Financing Non-state Providers of Sanitation - GTZ

8/2/2019 Financing Non-state Providers of Sanitation - GTZ

http://slidepdf.com/reader/full/financing-non-state-providers-of-sanitation-gtz 1/85

Financial Services for the Promotion

of Poverty-Oriented Water Supply and

Sanitation in Subsaharan AfricaPart 1: Desk Study

Brigitte Biesinger | Maren Richter

F i n a n

c i n g

S e r i e s



DESK STUDY POWS&S FINAL REPORT (16-03-2007) i

Table of Contents

Executive Summary .............................................................................................................. iv 1 Introduction .........................................................................................................................1

1.1 Background ................................................................................................................1 1.2 Objectives of the Desk Study .....................................................................................3 1.3 Definitions...................................................................................................................4 1.4 Why is Financing POWS&S Different?.......................................................................7

2 Review of Available Literature and Summary of Main Topics........................................9

3 Current Situation and Major Development Trends in Poverty-OrientedWater Supply and Sanitation (POWS&S).........................................................................12

3.1 General Situation in View of the MDGs....................................................................12 3.2 Typology in Water Supply ........................................................................................14 3.3 Typology in Sanitation..............................................................................................16 3.4 Technical Challenges...............................................................................................17 3.5 Politics, Regulatory Framework and Reforms ..........................................................19 3.6 Environmental Aspects.............................................................................................20 3.7 The Role of Subsidies in Water Supply and Sanitation............................................21 3.8 Development Trends ................................................................................................22

4 Role and Importance of Small-Scale Service Providers and Type of Activities inPOWS&S.............................................................................................................................23

4.1 Water Supply............................................................................................................23 4.2 Sanitation .................................................................................................................26 4.3 Households as Small Self-Service Providers – HSSPs............................................27 4.4 Private Small Service Providers - PSSPs.................................................................28 4.5 Community-Based Small Service Providers – CSSPs .............................................30 4.6 Advantages and Constraints ....................................................................................30 4.7 Kind of Investments and Financing Needs...............................................................32 4.8 Needs for Other Assistance .....................................................................................33 4.9 Financing Strategies of Small Scale Service Providers............................................34

4.9.1 HSSPs .................................................................................................................34 4.9.2 PSSPs .................................................................................................................34 4.9.3 CSSPs .................................................................................................................35

5 Demand for Financial Services in POWS&S...................................................................36 5.1 Effective Demand for Financial Services in the POWS&S Sector............................36 5.2 The Potential Demand of Financial Services for POWS&S Development ...............37

5.2.1 Housing Microfinance Loans ...............................................................................37 5.2.2 Short-Term Loans................................................................................................38 5.2.3 Investment Loans ................................................................................................39 5.2.4 Savings................................................................................................................39 5.2.5 Other Financial Services relevant for POWS&S..................................................40

6 Supply of Financial Services for POWS&S in SSA........................................................41 6.1 Existing Situation and Trends...................................................................................41 6.2 Key Constraints and Need for Improvement at the Different Levels of the Financial

System for Financial Service Provision in the POS&S Sector..................................42 6.2.1 The Micro Level ...................................................................................................42 6.2.2 The Meso Level ...................................................................................................42 6.2.3 The Macro Level and Enabling Environment.......................................................43 6.2.4 Other Constraints.................................................................................................44

6.3 Typology of Lenders relevant for POWS&S .............................................................44



DESK STUDY POWS&S FINAL REPORT (16-03-2007) ii

7 International Experience: Promising Approaches, Best Practices,Instruments/Tools and Promotional Concepts in the Financing of POWS&S .............46

7.1 Relevant Case Studies.............................................................................................46 7.1.1 HSSP Finance: Promising Approaches and Promotional Concepts....................46 7.1.2 PSSP Finance: Promising Approaches and Promotional Concepts......................46 7.1.3 CSSP Finance: Promising Approaches and Promotional Concepts .....................47

7.2 Innovative Approaches in Financing POWS&S: The Global Partnership on Output-Based Aid .................................................................................................................48

8 General Best Practices and Experience Relevant for Financing POWS&S.................50 8.1 Financial Services and Sustainability.......................................................................50 8.2 Water Supply & Sanitation and Sustainability ..........................................................51 8.3 Failure of Directed Credit for Agriculture..................................................................52

9 Conclusions.......................................................................................................................54 9.1 Controversial Working Hypothesis ...........................................................................54 9.2 Preliminary Conclusions...........................................................................................55

9.2.1 Supply – Demand Gap in POWS&S Financing and Key Constraints..................55 9.2.2

Potential for the Development of Financial Services for POWS&S in SSA .........56

9.2.3 Outlook ................................................................................................................57

Annex

Annex 1: Typology of Small-Scale Water Supply and Sanitation Operations and theirRespective Investment Needs...........................................................................................I

Annex 2: Case Study One...................................................................................................... VI Annex 3: Case Study Two.................................................................................................... VIII Annex 4: Case Study Three .................................................................................................... X

List of Figures

Figure 1: Providers of WS&S ...................................................................................................4 Figure 2: Financial Sector Market Segments relevant for POWS&S .......................................6 Figure 3: Financial Services in POWS&S ................................................................................7

List of Tables

Table 1: Typology of Unserved or Underserved Communities for Water Supply...................15 Table 2: Typology of Unserved or Underserved Communities for Sanitation (35) .................17 Table 3: Categorizing Small-Scale Service Providers in Water Supply .................................25 Table 4: Household Sanitation Options in African Cities........................................................27 Table 5: Typical Examples and Investment Cost for Different Technical POWS&S Options.32 Table 6: OBA Pilot Projects in Water Supply and Sanitation .................................................49 Table 7: Controversial Statements about Role and Significance of

Financial Services in POWS&S......................................................................................54



DESK STUDY POWS&S FINAL REPORT (16-03-2007) iii

Abbreviations

AGETIP Agence d’Exécution des Travaux d’Intérêt PublicAREQUAPCI Côte d’Ivoire’s Association of Water ResellersASM Association of Standpipe ManagersBMZ Bundesministerium für Wirtschaftliche Zusammenarbeit

und EntwicklungCBO Community-Based OrganisationCCAEP Cellule de Conseil aux Adductions d’Eau PotableCGAP The Consultative Group to Assist the PoorCSSP Community-Based Small Service ProviderDFID Department for International DevelopmentDNH Direction Nationale de l’HydrauliqueEU European UnionEUR EuroEUWI European Union Water InitiativeG 8 Group of 8 NationsGPOBA Global Partnership on Output-Based Aid

GTZ Deutsche Gesellschaft für Technische ZusammenarbeitGmbH - German Technical Cooperation

HDFC Housing Development Finance Corporation LimitedHSSP Households as Small Service ProvidersHUDCO Housing and Urban Development Corporation LimitedJMP Joint Monitoring Programme on Water Supply and SanitationKFW Kreditanstalt für WiederaufbauMBK Maji Bora KiberaMDG Millennium Development GoalsMFI Microfinance InstitutionMSE Micro and Small EnterpriseNA Neighbourhood AssociationNGO Non-Governmental OrganisationOBA Output-Based AidO&M Operation and MaintenanceONEA Office National de L’EauPOWS&S Poverty-Oriented Water Supply and SanitationPPIAF Public-Private Infrastructure Advisory FacilityPRS Poverty Reduction StrategyPSSP Private Small Self-Service ProviderROSCA Rotating Savings and Credit AssociationSEDAPAL Servicio de Agua Potable y Alcantarillado de LimaSEWA Self Employed Women’s Association

SME Small and Medium EnterprisesSSA Sub-Saharan AfricaSSP Small-scale Service ProvidersUEAEP Mali’s Union of Water SuppliersUN United NationsUNDP United Nations Development ProgrammeUNICEF United Nations Children's FundUSD United States DollarUSV Union of Sewerage EntitiesWHO World Health OrganisationWS&S Water Supply and SanitationWSP The World Bank / UNDP Water and Sanitation Programme



DESK STUDY POWS&S FINAL REPORT (16-03-2007) iv

Executive Summary

Background

The combination of safe drinking water and hygienic sanitation facilities is a precondition for

health and successfully fighting poverty, hunger, child deaths and gender inequality. It is alsocentral to the human rights and personal dignity of every woman, man and child on earth. Inadopting the Millennium Development Goals (MDG), the countries of the world have pledgedto reduce by half the proportion of people without access to safe drinking water and basicsanitation. These targets are to be achieved by 2015, with the base year set at 1990.Currently, more than 1 billion people or 17% of the world population have no permanentaccess to hygienically safe drinking water and about 2.6 billion people or 42% of the worldpopulation still lack basic sanitation facilities. The situation is particularly critical in countriesof Sub-Saharan Africa (SSA), especially in rural areas and peri-urban settlements with highpopulation increases.

The financing of infrastructure and services in water supply and sanitation (WS&S) is one ofthe major challenges for achieving the MDGs. Up to now, investments have been primarilyfunded by governments (public sector) and development partners. As these funds aredecreasing for various reasons and the share of commercial financing is still very low, thekey question is whether the financial gap for WS&S in developing countries can be reducedby mobilising additional local financial resources.

Financial Services for Powerty Oriented Water Supply and Sanitation1 (POWS&S)

From an economic and financial point of view, the WS&S sector differs from commercial(productive) sectors because water supply is regarded to be a human right and access toboth water and sanitation are basic needs. Shortcomings in access and service quality

disproportionally affect the poor. Water supply and sewerage also are natural monopoliesand therefore need to be regulated in order to balance the different interests involved. Theynormally work best under economies of scale conditions which implies high initial investmentcost. Especially sewerage has high externalities (environment, future generations) whichmakes cost recovery difficult. For all these reasons, WS&S projects do not and cannot onlyfollow mere commercial considerations but have to be embedded in a coherent approachwhere subsidies are targeted and an adequate mix of financing concepts be sought. Toadequately address the needs and capabilities of the poor is a major challenge.

Having in mind the above arguments, for the purpose of this study “access to water supplyand sanitation” focuses on better services for the poor (POWS&S) and the term“microfinance services” is defined in a broader sense that includes a wider range of technical

solutions and different market segments. This definition also covers larger investments thatmay be beyond the scope of traditional microfinance. Intersections arise to rural finance,SME finance, and housing microfinance. Hence, the provision of financial services forPOWS&S is not limited to conventional MFIs, but is used in a broader financial systemsperspective and considers different financial institutions or private actors. Nevertheless, it isvery clear that financial services have their limits as they can only address specific clientgroups and market segments. Bulk investments in the WS&S sector, however, would alwaysneed big investments funded by other financial arrangements. To ensure these investmentsis another challenge, often an important pre-condition to be met before smaller scalearrangements can step in or will make sense.

1Here, the term “sanitation” includes all types of excreta removal facilities, i.e. conventional and low-cost centralized water

borne sewage systems as well as on-site facilities.



DESK STUDY POWS&S FINAL REPORT (16-03-2007) v

WS&S Policy, Regulatory Framework and Reforms

One of the main constraints to expanding water supply and sanitation coverage is the lack ofpolitical will, i.e. the absence of political leadership and government commitment to allocatesufficient resources to the sector, and to undertake the necessary reforms in order toimprove performance and service quality and to attract investments. Broad policy and

institutional reform is essential for reducing political interference in the day-to-day operationsof WS&S utilities in many countries. As long as WS&S service providers have to rely on thestate for budgetary transfers, and as long as their staff is vulnerable to interference byofficials in decisions related to their careers, priority setting and pricing sector investmentswill continue to favour those with political connections – which almost never includes thepoor. Effective regulation of the WS&S sector is another challenge in order to increasetransparency, accountability, performance and service quality. Development partners shouldsupport reforms that enhance adequate regulatory mechanisms, make managementprocesses more transparent and less vulnerable to corruption, and improve incentives forgood performance. This would not only help to redirect planning and decision-making towardcommunities with relatively weak political voices but also prepare a sound basis for theinvolvement of financial services.

Advantages and Constraints of Small-scale Service Providers

The literature review clearly shows that in many developing countries so-called small-scaleservice providers play an important role in the provision of water supply and sanitationservices, especially in rural and peri-urban areas. This applies also to SSA countries.According to their type, area and level of intervention three market segments are suggested:(i) households as self-service providers (HSSPs), (ii) private small service providers (PSSPs)and (iii) community-based small service providers (CSSPs).

In many countries, HSSPs make a lot of efforts to develop their own private water sources fordrinking water supply or their own latrines for basic sanitation. However, the potential ofenhancing these activities through the provision of financial services to HSSPs is heavily

under-explored in SSA. Other constraints – often connected to the lack of credit access – arethe following:

Non-legal situation (illegality of settlements) Tenants (prevailing in peri-urban areas) for logical reasons do not want to incur major

investments and (absent) owners are not interested in house improvements. In peri-urban areas with high population density, the plots are too small and/or the

underground conditions are not suited for on-site sanitation. Lack of technical expertise

PSSPs are mainly found in peri-urban areas where for various reasons the public utility is notoperating. The main advantages of PSSPs are their ability to respond quickly to changes indemand, to offer services needed by low-income families, to self-finance, and to recover theirinvestment and operating costs. Several surveys also indicate that customers are quitesatisfied with these services because they know they will get water virtually anytime andanywhere, whether or not the utility’s service is up or down.

The main constraints to expanding and improving their service levels are the following:

Popular misconceptions about their pricing strategies and service quality Lack of recognition and communication with public authorities Weak policy and regulation in the water sector Hostile attitude of the (public or private) water utilities Lack of access to financing Insecurity of infrastructure they build on public lands, and rights of way (unprotected

investment)



DESK STUDY POWS&S FINAL REPORT (16-03-2007) vii

complemented by additional non-financial services to be provided by other institutions (e.g.WS&S sector institutions or NOGs).

To conclude, in SSA countries the potential demand for formal financial services forPOWS&S has not yet been translated into effective demand. Besides some rareexceptions, the most important source of finance for HSSPs and PSSPs are stillinformal sources. Further constraints are lack of tenure security for homeimprovements of HSSPs, the illegal status of many PSSPs and the untargeted grant-financing of CSSPs. It is assumed that a multitude of investments could be pursuedand hence MDG contribution enhanced if financial institutions and adopted financialproducts were available, especially in rural areas and informal settlements. Conduciveframe conditions, however, play an important role in order to prepare a sound basisfor investment and financing and to mitigate the financial risks for the FI’s and theirclients.

Supply of Financial Services for POWS&S

Compared to other countries (e.g. in Asia), the supply of the poor with financial services inWS&S lags behind in SSA. It is also clearly demonstrated that effective provision andoutreach of financial services would be an important key to success. However, theconstraints of the financial system are not only related to POWS&S but have to be classifiedunder the general problem of lack of access to financial services for the poor, notably (i) lowoutreach; (ii) little product diversification; and (iii) low financial performance of the financialsector. The financial sector focussing on the lower income market in SSA is still relativelyyoung and in an early stage of development. The vast majority of institutions in the region arein the start-up and/or consolidation phase yet and struggling with capacity, outreach, andviability issues.

The problem is aggravated further through several misconceptions of the financial service

industry regarding POWS&S. Little information is available and investments in this sector areperceived as non-productive. Reliable data on potential markets do not exist and the WS&Ssector has not found much attention from the financial sector in the past. Because thePOWS&S sector has not yet been identified as a potential market niche, the financialservices industry, therefore, is not offering financial products that meet the requirements ofthis clientele.

The challenge is to replace the predominantly informal financing arrangements withmore formalised financial services. This requires demand promotion at the level ofsmall-scale service providers on the one hand and an improved outreach of formaland semi-formal financial institutions with demand-oriented financial products on theother hand.

Preliminary Conclusions and Outlook

1. Controversial hypothesis still exists.

The topic of this study boils down to the following central questions: (i) Could financialservices in general play an important role in achieving the MDGs for water supply andsanitation; (ii) could and should small-scale providers contribute to close the coverage gap inlow-income areas and (iii) does the lack of access to finance constitute a major constraint forthe activities of small-scale providers?

The literature review has not provided clear answers to these questions and rathercontroversial hypothesis dominate the discussion. The experience reflected in literaturemirror the intervention approaches for each sector but in most cases do not link the two



DESK STUDY POWS&S FINAL REPORT (16-03-2007) viii

areas. An exemption is a series of publications by WSP-AF (World Bank/UNDP Water andSanitation Programme – Africa) that has been active in linking the two sectors.

The tenor of available literature is that there is a huge potential, once both sectors takeadvantage of the opportunities. Especially at the household level the role of microfinance inthe provision of financing for water- and sanitation-related equipment and facilities is widelyrecognised. On the contrary, the water sector has still reservations regarding the role ofPSSPs in water supply and sanitation, primarily because of quality and price reasons. Forthe financing of community-run WS&S schemes, a consensus has been found that theinstallation and upgrading of such systems must be leveraged with grant sources and to goalong with intensive technical assistance and management training on community level. Also,WSP is leading in testing new approaches.

Therefore, it is recommended that these hypothesis be a starting point for the two countrystudies and be looked into more closely when analysing the specific cases of Kenya andUganda.

2. Promising approaches from worldwide experience have the potential for replication inSSA

The desk study has analysed interesting approaches from worldwide experience that havethe potential for replication in SSA.

The first example is the provision of home improvement loans to HSSPs. SEWA Bank inIndia has demonstrated in an impressive way that it is possible to provide medium-termfinance in connection with a strong savings culture and an on-going relationship to thevulnerable poor population. Requirements are that technical and supervisory support forhousing is clearly separated from financial services and that the tenure status or tenuresecurity must be addressed at the same time if the potential demand for financial services

shall develop. It is important to outline that a ‘near legal’ tenure status may be sufficient andthat traditional collateral is fully replaced by innovative financing technologies such asreputation, a savings track record and credit history. However, SEWA Bank is a veryestablished institution that has gained substantial experience in serving the vulnerable poorpopulation. The goal for a replication in SSA, therefore, must be to support viable and stronginstitutions that could follow that path.

The aguateros from Latin America have shown that private small- and medium-sized watersupply systems are a viable alternative for a solid water supply in areas where the publicutilities fail to provide such service. The case also demonstrates that the sum of many small-scale operators can be more economical than the large-scale ‘economies’. Their potential tomobilise local financial resources is large. It is a prerequisite that the regulatory framework

recognises their operation as well as the fact that financial institutions provide financing tothis clientele that may have outgrown the typical microfinance spectrum but at the same timecannot comply with the requirements of typical SME finance (e.g. traditional collateral andfinancial statements in place).

The important role of community-run water and supply schemes is widely recognized butshortfalls of the past must be addressed, such as poor governance, poor systemmaintenance, lack of financial services and funds for major repairs. Financial services (e.g.savings) can play an important role but must be designed carefully and must comply with thefinancial sector development approach. Especially the experiences and lessons learned fromusing directed credits must not be replicated; instead, the ‘intelligent’ leverage of fundsshould be encouraged. OBA approaches, recently tested by the Global Partnership on

Output-Based Aid (GPOBA), have a great potential to create the right incentives forsuccessful implementation. They are currently tested by WSP and it is recommended toclosely follow-up the progress.



DESK STUDY POWS&S FINAL REPORT (16-03-2007) ix

3. The ‘marriage’ of the WS&S and the financial sector shows great opportunities for thecreation of win-win situations

The challenge to successfully link the two sectors depends on (i) a well-functioning financialsector and (ii) the ability of small-scale service providers to develop economically soundbusinesses. Conducive political, institutional, legal and regulatory frame conditions for thewater sector would significantly contribute to such a linkage. Financial services for POWS&Swill not require the creation of specific institutions or ‘windows’ but have to follow the widelyaccepted financial system development approach.

The creation of win-win situations could have an interesting impact. The water sector createsthe right set of incentives for supporting entrepreneurial activity and the financial sector takesmore responsibility in financing WS&S related investments in areas where a market demanddevelops on sound economic principles. Limited grant resources could then be targeted tothe poor or leveraged with loans. At the same time, the financial sector can increase itsbusiness volume directed to an economically active population that have never been reachedbefore. With the establishment of legal frame conditions that encourage market-led solutionsand the promotion of demand-driven approaches, an effective demand for financial serviceswill develop, especially at the level of HSSPs and PSSPs.

Both sectors have not yet found together due to their mutual lack of information, researchand opportunity for exchange. The creation of an exchange forum and a partnership betweenboth sectors will allow to create a linkage that can address the opportunities and constraintsfrom a multi-sectoral and more holistic perspective.



DESK STUDY POWS&S FINAL REPORT (16-03-2007) 2

The financing of infrastructure and services in the water supply and sanitation(WS&S) sector is one of the key challenges for achieving the MDGs. To reach thetargeted objectives, current investments must be increased by more than 30 billionUSD to over 60 billion USD per year. Up to now, investments in improving watersupply infrastructure in developing countries have primarily been financed by the

public sector. However, in view of already existing budgetary problems, the publicsector in most developing countries is expected by far not to be able to provide thefuture financing requirements for the WS&S sector.

Experience of the last years has shown that due to high financial and political risksthe international private sector is likely to contribute only to a neglectable extent tothe required investments in water supply and sanitation in poorer countries. As theshare of local financing is only less than 10% of the investment needs, aconsiderable potential is seen in closing the financing gap by mobilizing additionallocal financial resources. In the report of the world panel on financing waterinfrastructure (70) the importance of the further development of local financial

markets - and especially the microfinance sector - is highlighted for providingfinancing services to households, communities and small-scale service providers.Especially in low-income countries or areas with low service coverage and ineffectivepublic utilities small-scale service providers are of increasingly high importance.

