Pumps, Pipes and Promises

1. Pumps, Pipes and Promises Costs, Finances and Accountability for Sustainable WASH Services Christelle Pezon Catarina Fonseca & John Butterworth Background paper

2. Setting the scene for the symposium

3. Objectives • Why are we addressing finance, cost and accountability issues in the WASH sector at this time? • What are the key challenges and issues in the provision of financially sustainable WASH services? • Which trends and opportunities are relevant? • What do we want to see in the future? • What is the way forward?

4. The context

5. Why finances, costs and accountability now? • Huge investments in the WASH sector without achieving sustainable access • Insufficient information on the actual costs of provision which hinders financial planning and ultimately the sustainability of services • It is recognised that the current crisis in the water sector is a crisis of governance – accountability is a core of this problem

6. Key financial challenges and issues • Globally the sector is falling short on meeting the MDG water and sanitation targets : the overall rate of progress is too slow • We know there is a need to increase investment in the sector • Calculations have been made of the approximate cost of extending coverage to meet the targets • Calculations have also been made of the approximate costs to maintain existing systems

7. Key financial challenges and issues BUT • Do we know the costs of providing sustainable water and sanitation services? Life cycle costs: construction; post-construction (O&M, rehabilitation) and support functions (planning, regulation, monitoring, money transfers and revenue collection, reporting) Sustainable service: permanent and reliable access to safe and appropriate quantity of water and sanitation facility • Do we know how to share these costs between urban and rural users (tariffs), local and national tax payers (taxes) and international donors (transfers) in a transparent and equitable way?

8. Shortcomings in tackling the financial issues • Financial reporting remains generally inadequate to make a proper analysis of the origins of money (development aid/transfer – country & local taxes – users/tariffs), its destination(State, Intermediate level, communities, users, operators) and the conditions attached (loan vs grant; new infrastructure/enhancement; transparent reporting; etc) • Financial decision making tends to be based on investment costs and increasing coverage with insufficient attention to actual service provision costs to be covered by tariffs (64% of ODA goes to new systems when 88% of financial needs are for operation and high capital maintenance)

9. Shortcomings in tackling the financial issues • Increased investment does not necessarily result in increased access to services • Evidence of slippage (unsustainable investments): coverage is not increasing in proportion to investment because previously covered populations are adding to the backlog due to inadequate funding of post-construction costs resulting in service failure • Most recent reports suggest that ODA is primarily allocated to urban and towards enhancement of service levels for the growing middle class rather than basic access in rural areas

10. Financial risk analysis Loan: solvable users and borrowers (urban users and utilities) • the higher the risk, the higher the expected rate of return • risk mitigation strategies : back-up of national treasuries Grant (rural): risks are low disbursement, under performance and misuse • Risk mitigation strategies: change in financing mechanisms and priorities (SWAPs, utilities); conditionality (procurement process); public finance regulation; alignment of in-country reporting and monitoring processes depend on administrative & political reforms (deconcentration and decentralisation)

11. The challenge in addressing WASH financing Full costs not covered System breakdown Vicious circle No strategy to match funding with costs Slippage Tariffs unaffordable Insufficient expenditure on post-construction and support functions Sector decision making based on capital expenditures The infrastructure obsession Lack of data on full life-cycle costs

12. Accountability challenge Inferior and unsustainable services Poor sector governance Poor or no regulation Lack of incentives Little or no accountability of service providers to users Weak monitoring and reporting Little or no incentives / mechanisms for accountability and transparency Inadequate information and performance assessment systems In a natural monopoly, accountability cannot rely on market forces In-direct accountability Direct accountability

13. Trends and emerging opportunities

14. Trends, challenges and opportunities What are the major trends, challenges and opportunities in the sector relevant to costs, financing and accountability? • Major focus on the MDGs • Decentralisation • Sector wide approach

15. Focus on MDGs TRENDS • The focus on MDGs has mostly meant a focus on coverage and infrastructure rather than on services provided • The pressure to achieve the MDG targets means : • accelerating infrastructure delivery at the expense of operating and maintaining existing systems, and • more attention to those areas where coverage is easiest to achieve (picking the lowest fruit) • Quick wins are often not in the interests of equity, sustainability or addressing the needs of the poorest

