a graphical representation of the sector such as this example can help with visualizing not only who is in charge of what, but also how funding flows between these different actors. This can then provide a basis for estimating the volumes of funding that are currently going into sanitation and identifying ways to mobilize funding for the sector. In this module, we have talked about how sanitation services are organized and how they can be financed. Key take-away messages are as follows: One size does not fit all; there are many different ways to organize the delivery of sanitation services. A key principle would be to maintain a separation between policy, regulation and service provision functions, so as to ensure checks and balances. Sanitation services can be provided by public or private service providers. Bringing in the private sector requires clear regulatory arrangements, via licenses or contracts for service provision. Sanitation services can be funded from a variety of sources. However, public funds need to be spent in a smarter and more catalytic manner, to ensure that the Sustainable Development Goal of universal access to sanitation becomes a reality.