There are arguments that the lack of access to appropriate financial servicesconstitutes a major constraint for small-scale private service providers andhouseholds in order to broaden access to water supply and basic sanitation.Furthermore, there exist many other bottlenecks on macro and meso level(institutional, political and regulatory framework). As a consequence, the potential forincreased supply of poor population groups with drinking water and basic sanitationso far has not been sufficiently exploited. Currently, microfinance institutions (MFI)

have only little experience in medium and long-term financing of water and sanitationrelated infrastructure. Demand-oriented financial products that are suitable for thefinancing needs of households and small-scale service providers are only available toa limited extent, especially in SSA.

The German Federal Ministry for Economic Cooperation and Development (BMZ)has commissioned GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit)GmbH to carry out this study on “Financial Services for the Promotion of Poverty-oriented Water Supply and Sanitation in Sub-Saharan Africa”. The main objective ofthe overall exercise is to support the efforts of developing countries and donororganizations in expanding the access to financial services to PSSP, CSSP and

HSSP engaged in water supply and sanitation services. In this context, aninterdisciplinary concept is to be prepared aiming at the identification andstrengthening of adequate financial services for the promotion of poverty-orientedwater supply and sanitation through the local private sector relevant to the situation incountries of SSA.

The study will be implemented in a process consisting of three steps or sub-studies:

Step 1: Initial desk study with literature review and summary of information onthe existing situation and experience in the provision of financial services tothe water and sanitation sector.

Step 2: Conducting case studies in two countries of SSA (these are Kenya andUganda where the studies will be carried out in October/November 2006 andJanuary/February 2007, respectively).




Step 3: Summary of results from steps 1 and 2 and preparation ofimplementation-oriented concepts and strategies for strengthening financialservices in order to promote water supply and sanitation services through thelocal private sector in countries of SSA.

In the context of strengthening financial services in the water sector in general, theGerman Government is closely cooperating with the World Bank in the small-scaleirrigation sector in SSA. The respective study is underway, carried out by GTZ onbehalf of the World Bank.

1.2 Objectives of the Desk Study

As a state-of-the-art study the desk study will focus on the review and assessment ofthe relevant literature and data. It will analyze the water and sanitation markets(demand) and the existing possibilities for investment financing (supply), highlight theconstraints and potentials for sector development and suggest widely applicablestrategic approaches and promising avenues for the future.

The following issues will be analyzed and assessed in the desk study:

• The current situation, major development trends, needs, constraints andpotentials with regard to water supply and basic sanitation (also in view of thetargets set in the MDGs);

• The role, importance and opportunities of PSSP, CSSP and HSSP in theprovision of water supply and sanitation services;

• The demand of financial services for POWS&S: the type of activities (bydifferent service providers) and the nature of finance involved, how this isfinanced and the resulting demand for financial services;

• The supply of financial services for POWS&S: the current situation and trends,experience, key constraints and need for improvement and support on thedifferent levels of the financial system in the supply of financial services toPSSP, CSSP and HSSP;

• The promising approaches, best practices, instruments/tools, and promotionalconcepts which might already be available from specific interventions in thefinancing of water supply and sanitation (globally and in countries of SSA);

• General microfinance experience and best practices for their suitability and

relevance for the design of viable and sustainable microfinance services in theWS&S sector.

The literature review is mainly based on published information sources includingevaluations, reviews and reports by major donor agencies involved in the relevantsectors that are accessible through the Internet.

This report is divided into nine chapters. Chapter 1 describes the background andobjectives of the study and defines major terms used. Chapter 2 summarizes therelevant literature. Chapter 3 gives a brief overview of the current situation and majordevelopment trends in POWS&S. Chapter 4 describes the role and importance ofsmall-scale service providers and the type of activities pursued by them in the water

and sanitation sector and their financing strategies. In Chapter 5, the demand forfinancial services in poverty-oriented water supply and sanitation (POWS&S) isanalysed, followed by an analysis of the supply side in Chapter 6.




Chapter 7 outlines international experience in financing POWS&S. Chapter 8 pointsout general experience and best practices that are relevant for POWS&S.Conclusions are drawn in Chapter 9, including some tested hypotheses from theliterature that could serve as general guidelines for the two case studies.

1.3 Definitions

For the purpose of this study the following definitions are being used (18), (41):

Poverty-oriented water supply refers to households in rural or urban areas not servedby the water network of the public or private water utility system, especially low-income users who cannot afford a connection, including those squatting on landsubject to flooding and other marginal or illegal sites or people living beyond thenetwork’s reach.

Poverty-oriented sanitation refers mainly to rural or urban on-site facilities (latrines or

septic tanks) or urban small-bore sewerage systems (in contrast to Latin America, thelatter are rare in African cities).

To put Poverty-Oriented Water Supply and Sanitation (POWS&S) in the context, thefollowing figure confines the segment POWS&S is covering:

Figure 1: Providers of Water Supply and Sanitation (WS&S)

Source: Own compilation

Private Small Service Providers (PSSP) are found mainly in urban and peri-urbanareas for both water- as well as sanitation-related services (e.g. water kioskoperators, water carters, latrine cleaners) where the utility company – for variousreasons – is not operating. In addition to these, other PSSPs provide services tosupport the delivery of water and sanitation services. This category of PSSP covers alarge range of activities and varies in potential, investment required, and legality ofoperations. These enterprises are involved in production and supply chains thatproduce, distribute, sell and install water access, storage and purificationtechnologies (e.g. companies that produce or distribute spare parts, drill boreholes,sell pumps).

PSSPs that are relevant for this study belong for the most part to the micro and smallenterprise (MSE) sector. The MSE sector refers mainly to the category of enterprises

Water Utilities

Public

Utilities

Large PrivateServiceProvidersin some countries

POWS&Ssmall-scaleserviceproviders:

PSSPs

CSSPs

HSSPs




that operate in the informal sector. Microenterprises with a maximum of 10 workersconstitute the main market segment for water and sanitation related services. MSEshave usually low skills and simple organizational structures, with little access toorganized markets, formal credit, education and technical training.

Small and Medium Enterprises (SMEs) represent ‘firms’ in the more formal sensewith an important number of employees. In the provision of POW&S, the amount ofinvestment that can range up to USD 40,000 (e.g. water tankers) and even more forwater supply schemes. SMEs that operate in the water sector are often supervisedand regulated by the water authority2.

Community-Based Small Service Providers (CSSP) or Community-Based Organisations (CBOs) are found mainly in water supply schemes in rural areas.These include both point sources and piped schemes, either gravity-based ormotorized. For most CSSPs, communities are involved in the design andimplementation of new schemes, contribute to the capital investments, and havecomplete management and financial responsibility for operation and maintenance. In

most developing countries, the investment costs are at least partially covered bysubsidies.

Households as Small Self-Service Providers (HSSP) may use their own private watersources, or other natural sources such as springs or rivers, and their own latrines forsanitation. A household may also require credit to pay the connection fees to gainaccess to an improved system, possibly a CBO-based system in rural areas or asystem run by an urban utility. This has not been common in Africa, as in most casesthe utilities have avoided providing private connections in poor neighbourhoods orinformal settlements.

Microfinance is the supply of loans, savings, and other basic financial services to

poor and low-income people. They normally do not have access to bank loansbecause they need smaller credit amounts, cannot give collaterals and are employedin the informal sector. Microfinance clients need a diverse range of financialinstruments to run their businesses, build assets, stabilize consumption, and shieldthemselves against risks. Financial services demanded by the poor include loans,consumer credit, savings, pensions, insurance, and money transfer services. (9)

Originally, the subject of the study was ‘microfinance services for the promotion ofPOWS&S in SSA’. It has been realized, however, that the scope of the study must bewidened. The definition below defines the spectrum to be covered:

Financial Services for POWS&S defined for the purpose of this study are financial

services that enable the poor and low-income population to access WS&S. Thisdefinition includes not only financial services at the end-consumer level, but also atthe level of service providers such as CSSPs and PSSPs.

The provision of financial services for POWS&S is not limited to conventionalmicrofinance institutions (MFI), but is used in a financial systems perspective andconsiders different financial institutions or private actors providing financial servicesin different country contexts for various market segments (41). In this context, ‘MFI’ isdefined as all financial institutions that focus on the lower-income market such as

2In Kenya for example, a water service provision status is mandatory for PSSPs that provide water services to more than 20households.




commercial banks, financial cooperatives, NGO-MFIs and community-based financialorganisations.

Because the activities to be financed cover a wide range of technical solutions anddifferent market segments, the definition shall also cover larger investments (such astrucks, small distribution networks) – relevant for POWS&S – that may be beyond thescope of traditional microfinance, including SME finance, rural finance and housingmicrofinance.

The intersections are outlined below:

Figure 2: Financial Sector Market Segments relevant for POWS&S

Source: Adapted from CGAP, Donor Brief N°15

Microfinance means financial services for poor and low-income people, and itencompasses the lower income market (HSSPs and small PSSPs). Housingmicrofinance is a relatively new field in the microfinance spectrum, consisting of loansto low-income people for renovation, expansion, basic infrastructure, new housingconstruction and land acquisition. The two latter still are dominated by subsidies,

rather than financial services (11) and are not subject of this study. In contrast, houseimprovement loans for HSSPs can be a very important source of financing forinvestments in POWS&S.

Traditional housing finance is not offering products adapted to low-income peopleand, therefore, is not subject of this study.

Rural finance refers to financial services offered and used by people of all incomelevels in rural areas (rural HSSPs, PSSPs and CSSPs).

Traditional SME finance is handled predominantly by commercial banks and mainlyfocuses on larger companies with a relatively solid bottom line (large PSSPs). Whiletraditional SME finance covers some of the higher-performing SMEs, microfinanceusually covers the lower end (small PSSPs).

FINANCIAL SECTOR

MICROFINANCE

RURAL FINANCE

SMEFinance

HousingFinance

HousingMicrofinance




Figure 3 defines the areas that are relevant for this study and where financialservices for POWS&S can play an important role (yellow and red).

Figure 3: Financial Services in POWS&S


The end-users of POWS&S are poor and low-income households in urban, peri-urban and rural areas. Financial services, as defined above, are an instrument forfinancing HSSPs, PSSPs and CSSPs that provide water and sanitation services topoor and low income households where the public utility fails to provide suchservices. Figure 3 also lines out that financing the public utility is outside thescope of this study. A more detailed description of financing sources andinstitutional set-up of the water sector is given in chapter 3.

1.4 Why is Financing POWS&S Different?

For the purpose of this study it has to be highlighted that financing POWS&S isdifferent from financing other sectors (such as trade, small-scale producers) insofaras water supply is regarded to be a human right and access to both water andsanitation are basic needs. Water supply and sanitation (sewerage) are also naturalmonopolies and normally work best under economies of scale conditions. In addition,water- and sanitation-related activities have high (positive or negative) externalities(e.g. public health, environmental impacts). This means that WS&S projects do notonly follow mere commercial considerations. Other relevant aspects regardingfinancing the POWS&S to be taken into account are the following:

For centralized urban water supply and sanitation schemes, usually high initialinvestment cost of basic infrastructure (e.g. dams, boreholes, transmission lines,

pumping stations, treatment plants, networks) have to be made in the first place.The lack of funding to finance these investments (new investments,rehabilitations, extensions) as well as inefficiencies of the public utilities (e.g. high

End Users of POWS&S: Poor and Low-Income Households in Urban, Peri-Urban andRural Areas

URBAN and Peri-Urban RURAL

PublicUtility

P S S P ‘ s

H S S P s

C B O’ s

PublicBudget

DonorFunds

FinancialSector / CapitalMarket

FinancialServices

Financial

Services

FinancialServices

DonorFunds

C B O‘ s

H S S P s

Combinationof both +

contributionin kind




unaccounted for water, low collection efficiency, high staff cost, low tariffs) usuallyare the major constraint in terms of coverage. These investment cost have to befinanced either by the utility itself (cash flow, loans), by governments (soft loans,donor funds) and/or private investors, but are not subject of this study – aspointed out in figure 2. In an ideal case, POWS&S could be perfectly provided by

public (or private) utilities. In reality, however, this is often not the case due to theabove mentioned constraints. Therefore, small-scale service providers operatewhere traditional utilities fail to provide access with conditions that satisfy theneed of the poor or other unserved segments of the population. Nevertheless,small-scale providers often depend on the availability of some kind of basicinfrastructure, which is, however, completely beyond their control.

Investments into water and sanitation are generally perceived as consumptive.This is the main distinction to income-generating activities (e.g. trade, commerce)that are usually financed by typical microfinance institutions. In the course of thisstudy, this subject will be further elaborated.

In order to be effective and sustainable from an economic, financial andenvironmental point of view, the water and sanitation sector must follow clearlydefined sector principles and should be regulated by an independent body(regulator). The most important features of regulation include service and waterquality, efficiency aspects of the providers and protection of the customer (due tothe monopoly situation). These aspects have to be considered for any financingstrategy.

Another important aspect of financing POWS&S is quality – a question that is notaddressed in the MDGs. This means that even if financial resources are available,the (public) sector expenditure needs to be restructured in order to improve

delivery and coverage. In some instances, the problem has less to do with theabsence of financing than with issues of how to spend available funds morewisely and sustainably. This, again, is a matter of political willingness and ofimproving the governance of the water and sanitation sector (68).




2 Review of Available Literature and Summary of MainTopics

There is a growing body of research around POWS&S and financing. The literature

available can be roughly grouped into nine thematic areas: Water and sanitation sector strategies: The growing awareness among

policymakers in both developing and industrialized nations that improving watersupply and sanitation services are the key to achieving broader poverty reductiongoals, has been accompanied by calls for more concerted efforts and additionalresources from all stakeholders. In addition, many developing countries facedaunting water resource challenges as the needs not only for water supply butalso for irrigation and hydroelectricity grow, as water becomes more scarce,quality declines and environmental and social concerns increase, and as thethreats posed by floods and droughts are exacerbated by climate change.Therefore, the strategies (72) draw on broad thematic and corporate policies,including not only those related to urban, rural and private sector developmentbut also to integrated water resources management and the environment.

Meeting the MDG water and sanitation target: In adopting the MDGs, the countriesof the world pledged to reduce by half the proportion of people without access tosafe drinking water and basic sanitation. The results so far are mixed. With theexception of SSA, the world is well on its way to meeting the drinking water targetby 2015, but progress in sanitation is stalled in many developing regions. Thesubject is well covered, e.g. by the WHO/UNICEF Joint Monitoring Programme onWater Supply and Sanitation (JMP). The JMP’s estimates are critical forcalculating rates of progress towards national goals and for highlighting priorities,

especially those that target the underserved.

Meeting the financing challenge for water and sanitation: The vast literaturefocuses on how the financial means for achieving the MDG can be mobilized. The“Camdessus-Report” (70), for example, states that financial flows need to at leastdouble and that they will have to come from financial markets, from waterauthorities themselves through tariffs, from bi- and multilateral financial institutions,from governments, and from public development aid, preferably in the form ofgrants. The European Union Water Initiative (launched in Johannesburg inSeptember, 2002), whose main objective is to be a catalyst for action for the EUoverseas aid family to more vigorously meet the MDGs for water and sanitation

and for water resource management investigated key questions related to theefficiency and effectiveness of EU aid flows to the water sector (24). But it alsoaddressed the issue of how to use aid funding as a lever for other forms of finance(user and private sector) and how to better promote the inclusion of water andsanitation in Poverty Reduction Strategy (PRS) processes and in budgetarysupport.

Water and sanitation for the poor: One of the most severe problems characterizingthe agenda for sector finance is the fact that the poor often do not benefit fromincreased coverage and the existing WS&S services. This has been proven by alot of research done in Africa, Latin America and Asia. As a consequence, theneed was recognized to ensure that the poor are not excluded, e.g. due toaffordability concerns, through the use of well-designed mechanisms that helpeffectively target the poor. A wide range of literature is available regarding this




aspect. As an example, WSP (42) identified three sets of pro-poor subsidymechanisms: (i) use of access subsidies, (ii) improving the cross-subsidies and (iii)use of incentive-linked subsidies within the output-based aid (OBA) framework,including direct subsidies for access or consumption to consumers, minimumsubsidy concessions targeted to reach the poor, and support to pro-poor reforms.

WSP, with support from the Public-Private Infrastructure Advisory Facility (PPIAF),has also been increasingly engaged in the design of private sector transactionsbecause of their potential to impact, positively or negatively, on the lives of thepoor (48)

Independent water and sanitation providers: PSSPs have long been an importantpart of water and sanitation service delivery, particularly in peri-urban, rural andremote regions and in countries with failed or crippling public utilities.Nevertheless, they have only recently gained acceptability as a viable alternativefor developing and managing small-scale water supply and sanitation services (18)(35). PSSPs are often viewed as (i) “temporary” – although many have been in

operation for over 20 years, (ii) “rent-seekers” – that take advantage of unreliablepublic services so as to gouge their customers, and (iii) “poor quality” – providing aservice that does not meet technical and water quality standards. Manypractitioners now start to acknowledge the potential role of PSSPs in developingand managing private water supply and sanitation systems and in advancing localprivate sector development. They recognize that many communities would gounserved if not by PSSPs and that working with these providers to establishmeasures to improve their quality, efficiency and affordability, and to leverage theircapacity in order to expand service coverage will be of more benefit to consumersthan continuing to ignore them.

Financial services for water and sanitation: Financial services for the poor and low-

income population has proven to be an effective tool for reducing poverty andhelping poor people to improve their lives. They make an important contribution tothe achievement of the MDGs. Traditionally, microfinance has focused on othersectors, such as trade, small-scale producers or micro entrepreneurs. As the topicof financing water supply and services and sanitation has moved up the politicalagenda, it has received more attention within the water sector in recent years. Sofar, water supply and sanitation services have not been perceived as attractive byfinancial institutions because often they were regarded as having no direct linkwith income generation and the required maturity of loans is beyond the usualscope of short-term financing. (27) There is a large consensus that the potential toscale with local financing mechanisms for water supply and sanitation is not yetrealised.

Household credit for water and sanitation: In developing countries, mostinvestments in water and sanitation have emphasized water supply plants,wastewater treatment plants, and main construction infrastructure external to thehousehold (67). As such, these installations have often created little beneficialimpact on the lives of poor urban and peri-urban residents. For the immediate andperhaps also the mid-term future the only affordable solutions for many of thesehouseholds are simple on-site facilities such as water storage tanks, pit latrines,simple plumbing, septic tanks, and small-bore sewers, options ranging in cost fromUSD 70-500 per household. Assistance to financial intermediaries supplying the

household credit needs to implement such options is seen by any practitioners asa promising approach to improving water supply and sanitation within poorcommunities. These credits can also be channelled in form of a flexible house




improvement loan. A range of related experience (e.g. SEWA Bank in India) isdocumented for Asian countries whereas in Africa this approach still seems to beunderdeveloped.

Rural finance for water supply and sanitation: The majority of the world’s poor livein rural areas. It is clear that national institutions and donors will not be successfulin achieving their overall poverty reduction objective unless they address ruralpoverty and help to create better conditions in rural areas. Rural finance is anecessary ingredient for rural economic growth. However, it has primarily focussedon productive credits (e.g. for farming) and less on infrastructure. Concerningwater services in rural areas, in many countries governments have moved tocommunity-based approaches and hence thousands of small- to medium-sizedwater supply systems are operated by CSSPs. Normally, communities areinvolved in the design and implementation of new schemes, contribute to thecapital investment (in cash, kind or labour), and have complete management andfinancial responsibility for operation and maintenance. Potential demand for

finance falls into two main categories (41): (i) to meet the community share incapital contribution for new investments and (ii) to meet the cost of repairs or ofrehabilitation or augmentation of services. However, at first a fair degree ofoutreach of rural financial intermediaries is necessary as a base condition. Andeven where outreach exists, the lack of cash-flow history for a new CSSP makes itdifficult to assess the risks of such lending. All in all, the potential of financing ruralinfrastructure through rural financial intermediaries is not yet fully realized and thetopic is not well covered by the relevant donors.

Low cost technologies: In urban water supply and sanitation, technicians normallyprefer to design and apply conventional technologies that are more familiar andsafer for them and hence low-cost solutions are not aimed at in the first place.

However, the application of technologies that require lower investment andoperational cost makes it more likely that financial resources will be efficientlyused (80). This can help widen the coverage of water and sanitation services inperi-urban areas and in small towns. Examples from Latin America (e.g. Brazil)show that cost-effective approaches combined with strong community participationcan provide millions of people with piped water supply and sanitation at lower costand can also be an integral part of local area or urban development. Instead ofexpensive, conventional high-tech systems, neighbourhoods were able to choosefrom a range of more simple, innovative systems that made water supply andsanitation more affordable and more technically appropriate for poor and crowdedsettlements. The Brazilian experience has also caught the attention ofgovernments in other parts of the world and the challenge is to tailor this approachto conditions that may be very different from those in Brazil (73). However, forinterventions in this field up to now no interdisciplinary concepts are availablethrough which the access to financial services of households or small-scale privateproviders could be promoted.




3 Current Situation and Major Development Trends inPoverty-Oriented Water Supply and Sanitation(POWS&S)

3.1 General Situation in View of the MDGs3

Expanding access to water and sanitation is a moral and ethical imperative rooted inthe cultural and religious traditions of societies around the world and enshrined ininternational human rights instruments. In its General Comment 15, the Committeeon Economic, Social, and Cultural Rights of the United Nations Economic and SocialCouncil states that “the human right to water entitles everyone to sufficient, safe,acceptable, physically accessible, and affordable water for personal and domesticuses” (59). While the right to water has been implicit in the rights to health, housing,food, life, and dignity, General Comment 15 is the first to focus explicitly on the right

to water and the responsibilities that governments have in delivering clean water andadequate sanitation services to all. On the other hand, expanding access to domesticwater supply and sanitation services, as called for in target 10, will bring theinternational community closer to meeting a number of other MDGs; in fact, for manyof the targets, it is difficult to imagine how significant progress can be made withoutfirst ensuring that households have safe, reliable water supply and adequatesanitation facilities. Meeting target 10 is particularly vital in terms of the poverty,gender and health goals, and also has a significant impact on other goals. Forinstance, healthy people are better able to absorb the nutrients in food than thosesuffering from water and excreta-related diseases and in terms of the education goal,reducing the incidence of water and excreta-borne disease among children improves

school attendance.