16. Decentralisation TRENDS Decentralisation involves the devolution of authority over WASH services provision to local governments and/or the development of key functions at intermediate level to channel funds to and monitor/support/advise local governments • Decentralisation is still considered necessary for sector efficiency, responsiveness and accountability • Decentralisation is an administrative and political reform which takes time and may slower MDGs achievements

17. Decentralisation CHALLENGES • Financial transfers from national, intermediate to local level of WASH governance are complex • Ensuring good records and monitoring of financial flows at various country levels involves transaction costs • Intermediate and local levels often lack the necessary data and capacity to plan, budget, report, let alone decide on appropriate service levels and tariffs • Cost effective scales to regulate, plan, implement and operate WASH services do not necessarily correspond with the different governance levels

18. SWAps TRENDS SWAPs are increasing in the water sector where there is a shift from project based to sector based aid modalities, for example sector budget support, pooling donors and government money to support the implementation of a national sector strategy • SWAPs imply commitments from donors to transparent and predictable aid and countries to commit to mutually agreed sector objectives and indicators • Mutually agreed indicators tend to be MGD / coverage focussed rather than sustainability focussed • SWAPs require financial planning and medium term expenditure frameworks (MTEFs) for the sector and also requires improving public financial management systems and procedures in the country

19. OPPORTUNITIES • The development of key competence and functions, at sub-country level, supports WASH sector reform • New methodologies are available to better track inputs (costs) and outputs (service levels) and estimations of the life cycle cost of WASH services • Looking beyond 2015: provision of universal access to WASH services (everybody has adequate access to WASH services, no matter what it costs)

20. Where we want to be...

21. The Vision Implement the paradigm shift from infrastructure development to service delivery • Goals and objectives are defined and monitored on the actual level of service received by users – reliability, access as well as quality and quantity • Decisions are made to ensure that services will be delivered forever • Levels of services are defined with respect to long term water resource availability, consideration to all life cycle cost components and delivered to users at an affordable price

22. This Vision implies • Water accounting to prevent shortage of water resources to meet long term demand, taking into account climate change and rural migration • Reliable construction, post-construction and support costs data associated with different levels of service to plan and budget • A sound financial and cost recovery strategy (who is paying? what expenses? for what service?) • An institutional framework to define the responsibilities of governance levels, services providers and users in service delivery and accounting mechanisms

23. What do we want to see by 2015? • Consensus on service delivery approach - where service delivery indicators are developed to complement coverage indicators - SD indicators start being incorporated in reporting processes and monitoring tools • Consensus on life-cycle cost approach - where life cycle cost components are made explicit against services levels - LCCs start being incorporated in planning and budgeting processes • Information on financing flows - where the sector knows where finance comes from and what it covers

24. What do we want to see by 2015 • A clear institutional framework is in place with clear responsibilities for financing • service provision arrangements take economies of scale into account • Accountability mechanisms are strengthened • between providers and users (consumer oversight) • between providers and authorities (regulatory framework) • Professionalisation of the sector, especially through • capacity development of support functions • improved operational capacity • strengthened monitoring, reporting and regulation

25. Conclusions and questions arising

26. To conclude • Limitations in sustainability and decentralisation are major obstacles in reaching the MDGs • Utilities have developed capacity to extend services beyond the major urban areas, and are already using life cycle costs – they thus have the capacity to address services in areas where decentralisation is weak • Improvements in financing, costing and accounting for sustainable and decentralised WASH services depend on a paradigm shift from infrastructure development to service delivery in rural areas • This paradigm shift is needed to reach the post-MDGs target: the provision of universal WASH services

27. Some policy considerations • Decentralisation: how quickly and what functions should be decentralised given local capacity constraints? • Should the urban and rural sub-sectors be dealt with separately – we believe this is hindering the drive to provide services to everyone, particularly in rural areas? • How do we ensure that the pressure of the MDGs to achieve the targets does not threaten sustainability or services to the poorest? • What issues must be considered when making decisions about taxes, tariffs and transfers – towards ensuring financial sustainability? • What mechanisms are needed to strengthen accountability for service provision?