Financial Sustainability of WASH Services

Considerable effort has been done towards scaling-up coverage of WASH services in recent years. Sustaining these services in the long-term is crucial. Supplying water as well as providing sanitation and hygiene services incur financial cost not only with regards to initial capital investments, but also during operation and maintenance, rehabilitation, upgrading and expansion phases. Financial sustainability focuses on how the governments, donors, civil society and private sector that are responsible for WASH services can ensure revenue streams to cover all costs (AGUASAN 2012).

The most important aspect in financial sustainability is the planning process. With initial capital expenditure the service level raises. However if maintenance and service security is not planned in terms of costs and responsibilities, the service level drops in the long-run and leads to disappointment (IRC 2010). Therefore, cost and finance planning must be an integral part of ensuring sustainability, and the elements of the following Financial Sustainability Framework have to be considered for sustainable finance planning (AGUASAN 2012).

Adapted from AGUASAN (2012)

For sound finance planning the following aspects have to be considered and evaluated in advance:

This framework has been elaborated by the 43 participants of the AGUASAN workshop 2012 (AGUASAN 2012) that are professionals in the field of planning for water supply and sanitation management as well as more generic development specialists. Throughout the continuous learning process, the workshop participants came up with six key elements for the financial sustainability of WASH services(see figure and table below).

Start by evaluating your existing system – drawing a table of current costs, responsibilities and financing gaps – and move on to a future version of an improved system. The steps of the framework serve a realistic assessment of your system and the identification of opportunities.

Allocating costs and financing gaps of WASH services. Source: AGUASAN (2012)

The life-cycle cost approach, cost-benefit analysis and strategic finance planning (SFP) described below will help you in evaluating all costs.

Life-Cycle Cost Approach

Adapted from WASHCOST (2011); IRC (2011); FONSECA et al. (2011)

Which costs have to be considered for making WASH services last? The life-cycle cost approach is a methodology for monitoring and costing sustainable water, sanitation and hygiene (WASH) services by assessing costs and comparing them against levels of service provided. WASH services are expected to last. However, analysis in Africa and India has shown that there is little cost planning done in the service chain. This results in service levels dropping a certain time after project implementation. The life-cycle cost approach is based on the service delivery approach and aims at profound finance planning, taking into account all future costs (WASHCOST 2011; FONSECA et al. 2011).

When priority is given to capital expenditure only and recurrent costs get little attention in the cost planning, coverage rates stagnate at some point.Therefore the financial system has to ensure replacement of infrastructure when it is broken as well as extension of delivery systems when demand increases. Life-cycle means that costs follow a certain cycle and each cost component has to be considered in the planning – the costs that are needed to sustain, repair and replace a water (or sanitation) system throughout its cycle of wear, repair and renewal so it provides a service forever (IRC 2011).

Overview of Costs

Below you see an exhaustive overview of the costs to be considered to make water and sanitation solutions last, according to the life-cycle cost approach (adapted from IRC 2011).

• Capital expenditure: Initial costs of putting new services into place: “hardware” such as pipes, toilets and pumps and one-off “software” such as training and consultations.
• Cost of capital:The cost of borrowing money or investing in the service instead of another investment opportunity. It also includes any profits made by the service providers not reinvested. It has a direct impact on the ability to maintain a service financially.
• Operation and maintenance expenditure:Routine maintenance and operation costs that are crucial to keep services running, e.g. wages, fuel, or any other regular purchases. Neglect has long-term consequences for service delivery, e.g. expensive capital (maintenance) expenditure and/or service failure.
• Capital maintenance expenditure:Occasional large maintenance costs for the renewal, replacement, and rehabilitation of a system. These essential expenditures are required before failure occurs to maintain a level of service and need to be planned in. This is one of the most frequently “forgotten” costs.
• Expenditure on direct support:Pre and post-construction support costs not directly related to implementation, e.g. training for community or private sector operators or user groups. These costs are often forgotten in rural water and sanitation estimates but are necessary to achieve long-term functionality and scale.
• Expenditure on indirect support:The costs of planning and policy making at governmental level and capacity building of professionals and technicians. These costs have a direct impact on long-term sustainability.

Planning and identifying life-cycle costs is an essential aspect of a ‘service delivery approach’ geared towards achieving sustainable services at scale (WASHCOST 2011). By understanding how the different cost components affect the overall costs, finance planning can counteract interruptions of service provision and avoid backslides to use of unsafe water sources and environmental risks through open defecation (IRC 2011).

Valuing Costs and Benefits

Adapted from HUTTON (2012)

The objective of valuing costs and benefits is to understand their relation and compare them in monetary units, in order to utilise these operationalised benefits for better advocacy and decision-making.

What are benefits of improved water and sanitation?

• Health benefits:health care cost saving, health-related productivity, lower mortality-rates
• Environmental benefits:less water pollution, land use changes, energy/carbon/nutrients recovery
• Social and private benefits:more dignity, privacy, comfort, security, gender equality, better physical access
• Broader economic benefits:tourism revenues, business benefits, income generating water and sanitation markets

There are several methods how the benefit-cost analysis can be used as an economic tool for advocacy and decision-making:

• Benefit-cost ratio: evaluating the ratio by which benefits exceed costs comparing actual versus optimal conditions (on a time horizon of 20 years).

• Internal rate of return: annual rate of return on an investment.

• Payback period: after how many years do net benefits become positive?

Strategic Financial Planning (SFP)

Adapted from GWP (2008) and OECD (2009)

SFP aims at making the financing of infrastructure and services more predictable. It combines planning and financing – which are typically done separately – to make spending ambitions more compatible with available financial resources. Equally, financing strategies can be tailored to what is actually needed, which improves the prospects of getting funding (GWP 2008).

The frameworks objectives are:

• To provide a structure for policy dialogue, involving all stakeholders.
• Illustrating long-term impacts of set targets.
• To link sector policies with projects.
• To enable external financing through transparent and clear finance planning (OECD 2009).

General elements of Strategic Finance Planning:

• Building scenarios (≥10-20 years) of investment and service planning for the sub-sector (e.g. water supply and sanitation, irrigation, wastewater), including estimated costs for capital investment and recurrent operation and maintenance.
• Projecting feasible sources of finance for both the initial capital investment and the recurrent costs of operating services.
  Tariffs and other user charges, subsidies from the government, contributions from NGOs, loans, private equity, loans on concessional terms from international financing institutions (IFIs), other sources (use only project finance that is likely available)
• When finance gaps appear, a process of iteration takes place, involving revisions to both the spending and financing scenarios. Spending plans are adjusted to make them more realistic (like: less ambitious targets, more cost-effective options, demand management programmes, more attenuated implementation periods), while more rigorous assumptions are made about financing sources (higher tariffs, greater engagement with donors and IFIs, use of financial engineering and innovative financing sources and more.

This iteration goes on for several rounds until the spending scenarios are compatible with feasible sources of finance (GWP 2008).