Success in bringing water and sanitation to poor communities – often living in verydifficult circumstances – is an even bigger challenge and depends not only ontechnical ingenuity and financial resources, but also requires proper targeting to thepoor and active involvement of the communities.

Compared to water supply, meeting the sanitation target is far more difficult due tothe lack of political willingness and commitment, low effective demand among theunserved, inadequate financing, institutional constraints, the low pay and statusassociated with work in the sanitation field as opposed to work in other sectors, andnearly universal cultural taboos surrounding discussion of human excreta. In addition,

the scale of the problem is far greater for sanitation than for water supply; more thantwice as much people (2.6 billion) lack access to sanitation than lack access to watersupply (1.1 billion) (59).

Strategies for water and sanitation need to be tailored to specific circumstances atthe regional, national, and sub-national levels, and in urban and rural contexts. To beeffective, interventions, approaches, costs, technologies and financing mechanismsmust be highly context specific. Action plans rooted in generalities tend to be less

3This chapter is primarily based on the following document: UN 2005. ‘Health, Dignity and Development: What Will it Take;

Report of the Task Force on Water and Sanitation’. New York (59 ). The data of this report are the most reliable ones and itsgeneral approach and opinions are, by and large, also shared by the authors of this study.




effective than those that take advantage of local opportunities and address localconstraints.

The 2004 WHO/UNICEF Joint Monitoring Programme report (65) describes regionalcoverage for water supply and sanitation in the baseline year of 1990 and in 2002,which is the halfway point for the 2015 targets. This report, which is the most reliablesource of global water supply and sanitation information, indicates that SSA is theregion where coverage is lowest for both water supply and sanitation. In absolutenumbers, however, most of the 1.1 billion people without access to water supply livedin Asia (61% or 0.67 billion), and 26 % (0.29 billion) lived in SSA.

In 2002, most of those without access to sanitation lived in Asia (73% or 1.9 billion),while 17% (0.44 billion) lived in SSA. Nearly 1.5 billion people live in just twocountries, China and India.

The above-mentioned analyses also indicate that 25 countries have already achievedthe MDG target for water, another 43 are considered to be on track. 25 countries areeither lagging behind or even slipping in their progress toward the targets, amongthese 13 are from SSA.

The number of persons who must be reached in order to meet the MDG targets in2015 are estimated to be 1.57 billion for water supply (of which about 359 millionpersons live in SSA) and 2.1 billion for basic sanitation (of which about 363 millionpersons live in SSA).

In terms of access to water, the countries where access is poor and progress towardthe goal is challenging include 13 in SSA (59). But it is important to stress that, forseveral of the poorest countries in SSA, such as Sierra Leone and Burkina Faso,insufficient data are available and it is likely that many such states would be includedin this list. In terms of access to sanitation, the countries where access is poor andprogress toward the goal is challenging include 19 in SSA (59). The countries withthe highest incidence of diarrhoea are also located in SSA (and Asia). The HumanDevelopment Report 2003 argues that these countries should receive the lion’s shareof the world’s focus, resources, and assistance.

The above data, however, are aggregated and analyzed at the national level andhence can mask large swaths of people, typically in rural areas and urban slums,who lack adequate water supply and sanitation services and suffer from water andexcreta-borne disease in an otherwise fairly well served country.

To meet the MDGs for water and sanitation would require the mobilization of

substantial additional financial resources. There is a wide range of estimates abouthow much finance is required to meet the future needs of the water and sanitationsector. The UN Task Force on Water and Sanitation (59) estimates that globalfinancing cost range from USD 51 billion to USD 102 billion for water supply, andfrom USD 24 billion to USD 42 billion for sanitation for the period 2001-2015.However, there is no absolute cost figure, as much depends upon the technologiesadopted and country-specific preferences and conditions. Taking an average, wouldyield USD 68 billion for water supply and USD 33 billion for sanitation, i.e. a total ofUSD 101 billion and an annual average of USD 6.7 billion. Other estimates (e.g.Water Aid, 68) come up with much higher figures: additional USD 8 billion for watersupply and USD 17 billion for sanitation annually. And according to the European

Union Water Initiative – EUWI (24) an additional USD 9 to 30 billion per year on topof current commitments is required to meet the water and sanitation sector MDGs,much of this for sanitation needs. The realistic assumption of the EUWI finance




strategy is that adequate sources of non-aid finance do exist to help meet the watersector MDGs, but that the water sector in developing countries fails to attract andretain them. In general, EUWI identifies the following financing sources andmechanisms for the water and sanitation sector:

User finance (via tariffs)

Environmental charges Grants Loans Mixed credits and export funds Output-based aid Microfinance Bond markets Equity markets Direct private investment Public private partnerships and private finance initiatives Voluntary finance schemes Sector wide approaches and sectoral funds

Nevertheless, EUWI also identifies the constraints that explain why these resourcesmay not be attracted to the water sector as greatly as they could. As a consequence,rather than lobbying for simply increasing the water sector EU aid, the Initiativeinstead proposes to use existing aid commitments more effectively by targeting themtoward alleviating the constraints and, thus, make these other resources of financeavailable for investment.

This report focuses on the aspect of mobilizing local financial resources as a strategyand contribution to meet the MDGs and the role that small-scale service providescould play in this context. However, it is clear that financial services alone cannot

solve the problem due to the specific characteristics of the water and sanitationsector. One important aspect is that this sector generally requires huge and long-terminvestments. But potential niches for financial services do exist and they could bebroadened and better explored. One of the limitations of using a microfinanceapproach for infrastructure includes the small-scale and narrow reach of most MFIs.But perhaps the most serious obstacle to the large-scale application of microfinanceapproaches to infrastructure is the ability of most potential clients to repay loans ofthe necessary size.

3.2 Typology in Water Supply

As water supply coverage is a function of both demand and supply considerations,broadly six typology categories of unserved or underserved areas can be defined asshown in Table 1. Across all six community types, unserved households tend to bepoor and have limited voice in priority setting and resource allocation decisions.




Table 1: Typology of Unserved or Underserved Communities for Water Supply

Communitytype

Existing service Supply side Demand side Policy responses andfinancing strategies

1 Dispersedrural

Little or no service:supply from vendorsand surface water sources

• Limited publicinvestment

• Perception ofpoverty

• High per capitacost

• Poverty• Limited access to

financial services

• Challenge ofcollective action

• Low demand(availability ofalternatives)

• Capacity building• Combined

agricultural andwater projects

• Partnerships withCBOs

• Targeted subsidies

2 Dispersedrural

Inadequate supplyfrom existing facilities(e.g. boreholes withpumps)

• Limitedinvestment inO&M andexpansion


• Poverty

• Limited access tofinancial services

• Challenge ofcollective actionfor O&M

• Low demand(availability ofalternatives

• Capacity building

• Combinedagricultural andwater projects

• Partnerships withCBOs

• Targeted subsidies• Programmes to

strengthen supplychains

3 Mediumdensity (smalltown)

Supply from privatehousehold facilities,vendors, surfacewater sources

• Limited public andprivateinvestmentavailable

• Policy vacuum

• Limited access tofinancial services

• Demand capturedby privatehouseholdinvestment

• Policy development

• Promotion of PSSPs

• Managementinnovations(franchising)

• Targeted subsidiesand creditprogrammes

4 Mediumdensity (small

town)

Supply fromdysfunctional public

networks

• Inadequateresources and

capacity for O&Mof public system

• Policy vacuum

• Limited potentialfor use of voice

• Unwillingness topay higher tariffsfor low-qualityservice

• Higher-incomehouseholds mayexit system

• Capacity building forO&M

• Policy development• Promotion of PSSP

• Managementinnovations(franchising)


5 High density(urban orperi-urban)

Little or no improvedinfrastructure, supplyfrom vendors

• Growth (newlyincorporatedareas)

• Investmentrestrictions in un-

regularised areas• High per capita

cost


• Constrainingstandards

• High proportion ofrented dwellings

• Insecure tenure

• Challenges ofcollective action

• Urban developmentpolicy reform

• Promotion of PSSP

• Partnership withCBO



Supply from sharedpublic facilities

• High per capitacost



• High proportion ofrented dwellings

• Challenges ofcollective action

• Promotion of PSSP

• Partnership betweenCBO + provider

• Targeted subsidiesand credit programmes

Source: (35)

This typology clearly shows that there is a wide range of problems involved whenanalysing the reasons for low coverage. In order to increase coverage, policy issues




must be addressed in the first place, and the solutions have to be tailored to thespecific situation. The same applies to investment and financing strategies. In poorrural areas, for instance, technology levels have to be designed according to theaffordability of the beneficiaries. Subsidies are often justified but have to be clearlytargeted to the poor (e.g. based on poverty mapping).

3.3 Typology in Sanitation

When applying the typology presented in Table 2 to the case of sanitation services,two interrelated observations can be made. First, despite the fact that sanitationrepresents a service with greater public-good characteristics than does water supply,in reality sanitation is often regarded as a private household matter, organized andfinanced by users, whereas water supply commands considerable attention in thepublic policy and planning sphere. This view of sanitation services also leads to theobservation that the key leverage points in expanding sanitation coverage should

involve generating demand (e.g. by social marketing) and influencing decisions madeat the household level. For large congested settlements, however, the involvement ofneighbourhood or community and even public levels is important, especially whenwastewater treatment is involved. With regard to limited affordability of the poor,innovative low cost technologies are of utmost importance. Subsidies may be justifiedbut have to be clearly targeted to the poor.

The key elements of the current discussion on sanitation are summarized in Table 2.




Table 2: Typology of Unserved or Underserved Communities for Sanitation (35)

Communitytype

Existing service Supply side Demand side Policy responses andfinancing strategies

1 Dispersedrural

Little or noinfrastructure:

open defecation

• No institutionalresponsibility

• Low priority andlimited publicinvestment

• Poverty

• Limited access

to financialservices

• Low demand

• Social marketing andeducation

• Partnerships with CBO• Targeted subsidies

and creditprogrammes

2 Dispersedrural

Service fromdysfunctional private facilities,such as latrines


• Limitedconstructionsupport

• Limited privatesector skills forO&M

• Poverty

• Limited accessto financialservices

• Low demand


• Partnerships with CBO


3 Mediumdensity

(small town)

Service fromdysfunctional

public facilities, open defecation


• Limited resourcesavailable for O&M

• Constrainingstandards forserviceimprovement

• Limited accessto financial

services• Limited demand

• Demandcaptured byprivatehouseholdinvestment


• Partnerships with CBO• Regulatory reform

(standards, newconstruction)

• Innovative low costtechnologies

4 Mediumdensity(small town)

Service fromdysfunctionalprivate facilities


• Limitedconstructionsupport


• Limited demand

• Demandcaptured byprivate

householdinvestment



• Regulatory reform(standards, newconstruction)

• Innovative low cost

technologies


Little or noimprovedinfrastructure: open defecationor use of facilitiesin otherneighbourhoods


• Growth

• Investmentrestrictions in un-regularized areas

• High per capita cost



• High proportionof renteddwellings

• Insecure tenure


• Poverty

• Land tenure reform





6 High density

(urban orperi-urban)

Service from

shared public facilities

• High per capita cost



• Limited funding andincentives for O&M

• High proportion

of renteddwellings


• Poverty

• Challenges ofcollectiveaction

• Land tenure reform





Source: (35)




3.4 Technical Challenges

One of the important lessons of the past several decades of internationalcollaboration for expanding water supply and sanitation services has been that non-technical issues, such as financing, institutions and the overall frame conditions, areequally important to explain the persistent lack of availability of WS&S in developingcountries as are technical challenges. But the role of technical considerations inexpanding services should not be neglected. Indeed, the provision of safe andreliable services is often more technically challenging in poor communities than inrich ones. Extending services to a dispersal rural settlement or dense urbancommunity on marginal land, for example, may involve serious design problems forwater and sanitation engineers.

Climatic factors also shape a country’s ability to provide and maintain water supplyand sanitation services for its citizens. For example, many developing countries in thetropics suffer alternately from floods that damage infrastructure and droughts during

which water sources run dry. Whereas inexpensive solutions are available in somecases (e.g. rainwater harvesting), in others costly infrastructure is required in order tocontrol droughts and store water for the dry periods.

Although the amounts of water required for increasing access to safe drinking watersupply are relatively minor compared to the amounts required for agricultural uses,there are often situations in which the physical availability of water resources on asustainable basis limits efforts to increase coverage (in so-called water stressedcountries).

It is also important to recognize that the provision of water and sanitation is anongoing business that has to be understood and managed as such if it is to achieve

and sustain its goals. Where a water supply system is poorly planned or poorlymanaged, the consequences often include excessive loss of water through leakagesand waste, as well as loss of revenues needed to run the system effectively. Andachieving environmentally acceptable sanitation solutions is a major technicalchallenge, particularly in urban and peri-urban areas and some approaches may leadto environmental pollution, since increasing access to sanitation under conditions ofwater stress means that there will be more and more pollutants being disposed intoless and less water.

On the other hand, innovation and flexibility with technical standards will allowcountries to expand access to sanitation more rapidly and cost-effectively. Technical

designs should also reflect the new emphasis on local decision-making, i.e. allowinghouseholds, neighbourhoods, and communities to choose from a range oftechnological options based on their preferences and willingness to pay – rather thanrequiring a uniform standard across an entire city or region. This would certainly bringimproved services to more households in the short term.

One of the major problems in infrastructure design in developing countries is theadoption of technical design standards from developed countries without adaptationto local circumstances and affordability. But there are also promising initiatives. Forexample, Brazil has made significant advances in adapting sewer design standards.Simplified sewerage is an example of new sewer design that give users the same, orat least acceptable, standards of service at a fraction of the cost of usingconventional sewerage design standards. The adoption and replication of such bestpractices solutions is highly recommended wherever it is technically feasible.




As a conclusion, many technological options are already available to expandcoverage of water supply and sanitation in a variety of circumstances. At issue is thebest way to make choices to meet specific local needs.

3.5 Politics, Regulatory Framework and Reforms

One of the chief constraints to expanding water supply and sanitation coverage is thelack of political will, i.e. the absence of political leadership and governmentcommitment to allocating sufficient national resources to the sector, and toundertaking the reforms necessary to improve performance and attract investment.Broad policy and institutional reform is also essential for reducing politicalinterference in the day-to-day operations of water and sanitation agencies in manycountries. As long as water supply and sanitation service providers have to rely onthe state for budgetary transfers, and as long as agency staff is vulnerable tointerference by officials in decisions related to their careers, priority setting, pricing,

and investment will continue to favour those with political connections – which almostnever includes the poor. Joint efforts of agencies to help to make financial andpersonnel management processes more transparent and less vulnerable tocorruption, as well as enactment of civil service legislation to improve incentives forgood performance are two examples of the type of reforms that can help redirectplanning and decision-making toward communities with relatively weak political voice.

It is also worth noting that, in the water and sanitation sector, change is oftentriggered by a crisis, such as drought, a severe drop in service levels, an outbreak ofdisease, or a financial failure. Political shifts, such as decentralization or elections,can also be opportunities, such as the possibility of privatization or donor pressure.

Timing is one of the basic challenges of the sector – how to make progress withinone political cycle after decades of neglect or how to interest politicians in measuresthat are not likely to yield visible results during their term of office. It is, thus,important to look for historic opportunities to make large strides and also to pursuebuy-in around a few simple first steps that can yield short-term benefits. Suchconfidence building measures, that build capacity, trust, and social capital can helppave the way for deeper, subsequent reforms.

Absence of a sound regulatory system and a strong regulator are generally held to beconstraints to good performance by public as well as private sector operators. Theoverall aim of regulation is to ensure that such sector goals as MDG target 10 arereached, confidence is established to attract private investors in financing and service

delivery, and that the interests of both users and service providers are protected.Good regulation is critical where private sector participation is involved, but also inpublic sector systems and particularly so in decentralized administrations (e.g.municipalities). The regulator should have a clearly defined mandate and authority,with an independent source of funding. The primary responsibility of the regulatorshould be to supervise operators, both public and private. Two types of regulation arenecessary: service quality regulation (quality and efficiency of service providers) andeconomic regulation (tariff-setting on the basis of agreed upon objective criteria). Akey principle is to ensure that consumers are not made to pay for the inefficiencies ofservice providers.

Regulating the quality of small-scale service providers is particularly difficult becausethey are diverse, numerous, and often outside the formal sector. The authorities tendto be reluctant, hoping these providers will disappear soon and the official attitude




ranges from hostility to neglect. Policies of active encouragement are rare. Thus,most aspects of price and quality control are left to the market forces which can beharmful for customers’ safety and affordability, and the environment. One solutionmight be a gradual tightening in minimum service standards, with some incentivesplaced on the providers to enter the formal sector and upgrade their service in the

long run. This could be done by e.g. giving financing facilities to those who want toexpand their activities, on the conditions that they would fulfil licensing or operatingquality requirements. Such an approach would treat small-scale providers as a validlong-term solution to be considered in full and to be taken into account when planningexpansion of access to water and sanitation (5).

3.6 Environmental Aspects

Many cities in the developing world have achieved a minimal level of sanitationservice at the household level for millions of people. In most cases, however, such

investments have not been followed by the development of community- or public-level sanitation infrastructure, such as feeder and trunk sewerage systems, to conveythe wastewater away from the community for treatment and safe disposal. As aresult, septic tank and feeder network effluents regularly flow into open streams anddrainage channels, creating public health risks, environmental damage, andunpleasant living conditions. Even in many cities of Latin America where relativelycomplete feeder and trunk sewerage systems have been constructed, only about onethird of them have sewage treatment plants. Public health concerns are, thus,generally addressed in the immediate neighbourhoods, but environmental damagefrom untreated waste continues unabated, often affecting the poor who livedownstream.

For SSA, e.g. Collignon and Vézina (18) point out, that households are satisfied withthe on-site sanitation facilities and find them affordable even at the lowest level ofincome. These facilities are probably the most appropriate solution for urban areaswhere there are fewer than 300 persons per hectare, as in many towns and recentlysettled peri-urban areas. When the pits fill up, they can be closed and a new one dug,or emptied and the waste buried on the same lot. But in denser areas, on-site reburialbecomes difficult and another disposal site must be found. Manual cleaners usuallyfind a place to dump or bury waste nearby and suction trucks can transport wastebeyond the edge of the city. However, since there are few authorized dumps, theuntreated sludge ends up dumped in ravines and low-lying areas. In general, the

disposal of septic waste represents a serious environmental problem in all ten citiesin SSA studied by Collignon and Vézina. And more disturbingly, this seems of littleconcern to neither urban residents nor the authorities.

Breaking the full set of sanitation objectives into manageable steps – from the safecollection, storage, and disposal or reuse of human excreta to the treatment anddisposal, reuse or recycling of sewage effluents – can help create opportunities forprogress where the entire challenge seems overwhelming and funds are limited.

Drinking water quality must also be safeguarded because it is essential for humanhealth. This means that water governance arrangements should protect ecosystemsand preserve or restore the ecological integrity of groundwater, rivers, lakes,

wetlands and associated coastal zones. Pollution prevention has to be prioritised,because it is normally more cost-effective than the restoration of polluted waters.




3.7 The Role of Subsidies in Water Supply and Sanitation

Improving water supply and sanitation is an important strategy to reduce poverty andto positively influence the health situation of the poor. However, it is often arguedthroughout literature that the poor cannot afford to pay for access to adequate watersources and, even less, to adequate sanitation solutions. From the authors’experience, however, this hypothesis has not been found to be totally true. The rightchoice of affordable technology, efficient provider management, hygiene promotion,community participation and user information plays a much more decisive role whentalking about cost and the ability and willingness of customers to pay for water andsanitation services. Nevertheless, for the time being some forms of subsidies seem tobe necessary in order to reach marginal population strata. However, these subsidiesshould be targeted to the poor and should be designed in a way as to not disturbmarket mechanisms or endanger sustainability of the water and sanitationinstallations.

One form of indirect subsidies could be average tariffs that are below average cost(including depreciation of assets) but this concept has proven not to be viable in thelong run as it leads to the financial deterioration of any provider and hence itsgrowing financial dependency from political decision makers. The burden ofinappropriate cost recovery can be deadly, and is often paid by those least able tobear them (23).

However, the authors are of the opinion that in many countries the application ofcross-subsidizing tariff mechanisms (regional and/or between consumer groups) inorder to increase revenues and at the same time to cater for the poor is still under-explored – and more efficiency in revenue collection could often do the rest.

Therefore, the concept of applying cost recovering tariffs – at least in urban areas – has been generally acknowledged by governments and donors all over the world, notonly for financial, but also for ecological reasons (demand management). In ruralareas, at least cost for operation and maintenance and, eventually some parts ofasset renewal, should be covered by tariffs.

The general sector discussion which is reflected in many publications, does notexclude the concept of direct subsidies under specific conditions. For instance, inremote rural or in peri-urban areas where circumstances do not allow for commercialfinancing, leveraging of loans by grants can be justified in order to increase access ofthe poor. The need for investment subsidies is also widely recognized in states orareas devastated by wars or catastrophes or in states that have a lot of catching upto do in investment (e.g. former Soviet republics). Investment subsidies are justifiedas well for investments with high externalities (e.g. wastewater treatment in anecologically fragile environment) or as a start-up in transition phases (e.g. transitionfrom public systems to pro-poor PSP arrangements which are often accompanied bylarge additional investments in bulk facilities).

However, it is also state of the art that any subsidies must be designed in a way thatdoes not disturb market conditions (“smart subsidies”). This applies especially tofinancial services for PSSPs, HSSPs, and CSSPs. One of the key principles shouldbe that financial services of must pay for themselves and therefore any form of justifiable subsidies in water supply and sanitation must be applied elsewhere.




3.8 Development Trends

The literature reviewed does not indicate clear development trends with regard toPOWS&S. However, the following general observations can be made:

The role of PSSPs in SSA becomes more and more important as in manycountries the public utility companies are still weak; they have difficulties inproviding coverage and access to the fast growing population as low tariffs donot allow for expansion of the existing WS&S systems. It is in that niche wherePSSPs grow.

In principle, synergies could be created between public utility companies andPSSPs. In practice, however, this does not happen because of the bad imageof these providers (bad service and water quality, high prices, illegal business).The lack of appropriate regulation often adds to the problem.

In many countries of SSA, sanitation is becoming a burning problem with

regard to public health. In many peri-urban areas, for instance, water supply isoften somehow guaranteed but sanitation tends to be neglected or left to thehouseholds that normally do not care (because of lack of ownership, limitedaffordability and/or lack of awareness). This situation is reflected in policy andin many countries sanitation is gaining higher priority in the development andinvestment plans.

Subsidies in WS&S investments are often applied without proper targetingmechanisms, especially in rural areas. This leads to the fact that loanscompete with grants even if affordability is given. Tariff levels are by and largetoo low to allow for asset renewal/loan repayment and/or extension. In many

countries, demand management policies are not yet sufficiently in-built in tariffstructures and the potential of cross-subsidizing is not fully explored.




4 Role and Importance of Small-Scale Service Providersand Type of Activities in POWS&S

4.1 Water Supply

In the drinking water sector, literature from 44 countries with small-scale serviceproviders was identified and reviewed by Kariuki and Schwartz (77). Half theexamples cited were in cities or towns and the remainder in rural areas. Tens ofthousands of (informal) providers, mostly “point source” systems or vendors, hadbeen documented. The nature of these providers varies regionally, but correspondsclosely to the level of coverage and quality of service in a given country. In LatinAmerica and the Caribbean, where urban coverage tends to be high, these providersmore frequently take the form of piped water systems, mainly peri-urban, small town

and rural. In South Asia, these providers seem to focus on “gap-filling” activities withmany tankers operating in various cities. Across all regions, low-income countrieshad a larger presence of small-scale service providers, particularly point sources andmobile distributors (e.g. Haiti, Burkina Faso, Bangladesh).

In many African cities (18), the primary network, run by a (monopolistic) city-wideoperator, coexists with a wide variety of small-scale providers who resell this pipedwater, either by delivering it to households by cart or truck, or by selling it from fixedlocations such as standpipes or cisterns. These providers are especially active at theedge of the city where new settlements are being created, where the water utility hasnot yet extended the piped network, and where new, low-income arrivals from rural

areas are settling and possibly even trying to raise a few crops. But the small-scaleproviders often also cater to inner city residents who cannot afford a connection,including those squatting on land subject to flooding or other marginal sites.

In Latin America, Paraguay is an interesting and much debated example fororganizing water supply in peri-urban areas, especially in the outskirts of Asunciónand Ciudad del Este where the urban public water utility does not provide any serviceand the relatively abundant presence of underground water has fostered theemergence of a special type of operators, the so-called “aguateros ” (55), (56). Fordetails, see chapter 7.2. The aguateros were actively involved in the public debateson water sector reforms, new water law and regulation that took place in the late

nineties. They even presented their own draft for a new water law and thus initiatedquite controversial discussions. Unfortunately, their attempts in lobbying against thenew, quite restrictive water law and regulation provisions were not successful.Although potential clients for long-term loan financing, the aguateros did not financetheir investments by loans (unfortunately, the literature is silent about the reasons).Instead, it was the customers who had to pay a relatively high connection fee whichwas the aguatero’s principal income for amortizing the investment. The precariousnature of the installations and, above all, their legal insecurity in the medium term,means that the investment must be paid off rapidly. The aguateros’ developments arebased on a total recovery of investment cost before three years (56) which impliesquite a high financial burden for the customers.

In rural areas, water supply schemes are normally operated and maintained bycommunity-based organizations (CBOs) that are obliged to pay tariffs in order tocover the related running cost. Investment cost, however, is subsidized to a high




degree by governments, NGOs, and/or donor organizations. In remote rural areas,cash-flow history is often lacking and savings cannot be secured, as banks are notavailable. For the communities, this fact constitutes a real problem in accumulatingfunds for major repair works or replacements. In case of system breakdowns,therefore solutions are often sought on an ad-hoc basis and down time can last for

weeks – which has adverse impacts on hygiene and health. In order to meet thesechallenges, various efforts to regroup the CBOs in associations (often assisted bygovernment or NGOs) have been developed, but so far none of them has reallyproved to lead to sustainable solutions.

Besides CBOs, service providers such as mobile area mechanics or smallmechanical workshops who deal with repair works and spare part supply are otherpossible clients for financial services in rural areas. One constraint, however, is thattheir business often tends to be not really viable from an economic perspective asbusiness volume in low-density regions is little because regular spare part demand isoften limited due to robust pump technologies (some spare parts are not fast turning

items). Pump types should be standardized in rural areas in order to make stock-keeping and hence turnover of working capital feasible. Unfortunately, this is notalways the case as different donors have the tendency to finance different pumptypes (e.g. The Gambia, Burkina Faso).

According to the source and technology parameters as well as organizationalaspects, the following classification system can be derived for urban as well as forrural water supply (77):




Table 3: Categorizing Small-Scale Service Providers in Water SupplyFeatures, by technology Dependant Independent

A) Piped Networks

System Operator buys water in bulk fromutility and develops distributionsub-networks connected directlyto households and other users.

Operator develops own watersources (wells or boreholes) andconnects network to households andother users.

Organization Private company or individual,CSSPs or neighbourhoodassociation (NA).

Sole proprietor, cooperative, privateland and housing developer, wateruser association or CSSP.

Regulatory Issues Contract with utility, businesslicense, customer agreements,bulk rates, customer tariffs,performance incentives.

Groundwater abstraction permits, titledeeds, resale permits/licenses, waterquality testing, business licenses,rights of way (for own infrastructure

and/or for network).

B) Point Sources

System Kiosk or stand post connected tothe utility network; buying waterin bulk at a special tariff.

a) Water point linked to own source(well or borehole, underground oraboveground storage tank) installedprivately and operated on a for-profitbasis. Water may be purchased froma tanker.b) Same systems, but installedpublicly and handed over to a CSSPor NA for operation.

Organization Individual, micro-enterprise, self-help group.

NA, CSSP, micro-enterprise.

Regulatory issues Contract with utility,license/permit, bulk rates,customer tariffs, performanceincentives.

Groundwater abstraction permit,license, water quality testing.

C) Mobile Distributors

System Tankers or truckers obtain waterin bulk from the utility and

deliver it directly to the customer – including public utility waterstorage tanks, communalcisterns, or individualhouseholds and institutions.

Tankers, truckers or carters obtainwater from a private well for

distribution to households,institutions, public utility water storagetanks or communal cisterns.

Organization Sole proprietor, tankerassociation, lessee, informalsector.

Sole proprietor, tanker association,lessee, informal sector.

Regulatory issues Transport license, businesslicense, tanker cleanliness, bulkrate, utility contract, customertariff.

Transport license, business license,tanker cleanliness, water quality,abstraction permit.

Source: (77)




The above table also helps in structuring the overall picture and to showdependencies between small scale providers and public utility companies. Technicalsolutions, organizational set-ups and modes of delivery are manifold and hence areregulatory issues. Investment needs and financing strategies also vary across thedifferent categories. This makes interventions complicated as no “fits all solution”

exists. For instance, when it comes to financing small service providers (e.g. kioskoperators or water vendors) face different problems than do SMEs (e.g. water tankeroperators or aguateros). From a technical and financial perspective, dependantproviders are more vulnerable compared to independent providers as they rely upondelivery from public utilities that they cannot influence; but their investment cost andhence their financial risk is also lower. Independent providers are also more difficultto regulate as the quality of water they provide is not controlled by the public utilitycompany.

4.2 Sanitation

Financing urban sanitation is a global challenge with few sustainable success storiesin developing countries. Among the most common cited explanations are thatsanitation is too expensive and that poor people will only pay for water but not forsanitation. One promising example, however, is the so-called “Sistema Condominial”that has been introduced and is successfully operated in several states of Brazil. Thistechnology that has been supported by the World Bank (79) and other donorsconsists of shallow and/or small bore sewer systems that have emerged as a resultof adapting design standards of the conventional sewerage to suit the physicalconditions of urban low-income settlements, such as adverse ground conditions, highsettlement density and high water consumption. However, most households in

African cities (70-90%), and virtually all poor urban households deal with their ownwastewater by building their own latrines or septic tanks or hiring others to do it.Since the public sector is generally not involved in this area, private providersdominate the market and offer services tailored to customers’ needs and incomes forthe tasks that households choose not to carry out themselves. There is a wide rangeof activities in this field, like e.g. masons who build latrines, manual latrine pitcleaners, suction truck operators for septic tanks, and manual or mechanized drainand latrine ditch cleaning services. Small-scale providers also work in solid wastecollection and rainwater drainage, but these areas are not directly covered in thisstudy.

Burkina Faso has adopted an interesting approach to stimulate demand for sanitationand then meet that demand through small-scale providers. The innovation has beento introduce a “sanitation services levy” on all water bills and to subsidize sanitationpromotion and installations. Users finance approx. 70% of the on-site sanitation, butno information could be obtained as to whether financial services are involved or not.

Rural sanitation is even less developed. This may be explained by the low populationdensity and hence less evident hygiene or environmental problems perceived.Cultural factors and lack of hygiene promotion sometimes add to the fact that ruralareas tend to be more underserved in sanitation than urban areas. However, thereare promising approaches, e.g. in India with WaterAid and other NGOs that havesuccessfully launched low-cost and low-subsidy micro credit schemes for ruralsanitation in several areas.




According to the squatting and technology parameters as well as clientele and costaspects, the following classification system can be derived for sanitation (18).

Table 4: Household Sanitation Options in African Cities

Technology option Clientele Constructioncost (USD)

Annualmaintenance

cost (USD)

Unlined pit

The pit is dug by hand and is unlined, theopening is covered with boards. It is used forhuman wastes, wastewater, and organicgarbage. Often closed and re-dug when full.

Residents of ruraland peri-urbanareas where plotsare relativelylarge.

30 – 60 10

(for hiredhand)

Unlined latrine with platform and soak pit

An unlined pit is equipped with a cement

platform, which may have a manhole cover. Thesoak pit is dug separately to receive wastewaterand sometimes filled with large stones toprevent collapse.

Cleaning is done manually.

Residents of peri-urban areas,where plot size

permits.

50-100 15-20

(manual

cleaner hiredevery year)

Lined latrine with platform

The pit is lined and waterproof. Often used forwastewater as well as human waste, it fills upfairly quickly. When regularly cleaned, this typeof pit minimizes pollution.

Cleaning is generally carried out by suction

truck.

Residents ofurban areas,where small plotsrequire reusablepits.

150-300 30-50

(suction truckonce a year)

Latrine or toilet + lined pit linked to soak pit

When a lined pit is linked to a soak pit for liquidoverflow, the frequency of cleaning is reduced.

The pit fills with fairly liquid effluent and itscleaning is generally carried out by a suctiontruck. Compacted solids may need to be dug outby a manual cleaner, possibly hired from thetrucker’s staff.

Residents ofurban areas

Public buildings(schools, offices)

300-800 30-50

(suction truckonce a year)

Septic tank + grease trap + soak pit/filteringtrench

An effective septic tank system includes at leasttwo linked compartments. Waste passes firstthrough a filter, which traps solids and greases,and liquid overflow passes into a separate soakpit. This system can be said to be self-purifying.The grease trap is cleaned manually on aregular basis. The septic tank can be cleanedonly by suction truck (every 3-5 yrs).

Residents of high-income housing

(villas).

Unaffordable tomost households.

800-3,000 15-20

Source: (18)




4.3 Households as Small Self-Service Providers – HSSPs

Unlike cities in the industrial North, where there is often a single source of waterserving all residential and most industrial customers, in many cities of the South thereare a wide variety of water suppliers (18). Besides individual connections to thepublic utility network, people can get water from own wells, from their neighbours’wells or connections, from springs, from collecting rainwater, from water carriers,hand carters, carters using animal traction, standpipes and boreholes with manual orelectric pumps. Hence, any analysis of access to water must go beyond thehouseholds served by the public utility network, especially for low-income users whooften decide on a daily basis where they will get water – whether from moreexpensive, better quality sources (e.g. standpipes or a neighbour’s connection) orfrom less expensive, sometimes less clean ones (e.g. wells, springs, rivers, storedrainwater). The choice depends on household income and time available and onwhere water is available (distance). Sometimes it costs more to buy water from a

door-to-door carrier but using the time saved to earn money may more than cover thedifference in water cost. The choice of water supply depends also from rainfall,network down time and quality factors (taste, clarity of the water) and sometimessocial (relation to neighbours) and cultural factors.

Another interesting business for microfinance are private house or yard connectionsto poor households - although these households do not necessarily belong to thepoorest population who, because of affordability, is obliged to use standpipes.Therefore, the issue of subsidies and adequate technological standards has to becarefully investigated. In any case should credits to finance house connections notbeen subsidized, but partial grant financing in line with the above mentioned examplefrom Burkina Faso (levy on water bills to subsidize parts of the installations) could be

a viable solution in order to increase coverage in water supply. However, grantsshould be ceiled (e.g. 30% maximum) in order not to undermine market mechanisms.

Recent experience from South Asia (62) show that the active participation ofconsumers in financing housing infrastructure (including water supply and sanitation)is widely recognized as a key component of long-term sustainability of services. Forthe poor, an increased financial stake can guarantee improved delivery and operationof services. To facilitate such financial participation, poor communities or individualsoften use small-scale credit services and there is evidence of the enormous potentialof microcredit in improving service delivery at the lowest income levels.

In SSA, however, microfinance to HSSPs are still much less developed compared toSouth Asia. This might be explained by a less active microfinance sector in general,but also by the strong prevalence of cultural habits and alternative credit sources(family credits, traditional tontines, money lenders) and perhaps lower purchasingpower.

4.4 Private Small Service Providers - PSSPs

PSSPs today serve millions of people throughout the world despite the existence of(public) water utilities. These providers work for profit and they mostly operate inareas inhabited by the poor. This is not surprising considering that it is the poor whotend to be neglected by the formal system and are the ones who are often notconnected to the water network. It is the scarcity situation in which the PSSPs




operate and thrive. They generally cater to those not served or underserved by thewater utilities. In some countries they also serve households that cannot afford aformal connection to the network due to the related high cost.

PSSPs usually use low technology and charge rates that are much higher than thosecharged by the water utility. They survive because they are flexible in their approachand are responsive to consumer demands. They provide assured service and areeven willing to change payment patterns to suit their customers.

Normally, water supply is a mandatory function of either the central state or itsdecentralized bodies (municipalities, provinces, districts, etc). The task of watersupply is undertaken by public water utilities (or private under different private sectorparticipation arrangements) – central or municipal – that are often unable to serve theentire population within their jurisdiction due to numerous problems. These rangefrom lack of funds, inadequate infrastructure, high population growth, inefficiency inprovision of water, high levels of unaccounted for water, pollution and/or depletion ofwater sources (66). The net result is that citizens get inadequate or even no water at

all from public utilities even in the areas served by them. Hence, they are obliged tofind their own solutions to survive.

It is this situation that creates a conductive environment for the PSSPs to operate.They bridge the gap between demand and supply and provide water to unserved andwater scarce areas. In general, they operate informally and invest private funds in thebusiness. Given the water supply situation in many cities, they recoup theirinvestment within a few years.

In Africa, for example (41), over half of the residents in urban areas depend uponnon-utility sources of water, and 80% depend on non-utility sanitation solutions.Collignon and Vézina (18) found that e.g. in Kayes (Mali) revenue collected by the

independent providers of water is double that collected by the utility. And inOuagadougou and Bobo-Dioulasso (Burkina Faso), independent providers collectedrevenues half of those collected by the public utility (ONEA). This gives also anindication of their financial strength and hence the potential demand for credit, whichoften remains unfulfilled. It must, of course, be recognized that access to credit is justone constraint and cannot be addressed in isolation from other constraints, such asthe need for transparency in contracts with users and the public utility, legal aspects(title deeds, licenses), efficiency in billing and collection, and regulation to ensuretheir due performance (water quality, service quality) and a fair competition (53).

PSSPs cover a large range of activities and vary considerably in business potential,

technologies applied, cash flow, investment required, and legality of operation. Withregard to water supply, they are involved in production and supply chains thatproduce, distribute, sell, and install water access, storage, and purificationtechnologies. In sanitation, they work even more independently from the publicutilities as these usually cover only a very limited range of the population in urbanareas and none in rural areas.




4.5 Community-Based Small Service Providers – CSSPs4

In many countries of the South, governments have moved to CBOs as the providersfor water services in rural areas. Small- to medium-sized operations running intothousands of schemes are found in different countries. These include both pointsources and piped schemes, either gravity-based or motorized. It is likely thatmotorized piped schemes would have greater need for credit and financial services.For most CSSPs, communities are involved in the design and implementation of newschemes, contribute to the capital investments, and have complete management andfinancial responsibility for operation and maintenance. However, it has to berecognized that community-based water supply schemes often failed because of lackof managerial and technical skills, lack of access to banking institutions (for savings)and lack of access to technical assistance and spare parts’ supply in case of systembreakdown. In addition, the concept itself bears an inherent dilemma as thecommunity members are users and service providers at the same time: as users they

prefer low tariffs and as service providers they should strive for higher tariffs thatallow for proper operation and maintenance (O&M), including some asset renewal.

4.6 Advantages and Constraints

According to Collignon/Vézina (18), the main advantages of small-scale serviceproviders – especially PSSPs in SSA – are their ability to respond quickly to changesin demand, to offer services needed by low-income families, to self-finance, and torecover their investment and operating cost. Several surveys also indicate thatcustomers are quite satisfied with PSSP services because they know they will get

water virtually anytime and anywhere, whether or not the utility’s service is up ordown. As the sector is very competitive, users know that they can choose betweendifferent small-scale providers and this competition keeps value for money high. The(poor) user also appreciates being treated as a valued client, is spared administrativehassles, and has not far to go to be in touch with its – often neighbourhood – PSSP.

The main constraints to expanding and improving their service levels are thefollowing:

Popular misconceptions about their pricing strategies and service quality Lack of recognition and communication with public authorities Weak policy and regulation in the water sector

Hostile attitude of the (public or private) water utilities Lack of access to bank loans Insecurity of infrastructure they build on public lands, and rights of way

(unprotected investment)

Regarding the refuting popular misconceptions or objections raised to theinvolvement of PSSPs in the water and sanitation sector, Collignon/Vézina found outthat none of the statements was supported by their ten-country study. For example,the quality of water provided by PSSPs was found to be practically the same as thatof water from the mains, where it was drawn, and better than that of water drawn andcarried home by household members in uncovered basins.

4Information from (41)




Besides the unsatisfactory or even non-existent dialogue between the PSSPs andthe water utilities, another striking aspect of the water and sanitation sector in Africancities is the weak regulatory capacity, especially with regard to PSSPs. This leads tounfavourable working conditions for PSSPs (too high standards required, unrealisticprice ceilings prescribed), which makes it sometimes hard for them to survive.

As Collignon/Vézina point out, PSSPs are not looking for grants and do not expectsocial security benefits but they are unhappy with the lack of recognition frommunicipal and water company officials for the value of the services they provide.What they would like most of all is a fair institutional and legal environment that wouldbe favourable to more investment and expansion of their activities in response totheir clients’ demand. They would also appreciate better coordination with cityauthorities and water companies.

At a first glance, financial constraints seem to be of less relevance but it is alsomentioned that the modern banking sector does not offer loans to the PSSPs, exceptfor purchasing equipment (e.g. trucks) that can serve as a collateral for the loans.

PSSPs are therefore obliged to finance their investment through more traditionalmeans – family savings, saving clubs (tontines), money lenders, and suppliers’credits. Because there is no risk sharing when using traditional financing sources,PSSPs tend to minimize their risk by investing in short-term improvements (6-12months). This is also a strategy to limit their investment risk due to unclear legalsituations. As a result, they prefer to make a number of sequential smallerinvestments rather than take advantage of economies of scale. Normally they find thefunds they need, but they pay a high effective interest rate for capital, especially tomoneylenders. Transaction cost for family and tontine funds often involve reciprocity,i.e. contributions in kind equal to the amount borrowed.

Hence, the urban informal sector should be served by measures to improve bankloan administration policies and procedures and to broaden loan eligibility terms inorder to respond to the market demand. If PSSPs’ access to commercial bank creditcould be expanded, the savings in the cost of credit could be passed on to theircustomers.

CSSPs are a widely recognized organizational model for rural water supply, whichhas many advantages related to social coherence, empowerment of the poor andactive participation of the community. Nevertheless, they still have to cope withfundamental problems. The major constraints are the following:

Lack of technical expertise in case of system breakdown

Lack of timely availability of spare parts close by Required payment schemes do not correspond to the seasonal fluctuation of their

income and savings for water supply often compete with other basic needs(education, housing, health etc.)

Lack of funds to pay upfront capital investments and major repairs

Lack of reliable savings possibilities

The potential of improving water supply and sanitation through the provision ofhousehold credits (for housing and infrastructure) to HSSPs is heavily under-exploredin SSA. Other constraints – often connected to the lack of credit access – are thefollowing:

Non-legal situation (illegality of settlements)




Tenants (prevailing in peri-urban areas) for logical reasons do not want to incurmajor investments and (absent) owners are not interested in improvements.

In peri-urban areas with high population density, the plots are too small and/or theunderground conditions are not suited for on-site sanitation.

Lack of technical expertise

As a conclusion, it must be recognized that access to and effective demand for creditis quite complex and interdisciplinary approaches are required in order to mobilizefinancial services for POWS&S.

4.7 Kind of Investments and Financing Needs

The potential demand for finance from small-scale providers is affected by theirlocation (urban/rural), the environmental circumstances (water availability) and thetype of technology required. Another decisive factor is the scale of investmentneeded – there is greater demand for finance from activities requiring largerinvestments. Investigations show (41) that the legal status of small-scale providersand the scale of capital investment have a strong influence on the selection ofspecific finance solutions. As legitimacy increases, potential for credit increases aswell, using financial products for small investments. And as the investment amountincreases, formal sector commercial credit products become more relevant. If thescale of investment is very small, however, there may not be demand for credit, asown savings or help/borrowing from relatives or friends are often sufficient.

Table 5 (see also chapter 4.2 and Annex 1) presents some typical examples andinvestment cost for different technical POWS&S options. It also shows that the rangeof investment cost varies considerably.

Table 5: Typical Examples and Investment Cost for Different Technical POWS&S Options

Technical option Investmentcost (USD)

Annual maintenance cost (USD)

Water Supply Handcart for water transport 50-135 marginalWater truck 7,500-15,000 approx. 5% of investment costStandpipe 50-700 approx. 5% of investment costBorehole & standpipe & electric pump 37,400 approx. 3% of investment costBorehole with handpump 12,000-19,000 approx. 3% of investment costSmall network with metered householdconnections

3,000 (per km) approx. 2% of investment cost

Sanitation Unlined pit 30 – 60 10Lined latrine with platform 150-300 30-50Latrine or toilet + lined pit linked to soak pit 300-800 30-50Septic tank + grease trap + soak pit/filteringtrench

800-3,000 15-20

Source: Annex 1 and own compilation




4.8 Needs for Other Assistance

Survey data collected on small-scale providers (18) (63) indicate that besidesfinancing there are needs for additional services or assistance in order to allow for amore effective and efficient development of their business..Examples from e.g. India

show that for HSSPs and CSSPs access to technical advisory support is vital for thesuccess of credit provision for infrastructure and many MFIs were found to provideloans along with support services for collective infrastructure projects in the informalhousing sector. Normally, technical support as well as community motivation andassistance linked with the public administration is provided by non-financialinstitutions, often local NGOs specialized in that area.

Collignon and Vézina point out (18) that PSSPs are rather interested in quite specifickinds of practical training, such as how to negotiate successfully with the publicsector, how to conduct market surveys, how to prepare a loan application or specifictechnical topics.

Providing technical advice regarding low cost technologies in water and sanitation inorder to allow for making informed choices is also vital to the CSSPs. In addition,technical assistance related to the operation and maintenance of rural water supplyschemes has proven to be crucial regarding the sustainability of projects. Thecreation of networks of local area mechanics, mechanical workshops or suppliers ofspare parts is one example of how to organize proper operation and maintenance inremote areas.

Providing advisory services regarding better financial management has also provento be successful, e.g. in Mali where a specialized unit (Cellule de Conseil auxadductions d’eau potable – CCAEP) is sponsored by the Water Ministry. This

approach has proven to be useful in improving service delivery and reducingoperating cost for the Water Users’ Associations that chose to subscribe to theCCAEP services. Financial audits by an independent agency may also be helpful forurban PSSPs.

In a number of African cities, small-scale operators have established a growingnumber of professional and trade associations through which they can addresscommon problems and advocate common interests (18). These include

Mali’s Union of Water suppliers (UEAEP)

Côte d’Ivoire’s Association of Water Resellers (AREQUAPCI)

Benin’s Union of Sewerage Entities (USV)

Ouagadougou’s Association of Standpipe Managers (ASM) and

The Kibera Kiosk Operators Association in Kenya (Maji Bora Kibera – MBK5) (64)

As long as these associations remain genuinely representative of the group they canplay a key role in improving professional practices and the quality of service deliverypromoting technical innovation, and integrating private and public service systems.Governments and municipal authorities can support such associations by recognizingtheir legitimacy and by negotiating with them to establish fair conditions to dobusiness. And donors can support them with technical and financial assistance.

5MBK was strongly supported by WSP-Africa.




As a concept, cost for technical and financial assistance and/or community promotionshould not be borne by financial institutions but rather by specialized NGOs orindependent agencies – preferably on a grant basis.

4.9 Financing Strategies of Small Scale Service Providers

4.9.1 HSSPs

Populations of poor urban and peri-urban areas differ widely by income, assets,education, and age structure. Nevertheless, the following features are prevailing: (i)most HSSPs are involved in the cash economy, either in low-paying jobs or astraders and producers of goods and services; (ii) most activities take place in theinformal sector; (iii) HSSPs are often characterized by low-income levels, irregularincome streams, lack of tenure and/or ownership of the house.

With regard to house improvements (that may include WS&S) investments often takeplace incrementally rather than as a one-time investment in a full range of facilities. Ina first stage, basic water storage facilities and a pit or bucket latrine may be installed.The next stage might be a well, the connection to a centralized system or investmentin a large storage tank. Sanitation can be upgraded from a pit latrine to a flush latrineand connection to an individual or communal septic tank or to a centralized sewersystem. (67) Literature generally acknowledges the progressive investment processof low-income households. However, the availability of affordable facilities and cost-effective technical solutions is a precondition for it.

Investment cost of different facilities varies significantly among different countries butamount on average from USD 15 to USD 800, but can also go up to USD 3,000 (seeAnnex 1). In the absence of formal or semi-formal financial services, own sources,family savings and informal loans from friends and relatives mainly cover suchinvestments. In a context where financial services are available, it was frequentlyobserved that clients borrow for income generation purposes yet channel the fundsinto house improvements. This may be an indication of the high priority WS&S hasfor low-income households and mirrors the fact that suitable loan products to addresshouse improvements are not available in SSA.

4.9.2 PSSPs

Most PSSPs start out without any institutional help. Collignon and Vézina (18) pointout that PSSP’s ability to raise funds in the informal sector to finance equipment andinfrastructure investment is one of their key characteristics. Most enterprisescontacted during the surveys have never had borrowed from the banking sector. Thisapplies not only to microenterprises but also to larger enterprises holding publicsector contracts such as suction truck owners that require substantial investments.

The entrepreneurs usually obtain the amount of finance from own savings, from thefamily or money lenders. Micro-entrepreneurs often participate in rotating savingsclubs or tontines. The financing of larger investments such as vehicles or small waterdistribution networks is – in the absence of term loans – often to a high degree

financed by contributions or advances from clients (see also the example of‘aguateros’ in chapter 4.1).




Financial services are required for capital investments and O&M management.Capital cost vary considerably between different countries and the range of activities.Beside other important constraints (e.g. efficient billing and collection systems,regulation to ensure competition, transparency in contracts), the lack of access tocredit for capital investments is often one of the main constraints to new and

expanding small-scale water and sanitation providers. Further, they need depositfacilities and current accounts to better manage their finances.

Most of the PSSPs are operating under informal conditions and have to face all kindof insecurities (e.g. theft of equipment, eviction from their premises). Legal frameworkconditions are often unclear and political and economic framework conditions areunpredictable. The strategy of many service providers to cope with such risks is tolimit investments to a minimum, which may have negative and undesirableconsequences for the quality of services and expansion (for details, see chapters 4.4and 4.6).

4.9.3 CSSPs

CSSPs operate water supply schemes mostly in rural areas. Such schemes cansupply up to 1,000-2,000 households with water. In many countries, subsidies areprovided to meet the capital cost which reflects the perception of a lack ofaffordability. Only some rare cases have been reported, where the schemes arecompletely self-funded.

Although no specific financing strategies of CSSPs could be identified from theliterature review, there is certainly a high potential demand for financial services atthat level. This demand can be divided into three main categories (41):

New investments to meet the community share in capital contribution: In general,most countries provide subsidies to meet the capital cost of rural water supplyschemes and only a minimal community contribution to capital costs is required,usually ranging from 5 to 10 percent. In addition, contribution in kind (labor orlocal material) may also be required. The low share represents the perception of alack of affordability. However, sustainable access to credit would enable anincrease of the community contribution without any adverse impact onaffordability, though this would require a clear government policy on communitycontribution and a ceiling on capital subsidy associated with some notion of basicservice levels and related technologies.

Investments in major repairs/rehabilitation/extension : In most countriesgovernment subsidies are only available for new investments but not for meetingthe cost of repairs or rehabilitation/extension. Latent demand for finance for theseactivities can be seen in two contexts: (i) transfer of water schemes fromcentralized agencies to CBOs that need to be rehabilitated prior to transfer and (ii)availability of timely finance in case of major repairs and extensions.

Deposit of savings generated from user charges: If water tariffs are paid regularly(which is also aimed at in rural areas), quite high amounts of savings from usercharges accrue over time (e.g. in the northern part of Mali: one million EUR forapprox. 50 village water schemes) seeking for safe deposit possibilities. But thelow degree of outreach of financial institutions in rural areas often leads to non-

payment of tariffs or even robbery of the accumulated money.




5 Demand for Financial Services in POWS&S

Literature gives only few details on the demand for financial services in POWS&S,mainly because an effective demand has not yet developed and most investmentsare hitherto financed through informal or own sources – as outlined in chapter 4.9.The following two chapters reflect the authors’ perception on the effective andpotential demand for financial services in POWS&S and shall also define the termsand concepts used in the subsequent studies (country case studies and conceptstudy).

5.1 Effective Demand for Financial Services in the POWS&S Sector

Effective demand is the demand generated when a client is both willing and able topurchase a good or service. In the countries of SSA, the demand for financialservices for POWS&S has not yet been translated into effective demand. Accordingto the author’s analysis, the reasons are found on three levels:

The willingness of different market segments to use financial services for WS&S isnot fully developed at present. Possible reasons are:

Non-awareness of possible advantages.

Low priority for investments and/or improvements into sanitation.

Unfamiliarity in dealing with banks and other financial intermediaries.

Bias against formal financial institutions.

Expectance of subsidies, particularly for CSSPs.

Insecure legal status of HSSPs regarding tenure and ownership of property.

Insecure business perspective of PSSPs due to unclear regulation in the watersector.

Physical insecurity of equipment.

The ability to repay a loan under agreed conditions is also important. The factorsthat determine the ability to repay a loan for WS&S mainly are:

HSSPs: household income and cash flow of the entire household;

PSSPs: profitability and liquidity related to the investment; household income;

CSSPs: percentage of community share/amount of subsidies involved;technology and its total cost including cost of operation and maintenance,tariffs and effectiveness of collection with regard to user charges.

The ability to repay the loan further depends on (i) financial and managerialcapacities and capabilities; the availability of affordable technologies; and (iii) reliablesupport services.

External factors that determine the potential demand are:

Limited outreach or non-availability of financial services in most countries of

SSA – as one of the major constraints for the use of financial services inPOWS&S.




Financial services are not client-oriented and/or do not correspond to thespecific needs of HSSPs, PSSPs, CSSPs.

Non-availability of affordable equipment, non-existent supply structures, lackof technical knowledge.

Lack of land tenure and ownership of houses.In the framework of this study, it is not possible to verify the above reasons and toderive a conclusion. The case studies in Kenya and Uganda will most probably bringmore clarity to the topic. The following chapter will outline the potential demand forfinancial services, while chapter 6 will describe the supply situation.

5.2 The Potential Demand of Financial Services for POWS&SDevelopment

The three client segments that are relevant for POWS&S have different requirementswith regard to financial services. Literature does not detail the required financialproducts for HSSPs, PSSPs and CSSPs. The following chapter outlines differentfinancial products that can increase the outreach and scale of small-scale serviceproviders according to the author’s assessment. The chapter also defines thedifferent product categories of financial services that are relevant for POWS&S.

5.2.1 Housing Microfinance Loans

Housing microfinance mainly consists of loans granted to low-income people forrenovation or expansion of an existing home, construction of a new home, and basic

infrastructure. The most experience in this relatively new field has been gained inAsia and Latin America with home improvement loans that are designed to helphouseholds to finance incremental improvements to their homes. Microfinance homeimprovement loans are the central aspect for WS&S investments of HSSPs.

Key features of housing microfinance loans are: (i) the size is generally 2-4 timeslarger than average working capital loans; (ii) the term is usually 2-24 months forhome improvements and 2-5 years for land purchase or house construction; (iii) thedelivery method is rather individual lending than group methodology; (iv) collateralrequirements may include compulsory savings, guarantors and real guarantees butare often unsecured; (v) the target clientele are low-income people, salaried workersor micro-entrepreneurs and/or home workers primarily in urban and peri-urban areaswith established track record. (11)

Literature suggests that the demand for housing microfinance is high. MFIs aroundthe globe are reporting that clients already use a good portion of micro-enterpriseloans to home improvement. (11) In the context of this study, housing microfinanceloans are basically relevant for HSSPs that want to improve their WS&S facilities.

An important constraint for the low-income population to invest into homeimprovements is insecure land tenure. In most countries of SSA, poor families do notpossess formal proof of land ownership. While formal land titles are not necessary inhousing microfinance, land security is essential. (11) Even when income increases,

households will not spend more than 15 percent on shelter, without some assuranceregarding security of occupancy as owners or renters. (30)




HSSPs demand home improvement loans that are tailored to the way they build butand also adopted to their repayment capacity. An important finding of CIVIS (ShelterFinance for the Poor) is that housing finance loans are in essence a variant ofordinary working capital loans with the following distinctions: (i) longer terms; (ii)larger amounts; (iii) adapted loan appraisal techniques. Housing loans however are

following the basic concept that original microfinance working capital loans are basedon: (i) loans remain uncollateralized; (ii) savings remain important; (iii) significantpresence of women. Most often, the basic lending methodology rewards a client’sgood repayment performance by providing access to longer-term and bigger loans.

Therefore, access to home improvement loans is a result of an on-going relationshipwith innovative financial intermediaries that have already reached a high level ofinstitutional strength and financial viability. In SSA, very few institutions are offeringhousing microfinance loans and the demand remains mostly unfulfilled and/or is notyet fully developed.

5.2.2 Short-Term Loans

Short-term loans6 are the most important product of financial intermediaries and mostoften constitute the main proportion of the portfolio. At the same time, short-termloans are the most important source of finance of small-scale service providers.Short-term loans are required by HSSPs, PSSPs and CSSPs for working capital ofenterprises, for small investments, and for consumption. Seeing the large number ofinformal loan arrangements in the WS&S sector, it is assumed that the demand forshort-term loans is very high but however, rarely satisfied in the WS&S sector inSSA.

Key features of short-term loans are: (i) the size of average working capital loansvaries among different countries and between different client segments but rangestypically between USD 50 and USD 1,000 in SSA; (ii) the term is usually 1-12months; (iii) a regular repayment schedule, usually weekly or monthly (iii) the deliverymethod is following an individual lending or group methodology; (iv) the collateralrequirements may include compulsory savings, guarantors, real guarantees, but areoften unsecured; (v) the target clientele are low-income people, salaried workers orentrepreneurs.

Short-term loans can be an important source of finance for small-scale serviceproviders:

Working capital loans are important for PSSPs in pursuing their business. Theaccess to working capital can increase size and scale of operations.

PSSPs may apply for working capital loans several times a year, dependingon their business. Timely availability and flexible financing mechanism areessential. Ideally, a special credit line or an overdraft would be provided notonly to reduce transaction cost but also to serve PSSPs in the most efficientway.

Short-term investment loans can be an important source for investments inequipment and/or facilities, rehabilitation, repair, extension of existing businessof PSSPs or CSSPs. Small investment loans may also serve HSSPs for

6Loan term < 1 year




investment or improvement into WS&S. In combination with savings, short-term loans may be an adequate source to finance even larger investments.

Consumption loans can be an important source for HSSPs for investment orimprovement into WS&S.

Often short-term loans are the first means of financing for small-scale providers ofWS&S. Successful financial institutions have adopted the graduation principle, whereclients start with small loans that will increase after timely repayment of the formerloan. This practice has the advantage that the clients will continually increase theirfinancial management skills. Especially for small-scale providers of WS&S that so farhave little experience with financial services and that have minimized theirinvestment, the availability of short-term loans will enable them to gradually expandtheir business or activity and to access larger loans with longer duration in a medium-term perspective.

5.2.3 Investment Loans

The financing of the initial purchase of equipment and/or construction of facilities is apotential demand in the POWS&S sector that is not yet developed in SSA. Only rarecases have been reported where investment loans for WS&S were extended oncommercial terms. Many investments in WS&S require larger amounts of capital thatonly amortize over several years. The size of the investment loan widely depends onthe technology and type of equipment and on the percentage of the borrower’scontribution in the case of community schemes. These investments are often beyondthe self-financing capacity of the players in the WS&S sector and require access toterm finance, which allows spreading the repayment of investment costs over severalyears.

Key features of investment loans are: (i) the size is generally few times larger thanaverage working capital loans; (ii) the term is usually 24-60 months for medium-termloans; more than five years for long-term loans; (iii) the delivery method is ratherindividual lending; (iv) the collateral requirements may include more traditionalsecurities such as land title, guarantees, compulsory savings; (v) the target clienteleare low- to medium-income people, salaried workers or MSEs/SMEs primarily inurban and peri-urban areas with established track record.

Investment loans are important in the following areas:

CSSPs: community share in capital contribution, major repairs and

replacements;

PSSPs: larger investments such as trucks, small distribution systems;

HSSPs: acquisition of upgraded or more sophisticated WS&S facilities andequipment.

5.2.4 Savings

In general, savings help PSSPs and HSSPs to manage emergencies and to bettermeet unexpected demands, facilitate smooth consumption, and take advantage ofinvestment opportunities. Savings services can play a critical role, buffering themfrom crisis and enabling them to meet basic needs. For CSSPs and PSSPs, savingscan play an important role in collecting and depositing user charges. First, clients




could pay their fee directly to the account; secondly, the providers of small-scalewater utilities need a safe place to deposit the money they have collected.

For HSSPs, PSSPs and CSSPs, savings equally play a crucial role as they enablethem to

become less vulnerable to emergency situations; protect themselves from robbery and/or loss of money;

cover investment and/or operating cost from own resources;

collect user charges more efficiently;

establish a savings track record with financial institutions for future access tocredit.

Encouragement of savings and establishing the financial reserves for different clientsegments in the WS&S sector will strengthen their self-financing capacity and thevarious clients themselves. Therefore, savings play a crucial role in financing WS&S

whether direct or indirect. Unfortunately, the demand for secure deposit facilitiesremains largely unmet in SSA.

5.2.5 Other Financial Services relevant for POWS&S

Other financial services that can become important for small-scale service providersin the WS&S sector are:

Current accounts for advanced PSSPs to better manage financial incomeand expenditures.

Non-credit financial services include domestic and international money transfers such as remittances. They can play an important role for smoothingincome flows of HSSPs and PSSPs but also for investments in WS&Sequipment and facilities.




6 Supply of Financial Services for POWS&S in SSA

6.1 Existing Situation and Trends

The provision of financial services for POWS&S depends on the ability of thefinancial sector to offer a range of financial services that are tailored to the specificcharacteristics of the water and sanitation sector (e.g. term investments, addressingservice and water quality issues) and the demand of different client segments (HSSP,PSSP, CSSB). The water and sanitation sector has – because of its specificcharacteristics pointed out earlier – not been given much attention by the financialsector in the past. However, the challenge to link the two sectors depends on a well-functioning financial sector in any given country and the ability of small-scale serviceproviders to develop economically sound businesses. Conducive political,institutional, legal and regulatory framework conditions for the water sector wouldalso contribute significantly to a better linkage with the financial sector. Past

experience indicates that financial services for POWS&S will not require the creationof specific institutions or ‘windows’ but have to follow the widely accepted financialsystem development approach. This approach has the dual aim of creating aninfrastructure for the provision of effective financial intermediation services andcreating efficient and viable financial institutions. The financial system developmentapproach therefore also is of relevance for the supply of financial services forPOWS&S as only viable and healthy institutions will be able to serve the water andsanitation sector in a permanent manner.

The main problem in the countries of SSA is that the effective provision and outreachof financial services to the economy and the population generally is inadequate.

According to studies conducted by the World Bank, less than 10% of the populationhas access to financial services. The situation is even worse in rural areas.

The microfinance sector in SSA is still relatively young and in an early stage ofdevelopment. The vast majority of MFIs in the region still are in the start-up and/orconsolidation phase and still are struggling with capacity, outreach, and viabilityissues. (41)The only notable exceptions are South Africa and Mauritius that have awell-developed financial infrastructure (50). Also, the financial sector in Kenyaexhibits greater financial depth and more institutional variety than in most other SSAcountries. Its microfinance industry has achieved considerable growth rates and anumber of dynamic institutions are committed to ‘best practices’.

Despite these positive developments in some countries of SSA, the continent has totake up many challenges in order to develop a more professional, more competitiveand more dynamic financial sector. The following chapter will outline the keyconstraints at the different levels of the financial system that are relevant for theprovision of financial services to the POW&S sector.




6.2 Key Constraints and Need for Improvement at the DifferentLevels of the Financial System for Financial Service Provisionin the POS&S Sector

6.2.1 The Micro Level

Financial systems' development at the micro level is about building sound domesticfinancial intermediaries that can provide financial services to poor people on apermanent base. The provision of financial services to the WS&S sector is a nichemarket for financial intermediaries and requires healthy institutions that are able to gobeyond their usual scope. The key constraints that concern the WS&S sector arelisted below:

Limited outreach. The number of professional financial service providers with client-oriented services and a potential for further development and sustainable operations

remains limited in SSA. Other than in Asia, where the microfinance industryspecifically targets the lower-end of the poor, the microfinance industry in SSA hasnot yet reached many of the lower segments of the low-income population, especiallyin peri-urban settings. An indicator can be the weighted average outstanding loan perborrower of African MFIs that stands at USD 307 and is in absolute terms larger thanthose offered in other regions (40). Furthermore, in remote rural areas with littleagricultural potential, financial services are hardly available at all.

Poor financial performance . In general, MFIs in SSA perform poorly in terms ofportfolio quality and operational and financial performance (41). The Micro BankingBulletin (40) reports that that the overall financial performance of MFIs in Africa lags

behind other global regions. Out of 163 MFIs analysed, only 47% earned positivereturns in 2003. Furthermore, MFIs in Africa report the lowest average return onassets.

Little product diversity . The range of products offered to the low-income populationin SSA is mainly limited to short-term loan products for income-generating activitiesand simple savings accounts, if available at all.

For financial system development on the micro level major efforts in institutionalstrengthening is required, especially regarding product development. Improvement inthe core business of financial institutions will lead to an expansion into new marketsegments, and therefore also will be beneficial for the POWS&S sector. Furthermore,

competition in the financial market is a key incentive for financial institutions toexpand their product range and to search for new client segments.

6.2.2 The Meso Level

The meso level refers to the overall infrastructure of the financial system. It canfacilitate or obstruct the emergence of financial intermediaries and includes acomplex and varied set of actors (10). The financial infrastructure at the meso level isweak in nearly all SSA countries. However, the performance and viability of financialinstitutions at the micro level to a high degree depends on the level of supportservices they are able to receive from meso level institutions. In other words, aneffective meso level is critical for the functioning of the financial system as a whole




and especially for expanding access to financial services for the poor and, thus, forthe POWS&S sector as well.

Financial intermediaries that want to expand to new client segments such as WS&Sneed an infrastructure that provides the following:

Training to build-up human resource capacities by technical service providersand educational institutions.

Refinancing facilities to buffer liquidity shortages and term-mismatches offunds.

Market research and support for product development.

Transfer and payment services, for example, to receive remittances fromabroad or to move money around the county in a secure, cost-effective, andefficient manner.

To reach the poor population with demand-driven financial services for POWS&S, an

improved financial infrastructure and more service providers are required than arecurrently available in the countries of SSA. The donor community can significantlycontribute to establish and strengthen the financial infrastructure and to ensure apermanent and competitive supply of these much-needed meso-level services (31).

6.2.3 The Macro Level and Enabling Environment

There is a growing consensus that the role of the government is to enable financialservices but not to provide them directly. Governments need to maintainmacroeconomic stability, avoid interest rate ceilings, and refrain from distortingmarkets with subsidized, high default loan programmes that cannot be sustained.

(10) However, the inability of many governments to assure an adequate policyenvironment is a major constraint for the development of financial services to the low-income population in SSA and also affects the provision of financial services to thePOWS&S sector.

The most important factors that are relevant for POWS&S are the following:

Financial sector policy: The challenge is to promote a variety of viable financialinstitutions that are client-oriented, that mobilize savings efficiently, and thatprovide access to loans for a wide range of the economically active poorpopulation. An aspect that is of special importance for POWS&S is that policiesshould facilitate the experimentation and adaptation of new financial technologies

and development of demand-driven products. Constraints that prevent financialservice providers on their ability to provide appropriate loans and savingsproducts should be removed. Furthermore, policies must support the creation of aconductive environment with room for competition.

Macroeconomic policies and legal framework: The macroeconomic policyconditions and legal framework that exist in a developing country can eitherenhance or hinder the development of the private and financial sector. The so-called ‘enabling environment’ is essential for any private sector development andtherefore of high significance for PSSPs. It encompasses legal aspects ofbusiness operation as well as a sound business climate.

Housing and property issues: Land security determines the degree ofwillingness of poor people to improve the value of property and, thus, to invest in




WS&S and to take a loan. At the same time, land security also affects the supplyof credit (15). A positive enabling environment for housing microfinance (underwhich home improvement loans for POWS&S may be classified) is one in whichpoor households have access to affordable land with a reasonable hope ofobtaining secure tenure. (14)

6.2.4 Other Constraints

Lack of information: Financial institutions usually only have little knowledge ofthe WS&S sector and vice versa. From the perspective of financial institutions,POWS&S is rarely perceived as an economic activity that can be profitable. Thewater sector still highly depends on subsidies and may not be aware of thepotentials the local financial market can provide. New perspectives can develop ifboth sectors have a forum for exchange.

Lack of harmonization: In most countries of SSA, a number of different

approaches to POWS&S are being promoted parallel to each other. Especially inthe POW&S sector where subsidies are an integral part of financing mechanismsit is important that market distortions (e.g. through subsidized interest rates and/ordirected credit) are avoided and that the government has clear guidelines on thesupport of the POWS&S sector. Donor harmonization according to the ‘ParisDeclaration' is another important aspect.

6.3 Typology of Lenders relevant for POWS&S

The provision of financial services for POWS&S is not limited to conventional MFIs,

but is used in a financial systems perspective and considers different financialinstitutions or private actors providing financial services in different country contextsfor various market segments (41). The following types of institutions could be relevantfor the provision of financial services for the development of POWS&S:

Formal lenders, such as commercial banks, cooperative banks, microfinancebanks, or other specialized financial institutions.

Semi-formal lenders, such as credit unions, credit cooperatives, NGOs, villagebanks.

Informal lenders, such as relatives and friends, moneylenders and rotatingsavings and credit associations.

Interlinked credit arrangements, such as supplier credit of equipment forPSSPs / CSSPs or PSSPs that give advances to households.

An assessment of financial service providers derives to the following conclusions:

(1) In the future, formal lenders may play the most important role for POWS&Sdevelopment because of their ability to provide a whole range of financialservices and improved outreach through branch networks. On the contrary, loansgranted by (credit-only) NGOs may play only a minor role in the development ofWS&S if other options are available.

(2) Often, semi-formal lenders are the only providers of financial services in ruralareas. However, their outreach and range of products often is limited. Majorconstraints include lack of financial management skills and limited resources.




(3) Innovations in providing house improvement loans on commercial terms toHSSPs are emerging largely from experienced financial institutions, many ofwhich originated as microfinance institutions. These institutions are aheterogeneous set of players and include commercial banks, credit unions, non-bank financial intermediaries, housing finance companies and NGOs.

(4) At present, informal lenders are playing the most important role for the provisionof financing to the POWS&S sector. However, the capacity is limited and it isdesirable that the different actors receive more formal financial services asdescribed in chapter 5.3. Furthermore, costs are high on interest rates as well ason social obligations.

(5) Right now, interlinked credit arrangements are – beside informal lenders – supposedly the second most important source of finance for the WS&S sector inSSA. Not much information is available about scale and product features.

The challenge is to replace the predominantly informal financing arrangements bymore formalized financial services. This requires demand promotion at the level ofsmall-scale service providers on the one side and an improved outreach of formaland semi-formal financial institutions with demand-oriented financial products on theother hand.




7 International Experience: Promising Approaches, BestPractices, Instruments/Tools and Promotional Conceptsin the Financing of POWS&S

7.1 Relevant Case Studies

7.1.1 HSSP Finance: Promising Approaches and Promotional Concepts

Annex 2 provides a case study of SEWA Bank in India that finances homeimprovements at the household level. It is a useful example to extract some leaningsthat could be translated into approaches and concepts for replication in SSA:

Experience: Microfinance housing requires established institutions that havealready substantial experience in dealing with the vulnerable poor population.

Housing microfinance is a consequence of careful market analysis and isbased on client demand and established relationships with clients.

Importance of savings: In the absence of legal land tenure, the vast majorityof the urban poor settled in peri-urban areas are unable to provide any form oftraditional collateral. Therefore, an established savings track recorddemonstrates financial discipline and serves as a collateral substitute. ForSEWA Bank, a regular savings habit is an indication for a creditworthy client.

Ownership issues: On-site slum upgrading projects had the assurance by themunicipal authorities that the upgraded slum will not be relocated for aminimum of 10 years. This ‘near legal’ tenure status has proved a powerful

incentive for poor communities to develop ownership and to pay their owncontributions. At the same time the financial institutions can manage their risksbetter.

Technical support services: Support services for collective infrastructureprojects are essential for the success of the activity. However, there must be aclear separation in the division of tasks: SEWA Bank provides financialservices while Mahila Housing SEWA Trust provides the technical support andcommunity motivation. Technical and supervisory support is critical not only fortechnical advise but also for interaction with the various parties involved. Aclear separation of the tasks allows financial institutions to concentrate on theircore business and to control costs.

Partnerships and linkages: The urban local authorities are important playersin the provision of infrastructure services. Communities need better bargainingpower in order to develop reliable partnerships that fit their interest.

7.1.2 PSSP Finance: Promising Approaches and Promotional Concepts

Annex 3 provides a case study of the “Aguateros” in Paraguay. A huge number ofsmall entrepreneurs have demonstrated that it is possible to create small scale watersupply systems to the unserved population. There is no doubt, that the case of theaguateros provides an interesting example to extract some leanings and to translatethem into approaches and concepts that could be replicated elsewhere. The followingare some interesting conclusions:




Financing: The potential of PSSPs to mobilize financial resources is verylarge. Formalizing and regulating their water business would certainly enhancetheir possibility to have better access to the formal banking sector and to getmore favourable loan terms and conditions. Thus, the financial burden of theircustomers could be lowered.

Privatization: Rather than privatize a large-scale (countrywide operating)water company as one unit a step-by-step approach – beginning with thesmall- and medium-sized water supply systems (rural centres or secondarytowns) – seems to offer more viable alternatives. This implies a certainpromotion of the local small-scale operators. This type of privatization couldassume the form of an operational contract between the aguatero and thepublic water company.

Technology: The small-scale providers’ low cost and prices stem in large partfrom their development and use of innovative, low-cost technologies. Forexample, the simple well-drilling techniques and plastic hosing used by the

aguateros has reduced the installation cost of a small water networkconsiderably.

Efficiency: Under favourable conditions, small network operators cancompete successfully on price with the public utility, even though they get nosubsidies. The aguateros' case demonstrates that the sum of many small-scale operators proves to be more economical than the large-scale“economies”.

Service quality and affordability: Service quality is often much better thanassumed and water charges are, in general, well-measured and adapted tothe customers’ ability and willingness to pay. The overall customer satisfaction

with lower rates and a somewhat lower level of service leads to the conclusionthat, subject to suitable groundwater conditions, the aguateros represent aviable alternative for expanding water supply service into peri-urban areas.

Regulation: Instead of imposing a regime of “overregulation” that wouldundermine the efforts and chances of the aguateros , their responsibility shouldgrow from its present unregulated and informal contract to one that is subjectto certain controls and a closer collaboration with the state or the public waterutility.

7.1.3 CSSP Finance: Promising Approaches and Promotional Concepts

Annex 4 provides an example of village banks in Benin and Mali that have beenlinked to rural water supply schemes. These cases provide limited but usefulexamples to extract some leanings and to translate them into approaches andconcepts that could be replicated elsewhere:

Cost recovery tariffs: The application of water charges that at least cover theO&M cost (in Mali, it is reported that even parts of asset renewal is feasible) ispossible, even in remote rural areas. However, substantial technicalassistance (training the CSSPs on technical and administrative functions ofwater supply) is necessary in order to bring the CSSPs to the desired level.Close cooperation of a “support body” (DNH in the case of Mali) is also seen

as an important condition for sustainability of the approach.




Outreach: The outreach of financial Intermediaries in remote rural areas isoften quite limited. Village banks can fill the gap but there is a risk ofoverburdening from a banking point of view when savings reach a certainquantity.

Operation and maintenance: Referring isolated remote village water supplyschemes to a nearby rural growth centre for technical issues can solveoperation and maintenance issues. Regular audits would help to increaseoperational efficiency of the water supply system and create awareness amongthe CSSP members.

7.2 Innovative Approaches in Financing POWS&S: The GlobalPartnership on Output-Based Aid

In January 2003, the Global Partnership on Output-Based Aid (GPOBA)7 wasestablished by the United Kingdom’s Department for International Development(DFID) and the World Bank. The purpose of this innovative financial instrument is tofund, demonstrate and document output-based aid (OBA) approaches to support thesustainable delivery of basic services in developing countries. GPOBA’s focussectors are: (i) water and sanitation, (ii) electricity, (iii) telecommunications, (iv)transportation, (v) health and (vi) education. GPOBA co-finances OBA pilot projectsand related activities in order to identify and disseminate lessons of experience onthe design and implementation of schemes involving explicit performance-basedsubsidies. OBA is a mechanism for providing subsidies to support the delivery ofbasic services in the above sectors where policy concerns – such as limitedaffordability for some customers, the desire to capture positive externalities, or the

infeasibility of imposing direct user fees – justify public funding to complement orreplace user fees. At the heart of the OBA approach is outsourcing of service deliveryto a third party – usually small-scale private providers and NGOs but also possiblypublic utilities – which would operate within a strong performance regime that linkspayments to results. Domestic microfinance institutions and banks participate in pre-financing parts of the investment cost (usually 80%) and the performance-linkedsubsidies are paid subsequently over time to enhance chances of sustainability.Local MFI and banks are used to leverage GPOBA resources that in the medium-and long-run could be reduced or replaced by locally available public grants or donorfunds (e.g. Water Services Trust Fund in Kenya). The pre-finance loans strictly followmarket conditions and are dealt with separately, whereas the OBA component

(approx. 40%) will be allocated after completion upon compliance with the agreedperformance criteria. Thus, the initial loan amounts would be reduced accordingly.This approach can sharpen the focus on objectives, improve efficiency andinnovation, enhance accountability for the use of public resources, and createopportunities for engaging private sector know-how and (micro-)financing.

For the water and sanitation sector, several interesting pilot projects are currentlybeing developed in Africa. Latin America and Asia. Table 6 highlights the mainfeatures of these projects:

7For details, see http://www.gpoba.org/activities




Table 6: OBA Pilot Projects in Water Supply and Sanitation

Country Type ofProject

Area Execution/Operation Target Group

SSAUganda Piped water

supplySmall towns and ruralgrowth centres

Local privateproviders

Urban and ruralpoor

Senegal On-sitesanitation

Dakar AGETIP/small-scalecontractors

400,000 peopleliving in peri-urban areas

Kenya Water andsanitation

Kisumu Town(informal settlementsof Nyalenda andManyatta)

Private small-scaleproviders incooperation withpublic utility

Poor people inperi-urban areas

Kenya Microfinancefor small waterschemes

21 rural communitiesin the broader servicearea of Nairobi -under jurisdiction ofAthi Water Services

Board

Community-basedorganisations

Rural populationin medium- tohigh-potentialagricultural areas

Latin AmericaPeru Innovative low

cost(condominial)technology

Lima MetropolitanArea

LocalNGOs/SEDAPAL(public utility)

Low-incomecommunities

Honduras Water andsanitationservices inlow-incomeareas

Whole country(national OBA Fund)

Government Poor in peri-urban and ruralareas

Brazil Waterservices in

low-incomeand peri-urbanareas

Manaus No informationavailable

Approx. 11,000poor families

AsiaIndonesia Water

services inlow-incomeareas

Jakarta No informationavailable

Poor in selectedperi-urban areasof Jakarta

India Ruralcommunitywater supply

25 villages in AndhraPradesh

Naandi Foundation(Indian NGO)

Unserved ruralpoor

Cambodia Water accesswith small-

scaleproviders

Secondary townsacross the country

Private small-scaleoperators

Low-incomehouseholds in

secondary towns


So far, only few pilot projects within the GPOBA arrangement have beenimplemented and one of them (the aguateros in Paraguay) is documented in Annex 3and under chapter 7.2. The others are still in the design/development or earlyimplementation phase. Therefore, lessons cannot be drawn yet.




8 General Best Practices and Experience Relevant forFinancing POWS&S

The following chapter will review general best practices and experience that arerelevant preconditions for successfully linking the financial and POWS&S sectors.

8.1 Financial Services and Sustainability

Sustainability in financial service provision means meeting the operating and financialcost of providing financial services on a permanent basis, independent of donor orgovernment subsidies. For this study, the above definition will be adopted and isequally relevant for all types of financial services such as microfinance, SME financeand rural finance.

Sustainability of financial institutions is an important factor for successfully linking thetwo sectors for the following reasons:

Financial institutions need to be run in a sustainable manner in order to providecontinuing services to a large number of poor people including those involved inPOWS&S.

Financially viable and sound financial intermediaries are in the position to mobilizesavings and to tap funds from other sources. Given the ambitious MDGs and thehuge potential demand for finance in POWS&S, the donor community and/orgovernments will not be able to provide the necessary funding for expansion andsatisfactory coverage of POWS&S. In other words, if financial institutions shallcontribute to fill the gap, they need to attract private investors and other sourcesfor refinancing for their (term) portfolios that is only possible, if institutions

demonstrate financial performance, transparency and sound operations8

. Financial intermediaries that do not have to meet standards are rarely run

professionally. This endangers deposits of poor people and creates a non-conductive environment with the result that financial services for the poor ingeneral and the POWS&S sector in particular will rarely be available.

It has also to be recognized that credit is not an appropriate service for people livingon the margins of survival. Other types of interventions such as support for socialservices or grants for health services, sanitation or education can be appropriate forpoor people who have no means of repayment. Therefore, in the debate of financingPOWS&S a clear distinction needs to be made between POWS&S for the destitute

that remains a function of government (grants) and financial services to the poor, buteconomically active population that is able to repay the loans.

Another important aspect is the clear separation of financial services and othersupport services (e.g. technical assistance). This allows financial institutions toconcentrate on their core business and to control costs. Non-financial services ideallyshould be carried out by an independent organization in close collaboration with thefinancial institution.

8Most formal banks in developed countries rely on rating agencies to attract investors. Rating agencies provide an “objective”credit benchmark that enables others to check and compare the performance, value, risk, etc. of a lending organisation.




8.2 Water Supply & Sanitation and Sustainability

For the WS&S sector, the sustainability aspect is likewise important. In order to beeffective and sustainable from an economic, financial and environmental point ofview, the WS&S sector must follow clearly defined sector principles and should be

regulated by an independent body (regulator). These principles that are outlinedbelow have to be taken into consideration for any financing strategy. Otherwise, theoverall objectives of water supply and sanitation will not be reached in a sustainablemanner.

Past experience has shown that efficiency and quality of service provision can onlybe ensured by adequate regulatory mechanisms. That means, regulation refersnot only to the traditional (large) utilities but should also include small-scaleproviders. Whereas good regulatory practices have been developed (e.g. inZambia, Peru, Bolivia) with regard to large utilities by introducing transparentbenchmarking systems and participatory tariff setting processes, regulation of

small-scale service providers in general is a still unsolved issue. Regulation in thesector will also balance between commercial and social objectives to address theneeds of low-income groups.

The concerns of the poor should be addressed by actively promoting pro-poorapproaches in the WS&S sector. This means that policy makers and serviceproviders should be prepared to (i) avoid the assumption that poor customers arehigh-risk, low-return customers, (ii) to address the specific problems of informalsettlements in water supply policy and the related legislation, (iii) to recognize thatthe main operator (utility) may not be the best service provider for the poor, andthat small-scale service providers have an important role to play, (iv) seekinnovative ways (e.g. low-cost technologies) to address the physical constraints to

infrastructure and service provision in low-income areas, (v) recognize that effortsto provide subsidies to the poor through water tariffs have often beenunsuccessful and (vi) aim to reduce the distance between the utility and poorcustomers (48).

There is a general understanding that tariffs for water supply – at least in urbanareas – should allow for the recovery of operating cost and capital cost for repair,replacement and expansion to cater for increasing population and renewal ofinfrastructure. Sustainable services means that management of water schemeshave to identify all costs relating to the supply of water, budget for and recoverthem through a variety of user charges. Revenues should be reinvested for

improved services. In many countries, water utilities still do not make adequateprovision for both capital and operating costs. As a result, schemes areinefficiently run, infrastructure is dilapidated and there is little or no expansionand, thus, access to services is on decline.

If a government decides that it is important to subsidize water supply and/orsanitation services – e.g. for environmental9 or social reasons – it must thendecide whom, what and how to subsidize. Usually, it is preferable to subsidizeaccess to service rather than consumption. When consumption is subsidized,households do not face the true cost of the service. This undermines

9Due to the high externalities (environmental impacts) involved, a certain subsidization of wastewater systems is justified in

many cases, especially when sewage treatment is involved. However, low-cost technologies can reduce the investment andoperating cost considerably.




economically efficient water-use and demand management. It has also becomeevident that 100 percent subsidies are inappropriate. This principle is necessaryto retain some measure of demand responsiveness in order to ensure thatsystems are not built when people are not willing to use them.

Water and sanitation investments must be designed in a way that enhancesenvironmental sustainability. In the first place, drinking water quality must besafeguarded because it is essential for human health. This means that watergovernance arrangements should protect ecosystems and preserve or restore theecological integrity of groundwater, rivers, lakes, wetlands and associated coastalzones. Pollution prevention has to be prioritised, because it is normally more cost-effective than the restoration of polluted waters.

As a conclusion, both sectors have many principles in common, e.g. the need forfinancially sound institutions, adequate regulation and targeting of subsidies. This factcould enhance the mutual understanding. It also means that a “marriage” betweenthe two sectors can only work if the respective framework conditions ensure that

these principles are duly respected in each of the two sectors.

8.3 Failure of Directed Credit for Agriculture

During the three decades prior to the 1990s, supply-led and directed creditprogrammes10 were an important tool to spur agricultural development in manycountries. It was argued that enhanced access to credit would accelerate technicalchange, stimulate agricultural production and improve rural income. However, thisapproach failed to produce the desired results. In fact, directed agricultural creditprogrammes proved to be subsidy-dependent, prone to disasters, and ineffective in

achieving their objectives. Instead of building a sustainable financial infrastructure,many of the directed credit programmes undermined the development of a viablefinancial market with the result that as of today the rural population has even lessaccess to financial services than before. The flaws of directed credit led to theformation of a new paradigm, the financial systems approach which is based on theassumption that a commercial approach is much more likely to reach large numbersof clients on a sustained basis.

Directed credit for POWS&S? The experience of the agricultural sector providesimportant lessons that should not be replicated. The POWS&S sector is susceptibleto replicate resembling models because (i) the government plays a significant role in

the provision of POWS&S services to the population; (ii) water and sanitation areperceived as ‘human right’; (iii) at present, there is a large interest of the donorcommunity to finance POWS&S (iv) concerns of ‘affordability’ dominate the debate.Therefore, in the discussion of involving the local financial market in the financing ofPOWS&S, the risk is high that a commercial orientation will be compromised inorder to achieve other goals.

The lessons from past experience of directed credit for the POWS&S sector are two-fold:

10

Government or donor programmes that have targeted the agricultural sector by supporting loan programmes for a number of‘beneficiaries’ who have benefited from ‘soft’ loan conditions, including subsidized interest rates and/or high tolerance to loandefaults. The assumption behind these efforts was that (i) farmers face liquidity constraints (ii) farmers are too poor to save; andthat (iii) financial institutions are too conservative to lend to the agricultural sector. Directed credit programmes focused onovercoming these constraints.




First, subsidized interest rates and ‘soft loan conditions’ have the opposite effect ofthat intended because local financial markets cannot develop under such distortions.Such conditions have most often resulted in:

Low loan collection rates because clients consider cheap loans as grants thatdo not have to be repaid.

Limited number of borrowers served because the loan capital shrinks due tohigh default rates.

Rationing of loans, which typically favours wealthy and politically connectedrent-seekers.

Institutional corruption and fraud because staff may try to capture thedifference in the interest rate by eliciting side payments from clients.

Continued reliance of financial institutions on subsidies, because they areunable to reach self-sufficiency given that their interest rate margin does notcover their administrative and financial costs over the long term.

Second, the critical issue in POWS&S financing is profitability and/or cost recovery by tariffs. As long as returns are low and legal framework conditions in the watersector are not clearly set, lending for POWS&S will not find the interest of the localfinancial market. It is essential that the POWS&S sector identifies sound business if itis to attract funds for viable investments. Water should be treated as an economiccommodity paid for by users. A commercial orientation is desirable and necessary inthe POWS&S sector – and is a condition for local financing to enter the scene.

Consequently, for the three market segments the following implications derive:

PSSPs are pursuing an entrepreneurial activity that has to follow a clearcommercial orientation. Business has to be profitable, investments have to be

born by the entrepreneur, services must be demand-driven and mustcorrespond to the customer’s preferences. Financial institutions have torecognise the entrepreneurial activities of PSSPs as a business venture. Anenvironment with lively competition provides the best incentives for clientresponsiveness and quality of services. Regulation of the water sector shouldtherefore enhance competition but at the same time need to ensure thatquality standards are met.

CSSPs are as user-organisations not profit-oriented but must ensure that atleast O&M costs of the system are covered by tariffs. Furthermore, up-frontinvestment costs have to be shouldered by the community to a certainpercentage, which is a potential demand for financial services from the localfinancial market. OBA approaches (see chapter 7.2) bear a high potential tocreate strong incentives towards a better commercial orientation andsustainability of community schemes.

HSSPs invest into water and sanitation facilities to create better livingconditions and increase convenience for private households. For mostfinancial institutions, a loan for water and sanitation facilities is a pureconsumption loan. Nevertheless, experience from India (see chapter 7.1) andelsewhere have demonstrated that house improvement loans can have astrong impact on household income. Notably in peri-urban areas and informalsettlements, the house is an important factor of production for poor people.

Furthermore, the indirect impact of ameliorated water and sanitation conditionsat household level, such as better health conditions or timesavings renderinvestments into water and sanitation to an attractive investment.




9 Conclusions

9.1 Controversial Working Hypothesis

The topic of this study boils down to the following central questions: (i) could financialservices in general play an important role in achieving the MDG targets for watersupply and sanitation, (ii) could and should small-scale providers contribute to closethe coverage gap in low-income areas and (iii) does the lack of access to financeconstitute a major constraint for the activities of small-scale providers? The literaturereview undertaken in this study shows that there are no clear answers to thesequestions. In table 7, the most common “pros” and “cons” are summarized:

Table 7: Controversial Statements about Role and Significance of Financial Services inPOWS&S

Pros Cons

(i) Financial Services and MDGsFinancial services / Microfinance services aretopical because it can make an importantcontribution to the achievement of the MDGs.

Non-financial measures are many times morecritical than merely increasing finance.

For the water sector, microfinance can help thepoor to have access to water services.

Huge investments are necessary in order to bringthe water and sanitation infrastructure toadequate levels; microfinance is only of marginalimportance (niche market). The dominantfinancial sources still remain the public sector andexternal aid flows.

(ii) Potential role of small-scale providersPSSPs offer services that are well adapted to theneeds of the poor and highly accepted by them.

PSSPs are no adequate solution because they donot pay their bills regularly (to the utility), chargehigh prices, offer bad water quality and operateunder inefficient conditions. It is the scarcitysituation in which the PSSPs operate and thrive.

The core blockage to increased financial servicesin the water sector is (the lack of) awareness ofthe business case for water supply projects.

Large-scale monopoly companies are justified inthe water and sanitation sector because ofeconomies of scale.

Small-scale providers are not regulated and oftenoperate illegally (illegal connections) and under

“cartel” conditions (push up prices artificially) thatis against the objectives pursued by water sectorreforms.

(iii) Access to financeSome MFIs (e.g. CMFL an Ugandan MFI)consider the entrepreneurial activities of small-scale provides as a business venture.

Making profits from the poorest is ethically wrong,even if the interest rates provided by MFIs arelower than those offered by informalmoneylenders.

The informal water sector is constrained in its rateof expansion due to the lack of access toadequate loans.

Small-scale providers often do not need loans butwould rather need a fair institutional and legalenvironment that is favourable to moreinvestment and expansion of activity on their part,

in response to their clients’ demand.Source: Own compilation




In this study it was tried to look behind these arguments and to find solutions thatcould bring both sectors closer together. However, desk studies tend to sufferingfrom limited insight into the problems. Therefore it is recommended that the abovehypothesis be a starting point for the two case studies and be looked into moreclosely when analyzing the specific cases of Kenya and Uganda.

Preliminary conclusions will be presented in the following chapter.

9.2 Preliminary Conclusions

From a bird’s-eye view the topic of the study is quite complex because the challengeis to analyse four target groups (HSSPs, CSSPs, small PSSPs and SME-POs) withdifferent needs from the perspective of two sectors that hitherto did not take muchnote one from the other. The WS&S sector in itself has different features in differentcountry contexts and the same applies to the financial sector. The initial idea to limit

the analysis on microfinance only has also proven not to be comprehensive enoughregarding the financial needs of the WS&S sector. Therefore, financial services thatare beyond the scope of traditional microfinance are to be considered as well.Although literature often optimistically refers to “microfinance for POWS&S”, the taskof effectively bringing the two sectors together remains still a major challenge. Inpractice, innovative systemic solutions with regard to financing approaches are rarelyfound and the only highlight, yet quite new, is the OBA approach that tries to in-buildsmart subsidies in a financial concept suiting the conditions and needs of thePOWS&S in SSA.

Nevertheless, a ‘marriage’ of the water and sanitation sector and the financial sector

can provide great opportunities to leverage local resources to provide poorpopulations with water and sanitation facilities that are needed to contribute forreaching the MDGs. However, these opportunities can only be converted into reality ifthe different stakeholders overcome the huge information gap and develop ownershipin order to actively move the topic forward. This process will take time and should bestrongly supported by the development partners.

9.2.1 Supply – Demand Gap in POWS&S Financing and Key Constraints

In order to derive exact figures regarding the financing gap for POWS&S, it would benecessary to give an estimate on the potential of small-scale service providers in thedevelopment of POWS&S in SSA. This information is not available. In mostdeveloping countries, the informal sector is servicing more than 50% of the overallWS&S market (54). Examples of their investments to the sector are rare and moststudies use localised case studies to extrapolate widely.

In general, the supply of financial services to the poor population in SSA lags farbehind the development in the rest of the world. Particularly the supply of financialservices for POWS&S is constrained through low outreach of financial institutions(especially to rural areas and the lower end of the poor), little product diversificationand low financial performance of the financial sector. Furthermore, severalmisconceptions exist regarding POWS&S: financial institutions have little information

on the water and sanitation sector and investments in this sector are perceived asnon-productive.




The potential demand for formal financial services for POWS&S has not yet beentranslated into effective demand among low income people in countries of SSA andsmall service providers. Besides some rare exceptions, the most important source offinance for HSSPs and PSSPs are still informal sources from family, friends, rotatingsavings clubs, moneylenders and equipment suppliers. Further constraints are lack of

tenure security for home improvements of HSSPs and the illegal status of manyPSSPs. It is assumed that a multitude of investments could be pursued if financialinstitutions and adopted financial products were available. Especially in rural areasand informal settlements in SSA the presence of financial institutions is negligible.Therefore, the demand for formal financial services is underdeveloped.

The water and sanitation sector – because of its specific characteristics pointed outearlier – has not found much attention from the financial sector in the past. However,the challenge to link the two sectors depends on a well-functioning financial sector inany given country and the ability of small-scale service providers to developeconomically sound businesses. Conducive political, institutional, legal and

regulatory framework conditions for the water sector would furthermore contributesignificantly to a better linkage with the financial sector. Past experiences indicatethat financial services for POWS&S will not require the creation of specific institutionsor ‘windows’ but have to follow the widely accepted financial system developmentapproach.

9.2.2 Potential for the Development of Financial Services for POWS&S inSSA

The case studies in chapter 7 have outlined promising approaches from worldwide

experience that has the potential for replication in SSA. The most important findingsare summarized below:

At the level of HSSPs, financial institutions have to recognize the close relationshipbetween water and sanitation facilities and increased capacity of households forincome generation. The development of financial products for water and sanitationrequires institutions that have already substantial experience in serving vulnerablepoor populations. Established relationships with clients and a positive savings andloan track record can replace traditional collateral requirements. Individual or grouplending methodologies as well as the graduation principle are useful methods thathave been developed by the microfinance industry over decades and can be adaptedto the local circumstances for the development of suitable financial products for

POWS&S including much-needed deposit facilities. Technical and supervisorysupport of related house improvements is a critical factor of success but should beclearly separated from financial services. Tenure status or tenure security must beaddressed simultaneously if the potential demand for financial services shall develop.

PSSPs mainly operating in urban and peri-urban areas can be a very interestingclientele for financial institutions. They pursue profitable business and should betreated by financial institutions as any other micro or small entrepreneur. Once theyenter into the formal financial market, PSSPs will require not only financing but alsoother financial services. Regulation in the water and sanitation sector can eitherenhance or impede the development of PSSPs. Therefore, a conducive regulatory

framework is a precondition for the development of a healthy environment withcompeting PSSPs.




CSSPs mainly operating in rural areas must learn to better manage their systemsand not to repeat the shortfalls of the past. Poor maintenance of systems, poorgovernance and lack of user charges, financial services and funds for maintenanceand major repairs have resulted in dysfunction of many schemes. In addressingthese issues by community organization, sensibilisation, training in financial

management and governance, many of past failures can be avoided. The tendency isto demand a larger share of community contribution for the investment and the fullresponsibility for operation and maintenance. Financial services can play animportant role but need a careful design and compliance with the financial sectordevelopment approach. OBA approaches have a great potential to create the rightincentives for amelioration. Furthermore, village banks have good prospects to act asfinancial intermediaries where more formal financial institutions are not present.

Innovative concepts in financing POWS&S such as the OBA approach bear a highpotential for wider replication in SSA. The direct link to performance criteria is apromising approach in the provision of ‘smart subsidies’ that support the sustainable

delivery of WS&S services.

9.2.3 Outlook

The ‘marriage’ of the two sectors is a great challenge.

First, both sectors show astonishing similarities. Mainly the concerns aboutsustainability have led to sector principles that deny the access to services free ofcharge. The financial services industry has come a long way in defending ‘high’interest rates to the poor that allow operational and financial sustainability andtherefore lasting operations. The water sector likewise is insisting in cost recoveringtariffs in order to maintain the systems and to provide sustainable access to water 11.Furthermore, financial institutions have developed sophisticated systems for loanrecovery. The water sector faces similar challenges with regard to collecting tariffs.

The creation of a win-win situation could have an interesting impact: the water sectorcould take advantage of financial services and bank clients that are already familiarwith various aspects of these services: on-time repayment, interest rates, fees,savings and other related issues. At the same time, many microfinance institutionsface difficulties resulting from poor health conditions of their clientele, many of whichare waterborne. The risk of loan default could be significantly reduced if healthconditions of clients improved because they have access to safe water supply andadequate sanitation facilities.

Second, there is a strong consensus in the financial sector that governments shouldonly enable the provision of financial services but not provide them directly12. Publicfunds should not crowd out or compete with private funds but rather being deployedin areas where private funding is not applicable, e.g. in areas where social orecological objectives have priority. ‘Intelligent’ leverage of funds and the creation ofsound policies without compromising sector principles may be the biggest challenge.

Third, both sectors have not yet found together because they lack of informationabout each other and opportunities for exchange. The creation of an exchange forum

11Noteworthy that inefficient operations may push prices (interest rates for financial services and tariffs for water services) uphigher than required.

12Governments need to maintain macroeconomic stability, avoid interest rate ceilings, and refrain from distorting markets withsubsidized, high default loan programs that cannot be sustained.




and enhancing linkages and networking between the financial sector and thePOWS&S sector will allow to create a cooperation that can address the sector-related problems from a multi-sectoral and more holistic perspective.




References

1. Accion. 2003. ‘Building the Homes of the Poor – One Brick at a Time: HousingImprovement Lending at Mibanco’. In: Insight No. 4, January 2003. Boston.

2. ADB. 2000. ‘Finance for the Poor: Microfinance Development Strategy’. Manila.

3. ADB. 2005. ‘The Changing Face of the Microfinance Industry’. Manila.

4. Amegashie, D and Appeah, B. J. and Zander, R. 2001. ‘Promotion of Small and MicroEnterprises: Financial Sector Market Study’. Gesellschaft für TechnischeZusammenarbeit (GTZ) / Republic of Ghana. Rome and Accra.

5. Baker, B. and Tremolet, S. 2000. ‘Micro Infrastructure: Regulators must take SmallOperators Seriously’. In: Public Policy for the Private Sector, Note No. 220, October2000. Washington D.C.

6. BMZ. 2004. ‘Sektorkonzept Finanzsystementwicklung’. Bonn.

7. BMZ. 2006. ‘Wassersektor in der deutschen Entwicklungszusammenarbeit’. Bonn.

8. Camilleri, J. L. 2005. ‘Micro & Small Enterprises and Micro Finance in Africa: TheSupport to Dynamic Enterprises: an Effective Weapon for Poverty Alleviation’. In: LesNotes de l’Institut Thomas More, No. 4 September 2005. Paris.

9. CGAP. 2002. ‘Microfinance and the Millennium Development Goals’. Donor Brief No. 9,December 2002. Washington D.C.

10. CGAP. 2004a. ‘Building Inclusive Financial Systems: Donor Guidelines on GoodPractice in Microfinance’. Washington D.C.

11. CGAP. 2004b. ‘Housing Microfinance’. Donor Brief No. 20, August 2004. WashingtonD.C.

12. CGAP. 2005. ‘Managing Risks and Designing Products for Agricultural Microfinance:Features of an Emerging Model’. Washington D.C.

13. CGAP. 2006. FAQ 1. Available at:http://www.cgap.org/portal/site/CGAP/menuitem.b0c88fe7e81ddb5067808010591010a0/

14. Civis. 2003a. ‘Shelter Finance for the Poor Series Synthesis’. Washington D.C.

15. Civis. 2003b. ‘The Enabling Environment for Housing Finance in Kenya’. WashingtonD.C.

16. Coffey, E. 1998: ‘Agricultural Finance: Getting the Policies Right’. Agricultural FinanceRevised N° 2. FAO, GTZ. Rome.

17. Collignon, B. 1999. ‘The Potential and the Limits of Private Water Providers:Independent Sellers in Francophone Africa’. Washington D.C.

18. Collignon, B., Vezina, M. 2000. ‘Independent Water and Sanitation Providers in AfricanCities: Full Report of a Ten-Country Study’. Washington D.C.

19. Conan, H. and Paniagua, M. 2003. ‘The Role of Small-Scale Private Water Providers in

Serving the Poor’. Manila.




20. Conan, H. 2003. ‘Scope and Scale of Small-Scale Independent Private Water Providersin 8 Asian cities: Preliminary Findings’. Manila.

21. Cracknell, T. and Mugwang, T. 2004. ‘Microfinance Institutions and Salary BasedConsumer Lending’. In: MicroSave Briefing Notes No. 45. Nairobi.

22. Department of Trade and Industry South Africa. 1998. ‘Financial Access for SMMEs:Towards a Comprehensive Strategy’. Pretoria, South Africa.

23. Deshpande, R. 2003. ‘Microfinance for Infrastructure Provisioning: Completing theMarket’. Washington D.C.

24. DIFID / European Union. 2003. ‘The European Union Water Initiative: Final Report of theFinancial Component’. London.

25. Drees-Gross, F. et al. 2005. “Output-Based Aid in Water. Lessons in Implementationfrom a Pilot in Paraguay. Washington.

26. Fisher, J. 2006. ‘Local Financing Mechanisms for Water Supply’. WELL Briefing Note 16.Available at:http://www.lboro.ac.uk/well/resources/Publications/WELL%20Brieifing%20Notes.htm

27. Fonseca, C. 2006. ‘Microfinance for Water Supply Services. WELL Factsheet. Availableat: http://www.lboro.ac.uk/well/resources/fact-sheets/fact-sheets.htm

28. Gesellschaft für Technische Zusammenarbeit (GTZ). 1998. ‘Financing Small and MicroEnterprises in Namibia’. Eschborn.

29. Haarmeyer, D. and Mody, A. 1998 ‘Pooling Water Projects to Move Beyond ProjectFinance’. In: Public Policy for the Private Sector Note No. 152. Washington D.C.

30. Harvard University Graduate School of Design. 2000. ‘Housing Microfinance Initiatives.Synthesis and Regional Summary: Asia, Latin America and Sub-Saharan Africa withSelected Case Studies’. The Center for Urban Development Studies. Cambridge, USA.

31. Helms B, 2006: ‘Access for All. Building Inclusive Financial Systems’. CGAP.Washington, D.C.

32. Holtmann, M., Rühle, I. and Winkler, A. 2000. ‘SME Financing: Lessons fromMicrofinance’. In: SME Issues: New Ideas from the World of Small and MediumEnterprises, Vol. 1, No. 1 November 2000, Washington D.C.

33. IFAD. 2004. ‘Rural Finance Policy’. Rome.

34. Jalvaani. 1999. ‘Flush with Loans: Microcredit for Rural Sanitation’, in JalvaaniNewsletter on Rural Water and Sanitation in India, Vol.2, No. 3, July to September,1999. New Delhi.

35. Kariuki and Schwartz. 2005. Small-scale private service providers of water supply andelectricity. The World Bank. Washington D.C

36. Kauffmann, C. 2005. ‘Financing SMEs in Africa’. In: OECD Development Center, PolicyInsides No. 7, Issy-les-Moulineaux, France.

37. KfW Entwicklungsbank. 2004. ‘Woran scheitern so viele Vorhaben der

Siedlungswasserwirtschaft?’. Frankfurt a. M.

38. KfW Entwicklungsbank. ‘Priority Areas of Cooperation in Mali’. Frankfurt am Main.




39. Labia, M. 1995. ‘Credits to Small Businesses and Microenterprises’. In: ADA Dialogue,No. 5, Decembre 1995. Luxembourg.

40. Lafourcade, A., et. al. 2006. ‘Overview of the Outreach and Financial Performance ofMicrofinance Institutions in Africa’. Microfinance Bulletin, April 2006. Washington D.C.

41. Mehta, M. and Virjee, K. 2003. ‘Financing Small Water Supply and Sanitation ServiceProviders: Exploring the Microfinance Option in Sub-Saharan Africa’. Nairobi.

42. Mehta, M. 2004. ‘Meeting the Financing Challenge for Water Supply and Sanitation:Incentives to Promote Reforms, Leverage Resources and Improve Targeting’. Nairobi.

43. Mehta, M., Knapp, A. 2004. ‘The Challenge of Financing Sanitation for Meeting theMillennium Development Goals’. New York.

44. Mehta, M. and Canal, O.M. 2004 ‘Financing Water for All: Behind the Border PolicyConvergence in Water Management’. In IDS Working Paper 233. Brighton.

45. Netherlands Water Partnership. 2003. ‘Success Factors in Self Financing Local WaterManagement’. Den Haag.

46. Owen, G. 2004. ‘Rural Finance/Financial Services & the Provision of InfrastructureServices (Role, Experiences to Date, & Recommendations)’. Washington D.C.

47. PADCO / Peterson, George. 2003. ‘Innovations and Solutions for Financing Water andSanitation - Background Paper’. Washington, D.C.

48. PPIAF/WSP 2002. ‘New Designs for Water and Sanitation Transactions. Making PrivateSector Participation Work for the Poor’.

49. Rijsberman, F. 2004. ‘The Water Challenge’. International Water Management InstituteColombo.

50. Sacerdoti E, 2005: ‘Access to Bank Credit in Sub-Saharan Africa: Key Issues andReform Strategies’. IMF Working Paper (WP/05/166). IMF. Washington, D.C.

51. Saladini, M. 2005. ‘Access to Finance for Chinese Poor Households and Micro, Smalland Medium Enterprises’. Washington D.C.

52. Saywell, D. updated by Fonseca, C. 2006. ‘Microfinance for sanitation’. WELL Factsheet.Available at: http://www.lboro.ac.uk/well/resources/fact-sheets/fact-sheets-htm/mcfs.htm

53. Snell, S. 1998. ‘Water and Sanitation Services for the Urban Poor - Small-ScaleProviders: Typology & Profiles’. Washington D.C.

54. Solo, T. M. 1998. ‘Competition in Water and Sanitation - The Role of Small-ScaleEntrepreneurs’. in: Public Policy for the Private Sector, Note No. 165, December 1998.Washington D.C.

55. Solo, T. M. 2003. ‘Independent Water Entrepreneurs in Latin America – The otherPrivate Sector in Water Services’. Lima.

56. Troyano, F. 1999. ‘Small-scale Water Providers in Paraguay’, Washington D.C.

57. UN. 2000. ‘United Nations Millennium Declaration: Resolution Adopted by the GeneralAssembly, 55th Session’. New York.




58. UN. 2001. ‘Road Map towards the Implementation of the United Nations MillenniumDeclaration: Report of the Secretary General’. New York.

59. UN 2005. ‘Health, Dignity and Development: What Will it Take; Report of the Task Forceon Water and Sanitation’. New York.

60. UNDP/World Bank - Water and Sanitation Program. 2000a. ‘Credit Connections:Meeting the Infrastructure Needs of the Informal Sector through Microfinance in UrbanIndia’. Issues Paper. New Delhi.

61. UNDP/World Bank - Water and Sanitation Program. 2000b. ‘Credit Connections: SEWABank, Ahmedabad, Gujarat’. Field Note. New Delhi.

62. UNDP/World Bank - Water and Sanitation Program South Asia Region. 2000c. NationalWorkshop on Microfinance for Infrastructure: Recent Experiences. New Delhi.

63. UNDP/World Bank - Water and Sanitation Program. 2002. ‘New Designs for Water andSanitation Transactions’. Washington, D.C.

64. UNDP/World Bank - Water and Sanitation Program 2005. ‘Rogues no more? WaterKiosk Operators Achieve Credibility in Kibera’. In: Serving the Urban Poor, Field NoteJune 2005. Nairobi. Kenya

65. Unicef/World Health Organization. 2004. ‘Meeting the MDG Drinking Water andSanitation Target: A Mid-Term Assessment of Progress’. New York and Geneva.

66. Urban Finance. 2003. ‘Small-Scale Private Water Providers - A Growing Reality’ In:Quarterly Newsletter of the National Institute of Urban Affairs. Vol. 6 No. 3. New Delhi

67. Varley, R. 1995. ‘Financial Services and Environmental Health: Household Credit forWater and Sanitation’. Washington D.C.

68. Water Aid. 2001. ‘Financing Water and Sanitation. Key Issues in Increasing Resourcesto the Sector ’. London.

69. Water Aid. 2003. ‘Financing the Millennium Development Goals’. London.

70. Winpenny, J. 2003. ‘Financing Water for All: Report of the World Panel on FinancingWater Infrastructure’. Washington D.C.

71. World Bank. 1998. ‘A Framework for World Bank Group Support for Development ofMicro, Small Enterprises and Rural Finance in Sub–Saharan Africa’. Washington D.C

72. World Bank. 2004a. ‘Water Resources Sector Strategy’. Washington D.C.

73. World Bank 2004 b: Community Participation and Low Cost Technology – PROSANEARII, 2000-2006. Washington D.C

74. World Bank. 2004c. ‘Agriculture Investment Sourcebook’. Washington D.C.

75. World Bank. 2004d. ‘The World Bank Group’s Program for Water Supply and Sanitation’.Washington D.C.

76. World Bank. 2005a. ‘Meeting Development Challenges: Renewed Approaches to RuralFinance’. Washington D.C.

77. World Bank. 2005b. ‘Small-Scale Private Service Providers of Water Supply andElectricity’. Washington D.C.




78. World Bank. 2006a. ‘Inside Informality: Poverty, Jobs, Housing and Services in Nairobi’sSlums’. Washington D.C.

79. World Bank. 2006b. ‘Community Participation and Low Cost Technology - BringingWater Supply and Sanitation to Brazils Urban Poor’. In: Water Supply and SanitationFeature Stories No. 10, March 2006. Washington D.C.

80. WSP. 2005: ‘Alternative Technologies for Water and Sanitation Supply in Small Towns’.Nairobi.



DESK STUDY POWS&S FINAL REPORT (16-03-2007)

ANNEX



DESK STUDY POWS&S FINAL REPORT(16-03-2007)

Annex 1: Typology of Small-Scale Water Supply and Sanitation OperationInvestment Needs (Source: (41) and own compilation)

Water SectorOperations

Usual Sourceof Finance

13

Operator/PotentialClient

Examples (bestpractices)

Unit Cost(USD)

14

Preconditions Risks

1 Handcart for watertransport

Own and familysavings

PSSP,HSSP

• Burkina Faso(Ouaga)

• Mali (Bamako)

• Mauritania(Nouakchott)

50

120135

• Availability ofdrinking waternearby

• Conof w

• Lackcon

2 Water truck Formal orinformal loanand earningfrom otheractivities

PSSP • Mauritania(Nouakchott)

• Kenya(Nairobi)

• Uganda(Kampala)

15,000

13,000

7,500

• Availability ofdrinking water

• Qualified operatorin place

• Conof w

• Lackcon

3 Overhead water tank tofill trucks

Own and familysavings

PSSP • Uganda(Kampala)

2,000 • Availability ofdrinking water

•

Availability oftrucks

• Conof w

•

Lackcon4 Standpipe Own and family

savingsCSSP • Burkina Faso

(Ouaga)

• Senegal(Dakar)

• Mauritania(Nouakchott)

50

700

700

• Availability ofwater supplysystem

5 Private borehole andstandpipe with electricpump

Bank loan CSSPPSSP

• Kenya(Nairobi)

37,400 • Availability ofwater atreachable level

• Qualified operatorin place

13In some cases, these operations are also financed by donors.

14The unit cost refer to the technical options to be financed (e.g. water trucks, handcarts etc.). Where these costs are difficult to estimate (in case of s

inhabitant etc.






15



Unit Cost(USD)

Preconditions Risks

6 Small network withstandpipes

NGO loanOwn sourcesand family

savings

CSSPPSSP

• Guinea(Conakry)

• Benin(Cotonou)

• Ecuador(Loja/Zamora)

12,500

1,500

100 perinhabitantconnected

Urban: Availability ofwater supply systemRural:

• Water supply bygravity ispossible

• Qualifiedoperator in place

Proper& main

7 Small network withmetered householdconnections

Usersubscriptionfees

CSSPPSSP

Mauritania(Guerou)

3,000 (perkm)

Urban: Availability ofwater supply systemRural:

• Water supply bygravity ispossible

• Qualifiedoperator in place

8 Shallow water systems • NGOloan/grant

• Own sourcesand familysavings

HSSPCSSP

• Brazil

• Peru

n/a Availability of watersupply system

Proper& main

9 Rainwater harvesting • NGOloan/grant

• Own sourcesand familysavings

HSSP n/a n/a Rainfall in sufficientquantity andfrequency

Contamdrinkindue storagconditi

10 Household connections Own sources

and familysavings

HSSP n/a n/a Availability of water

supply system

In w

regionof wate







16



Unit Cost(USD)

Preconditions Risks

11 Hand-dug wells (open) • NGOloan/grant

• Ownsources andfamilysavings

HSSPCSSP

The Gambia n/a Availability of waterat reachable level

Contamwell

12 Hand-dug wells withhand pump

• NGOloan/grant


CSSP The Gambia n/a Availability of waterat reachable level

Properand m

13 Borehole with handpump

• NGOloan/grant


CSSP The GambiaBurkina FasoNorth Mali

12,00015,00019,000

• Availability ofwater atreachable level

• Borehole to befinanced byothers (grant)

Properand m





Sanitation SectorOperations


17



Unit Cost(USD)

Preconditions Risks

1 Manual latrine-cleaningequipment and latrinecleaning

Own sourcesand familysavings

PSSPHSSP

• Senegal(Dakar)

• Mali(Bamako)

• Kenya(Nairobi)

25

19

50

Availability of properdischarge site

2 Second hand suctiontruck (for septic tanks)

Formal orinformal loan

PSSP • Mali(Bamako)

• Burkina Faso(Ouaga)

• Senegal(Dakar)

• Uganda(Kampala)

15,000

8,300

16,700

25,000

Availability of properdischarge site

3 Public latrines andshower facilities

Formal orinformal loan

PSSP • Mali(Bamako)

• Uganda(Kampala)

200

3,500

Latrine cleaningservice available

4 Shallow sewer systems(SSS)

• NGO


HSSPCSSP

• Kenya

• Brazil18

n/a100 perinhabitantconnected

Availability of centralsewer system toconnect SSS

Properand m

5 Communal sludgetreatment plants usingponds (stabilizationponds)

• NGO

• Municipality

• Formal orinformal

loan

MunicipalityCSSP

• Ecuador19

• Benin(Cotonou)

80-100per inhab.connected200,000

Qualified operator inplace

Properand m


18CAERN: Rio Grande do Norte

19KfW. Loja / Zamora




Sanitation SectorOperations


20



Unit Cost(USD)

Preconditions Risks

6 Communal septic tankswith infiltration trenches

• NGO

• Municipality

• Formal orinformalloan

MunicipalityCSSP

• Ecuador 80-100perinhabitantconnected

Qualified operator inplace

Properand m

7 Unlined pit or latrine Own sourcesand familysavings

HSSP 30-100 Grouncontam

8 Lined latrine withplatform


HSSP 150-300 Grouncontam

9 Latrine or toilet + linedpit linked to soak pit


HSSP 300-800 Availability of watersupply system (flushtoilet)

Grouncontam

10 Septic tank and greasetrap and soakpit/filtering trench


HSSP 800-3,000 Availability of watersupply system (flushtoilet)

Grouncontam




DESK STUDY POWS&S FINAL REPORT(16-03-2007) VI

Annex 2: Case Study One

HSSP Finance: House Improvement Loans – SEWA Bank, Ahmedabad,India21 SEWA Bank, located in Ahmedabad City22 is part of the Indian SEWA movement.

The Self Employed Women’s association (SEWA) is a trade union of female workersin the informal sector (e.g. tobacco industry). In 1974, Mahila SEWA Co-operativeBank (SEWA Bank) was created by 4,000 SEWA members in order to address theproblem of non-availability of appropriate banking services and to free themselvesfrom the ‘vicious cycle of poverty’. Since then, SEWA Bank has been providingbanking services to poor, illiterate self-employed women. As of March 2004, SEWABank has 127 employees and more than 70,000 members. The bank holds morethan USD 14 million deposits and has an active loan portfolio of USD 3.7 million.SEWA Bank has been refinanced by the Housing and Urban DevelopmentCorporation (HUDCO) and the Housing Development Finance Corporation (HDFC)for its housing portfolio.

SEWA Bank has been a pioneer in the field of housing microfinance and started itshousing and infrastructure finance activities in 1976. SEWA Bank estimates that halfof all loans the bank disburses are used for housing whereas a large majority ofSEWA Bank’s housing loans are home improvement loans for general repairs,upgrading or expansion including water and sanitation facilities23. Its main housingmicrofinance products are not significantly different from its micro-enterprise loansthat can be used for housing as well. The housing loans are longer-term (60 monthsas compared to 36 months) and cheaper (14.5% as compared to 19%) than workingcapital loans. Clients are required to save regularly for at least one year before beingeligible for a housing or infrastructure loan. Assets such as jewellery are used as

collateral for secured loans; unsecured loans are backed by a lien on the client'sdemand deposits and guarantors. Property ownership (a land title) is not required fora housing loan; instead, the applicant is required to have legal rights (a so called‘near legal’ tenure status) to the property. The maximum loan amount for anunsecured housing loan is USD 532.

SEWA Bank has recognized that for a wide range of activities by women in theinformal sector, their home is a productive asset, e.g. workplace, warehouse, sortingplace and/or shop. Evaluation studies in the three slums of Ahmedabad City havedocumented an average increase of >USD 1 per day in the net earnings level of thehousing loan debtors. Furthermore, access to water facilities saves time for womenwho can do business instead of lining up for water.

The Slum Networking Project or Parivartan scheme deserves special attention. Theobjective of the programme is to provide basic infrastructure (road, electricity andwater) to people living in the informal settlements. The Ahmedabad MunicipalCorporation provides the connection of services (individual water supply,underground sewerage, solid waste disposal service, storm water drains, streetlightening, etc.) up to the city mains and pays with its own resources (generalmunicipal revenues and financing from the World Bank) 80% of the funds needed for

21Information from (14), (15), (60), (61) and own communications.

22 Considered as the second largest industrial centre of India, Ahmedabad has India’s third highest per capita income.Population is about 5 million. More than 30% of the people live below the poverty line.

23Separate figures on WS&S are not available.



DESK STUDY POWS&S FINAL REPORT(16-03-2007) VII

the upgrading work (USD 170 per participating household). In addition, theCorporation has also provided written land tenure security for a period of 10 years toall the slum participants of Parivartan. Beneficiary households are expected tocontribute the remaining 20% (USD 42).

Interesting to note that in the Parivartan scheme, most clients were able to save the

required amount instead of taking a loan given the time it takes from planning toimplementation.

SEWA Bank acts as a financial intermediary and provides savings and credit facilitiesin order to meet the cash contribution. Mahila Housing SEWA Trust is involved as atechnical agency and provides technical advise and supervision and ensures that thewomen residents of the slums are involved in the decisions made.



DESK STUDY POWS&S FINAL REPORT(16-03-2007) VIII

Annex 3: Case Study Two

PSSP Finance: The “Aguateros” in ParaguayIn Latin America, after decades of water supply provision by public utilities, thegovernments have tried to turn over the business to private operators. Where water

supply has always been seen as a basic service to be guaranteed by the state, publicmonopolies in some countries (e.g. Bolivia, Argentina) have been replaced by privatemonopolies in the pursuit of efficiency gains, private investment and better serviceunder a regulated environment. However, the concept of private provision of watersupply under public-private partnership arrangements has not always proven to besuccessful. Instead, Paraguay has been the reason for another type of experiment:the free entry mode of service provision. For almost two decades, a huge number ofsmall entrepreneurs have been operating under quite competitive conditions in aservice long believed to be a natural monopoly. In an almost unique case, the privatewater providers of Paraguay – or aguateros as they are called – have demonstratedthat competition within a given area is possible. They operate mainly in the outskirts

of Asunción and Ciudad del Este and often had started out as water truckers, butthen have moved on to create small-scale water supply systems based onunderground sources. A typical system consist of a well and pump house whichsupplies a series of houses close by through a low cost network simple to install.Usually, water is pumped for a limited number of hours each day and the customersplan their usage around this schedule, filling their on-site tanks with enough water forthe family’s daily usage. The development of these water supply systems iscompletely private. The aguatero selects an area where he calculates that hisbusiness can take root in a growing settlement, buys a lot, builds a well and pumphouse and provides water to the settlers. The aguatero makes the full investment andassumes all risks by himself and capital financing sometimes comes hard. Most of

the aguateros invest in infrastructure without recourse to public funding or soft loansthat normally sustain public utilities. Besides the connection fee to be paid upfront bythe customers, they rely for the most part on personal loans (often secured bymortgaging the entrepreneur’s home) or high-interest short-term commercial credits.The sometimes-precarious nature of the installations and, above all, their legalinsecurity in the medium-term, means that the investment must be amortized rapidly.It is reported (56) that the aguateros’ developments are based on a total recovery ofinvestment costs before three years.

The water charges are, generally, well-measured and, almost always, below what thepublic water company charges its clients. In addition, the highly personalized nature

of the aguatero business permits a great degree of flexibility in their relations withclients.

The existence of unclaimed areas on the edge of and between the aguateros’ business zones – where the “competition by comparison” on a reduced scale takesplace – assures that the aguateros do not take unfair advantage of their customers,as the residents in the unclaimed areas do have some choice. The Aguateros Association also limits the possibilities for open flare ups between them and helps tostandardize service quality and prices.

Assessment. This case study was not selected in the first place because of its

relevance for financial services, but because of the importance small-scale serviceproviders can play in serving the poor. Actually, the aguateros have long been citedas an important and convincing example for “informal” service provision and their



DESK STUDY POWS&S FINAL REPORT(16-03-2007) IX

potential for financial services is huge. It is estimated (55) that they have installedsome 50,000 connections in Asunción over the past 15 years for an investment ofaround USD 20 million in over 400 small-scale systems. The public utility’s USD 137million investment accounted for 62,000 new connections in the same timeframe.Granted, Asunción, like many of Paraguay’s and Argentina’s delta cities, enjoys aprivileged position with abundant and high quality ground water. However, it clearly

demonstrates one case in which the sum of many small-scale operations proves tobe more economical than the large-scale “economies”. A 2002 survey (25) of 1,000households served by the aguateros found that 90 percent were satisfied with theservice and 75 percent were unwilling to pay more for better service. What works inParaguay could work as well in any country in the hemisphere. However, if the small-scale operators are ignored where they exist, or left unmentioned where they do not,then private sector participation will necessarily tend toward the places wherebusiness opportunities are greatest, leaving behind and unattended the poorpopulation in peri-urban areas and the smaller communities.

Outlook. Under the recently launched OBA initiative (see chapter 7.4), aguateros

and local construction companies were sought to extend their expertise to rural areasand small towns whereby output-based aid subsidies would be awarded throughcompetitive bidding. Additional subsidies were guaranteed by the State (USD 150 perhousehold). This initiative was the first attempt to apply the OBA approach to ruraland small-town water sector investment. In the pilot phase, four systems wereplanned and implemented. All four systems are in service now, and a second phasefor additional systems in other small towns and rural areas is currently under way.The advantage of this approach is to (i) replicate the professional experience of theaguateros, to (ii) leverage locally available funds by combining contributions from thesmall-scale private operators, state funds and OBA subsidies and to (iii) reduce thefinancial burden for poor households.



DESK STUDY POWS&S FINAL REPORT(16-03-2007) X

Annex 4: Case Study Three

CSSP Finance: Village Banks in Benin and Mali24 GTZ/KfW are experimenting with microfinance and water programmes in two villagesin Benin: Allonkphon and Zian in the Oueme and Mono regions. Inhabitants of these

two villages have created committees to manage and sell water sourced from apump installed by a donor. The water is sold and revenues go into two bankaccounts. Both villages have accounts with the largest rural MFI (CRCAM), and earn3 percent interest on savings: 80 percent goes into a savings account which is usedfor maintenance in case of breakdown and the remaining 20 percent is used for on-lending to the village population for new connections.

In Mali, like in many other countries of SSA, the central problem of rural water supplyregard the operation and maintenance of hand pumps: almost 70 percent of Mali’spopulation still live in villages with less than 2,000 inhabitants and provide their watermainly from dug or bore wells. Together with DNH (Direction Nationale de

l’Hydraulique) is in charge of water supply in rural areas (and small towns), KfW hasdeveloped a new O&M concept for rural water supply schemes where the operationis being transferred to local user groups (CSSPs), which are organized like private-sector enterprises. Only when required, i.e. when spare parts need to be procured ortechnical problems need to be solved, will the CSSPs receive advice and supportfrom the next bigger water supply system (small town) or a central unit at the DNH.Twice a year, this unit conducts a technical and financial audit of the operator andcreates the necessary transparency by presenting the audit results before thegeneral assembly of the users. Like in Benin, the water is sold and revenues go intoa bank account. Savings are used for maintenance and for assets renewal andaltogether a considerable amount of savings (approx. EUR one million) has been

accumulated so far. Currently, the possibility of combining these savings with thewell-established villages' banks structure is being investigated.

24Information from (41), (38)



PUBliSheD By

Dutsc Gsscat ür

Tcsc Zusammarbt (GTZ) Gmbh

itratoa Watr Poc ad irastructur Programm

Dag-hammarskjöd-Wg 1–5

65760 escbor, Grma

T +49 (0) 6196-79-0

F +49 (0) 6196-79-7291

e wassrpotk@gtz d

COVeR PhOTOS

GTZ

PlACe AnD DATe OF PUBliCATiOn

escbor, 2007

ACKnOWleDGeMenTS

T pubcato draws o xct rsarc studs carrd out b

Brgtt Bsgr ad Mar Rctr, commssod b GTZ. T pubca-

to as b acd b GTZ (Sctor Programms itratoa Watr

mailto:wasserpolitik%40gtz.de?subject=

mailto:wasserpolitik%40gtz.de?subject=

Financing Non-state Providers of Sanitation - GTZ

Documents

Transcript of Financing Non-state Providers of Sanitation - GTZ