Financing sustainable sanitation projects Presentation at the EC-EIB seminar, 5/07/10 Sophie Trémolet ( :

Presentation structure 2 Why is financing sustainable sanitation difficult? What is sanitation? Identifying critical financing challenges What could be done differently to enhance the sustainability of sanitation projects? Recap from KfW meeting on sanitation financing (Oct. 2009) Identifying potential ways of increasing repayable financing, lowering its cost and improving its reach What do we need to know in order to improve sanitation financing?

The sanitation value chain Demand creation Collection Transport Treatment Disposal / Re-use MDG focus Types of servicesMain actors Households (investors) Masons Utilities Local governments CBOs, NGOs Promote sanitation, create demand, community organisation Pit-latrine emptiers (manual emptying, trucks, etc) Utilities (sewers) Local governments Utilities SSIPs Value chain Local governments Local farmers, etc.. On-site with reuse On-site w/o reuse Sewer connections Environment Decentralised treatment facilities Partial on- site treatment Treatment Plants Re-use (energy, agriculture) Environmental focus

Main sanitation financing challenges 4 Overall, insufficient financing for the sector: under- prioritised, taboo element Fragmented financing channels Difficult to charge for an immaterial service, with low or unexpressed demand Lack of clarity on what funds should be used for Evidence of wasted hardware subsidies Mis-allocation of funds across the value chain: too much for wastewater treatment rather than basic sanitation On-site sanitation: Households are supposed to be main investors in sanitation but get limited support Insufficient focus on environmental impacts of poor sanitation and associated economic losses

Example of mis-allocation: DES 5 Study for WaterAid on effectiveness of public finance for sanitation in Dar es Salam (Tanzania) 80% of population have latrines, most unimproved Most public funding going to sewerage (70%) and wastewater treatment (30%) Cost of on-site sanitation is much higher than connecting to sewers (USD 511 vs 188): weighs disproportionately on the poor (112% of yearly income) Inadequate systems for dealing with the residual sludge: need to invest in desludging services (private), transfer stations and decentralised treatment facilities

Presentation structure 6 Why is financing sustainable sanitation difficult? What is sanitation? Identifying critical financing challenges What could be done differently to enhance the sustainability of sanitation projects? Recap from KfW meeting on sanitation financing (Oct. 2009) Identifying potential ways of increasing repayable financing, lowering its cost and improving its reach What do we need to know in order to improve sanitation financing?

The sanitation financing equation COSTS Maintenance and operating costs Capital costs LOWER COST TECHNOLOGY COSTS Maintenance and operating costs Capital costs REPAYABLE FINANCING SOURCE OF FUNDS Household recurrent payments Household capital investment FUNDING GAP SOURCE OF FUNDS Household Recurrent payments Household capital investment FUNDING GAP PUBLIC SUBSIDIES Sources of funding: Government own resources Development Bank concessionary funding Commercial financing, microfinance e.g.: Financing on-site sanitation

8 October 2009 seminar on Financing Sanitation Stated objective: formulate recommendations for development banks (KfW, EIB, AFD, JICA were there) What the banks took away Consider lower cost technologies Invest more in regional and nation-wide promotion campaigns Focus on changing behaviours Consider the entire sanitation value chain - from a financing point of view, there is a need to unbundle along the value chain o Who benefits o Who should pay o Where are revenue streams and how to finance Use a broad mix of financing instruments and blend devt bank financing with other types (including grant financing) Examine in more detail the case for micro-finance o Loans to entrepreneurs (90% SSIPs) o Rely on local commercial banks, increase use of guarantees KfW seminar: take-home messages

9 Using lower cost technologies could be a key way to reduce the funding gap: Recent AICD estimates: would reduce costs of meeting MDGs in SSA by 30%, halving the funding gap in poorer countries, eliminating it in richer ones (high coverage) Wide differences in costs depending on standards / local factors (see WSP report on financing hh sanitation): implications for effectiveness of public spending (leverage) Multiple barriers to reducing costs: rigidities in choice of technologies based on existing standards, type of training received, prestige, political reasons, etc. Lower cost technology

Cost of on-site sanitation: alternative standards 10

Different public financing effectiveness 11

12 Mobilising repayable financing ConstraintsPotential solutions Affordability constraints Micro-finance, Output-based aid, blending grants and loans Limited availability of funds for domestic operators and SSWSPs Micro-finance, Output-based aid and innovative contracts Risk profile and difficulties in managing certain risks (e.g. political risk, foreign exchange risk) Guarantees, insurance, devaluation backstopping facility Local-currency financing, revenue agreements Lack of funds at decentralised level Municipal bonds, pooled funds, revolving funds, bond banks Instruments to increase sub-sovereign lending Short tenor of available financing Guarantees and equity contributions Under-capitalized balance sheets Raising equity to strengthen the balance sheet, convertible loans, debt-equity swaps Lack of understanding by external lenders and investors Blending of public and private finance, credit ratings Lack of bankable projects Project preparation facilities

Evaluating the potential for OBA in sanitation What is OBA? OBA: Performance-based grants to help cover the gap between what the user can reasonably afford and the cost of the service to the provider OBA subsidies (or payments to service providers) channeled most often as supply-side subsidies after pre-identified outputs have been delivered OBA part of a broader framework of Results-Based Financing – Focusing on concrete, sustainable results, using performance information to improve decision-making – Other results based mechanisms to improve access to basic services (e.g. CCT, COD, OBA)

Limited use of OBA for sanitation 14 Using performance-based subsidy schemes (OBA) in sanitation A number of sanitation programs are performance-based without being labelled OBA TSC campaign in India: subsidies to BPL HH after village becomes ODF PLM in Mozambique: payments to workshops per slab sold / latrine built PRODES in Brazil: linking payment to volume of wastewater treated GPOBA has had limited success with sanitation projects OBA project in Senegal built on existing subsidy scheme, slow to start OBA in Morocco: some success – GPOBA involved Key questions (recent study for GPOBA/WSP) How could OBA-type subsidies be used for sanitation? At which step of the value chain can OBA financing be provided and should it be packaged with other services? (e.g. water, solid waste) What other components (e.g. support services to SSIPs, micro-finance, etc) may be required to improve chances of success of OBA schemes?

Potential OBA project types 15

PRODES (Brazil): OBA for WWT 16 In 1999: <½ sewage volume collected, <1/3 collected volume treated ANA (National Water Agency) created in 1997, initiated PRODES program with objective to create incentives to invest in WWT Build new plants Enlarge/improve existing ones (higher-end treatment, new units) History of wasted investment in WWTs: provide subsidies only for investments that works OBA/PRODES : deliver subsidies based on reaching performance standards (e.g. payment per volume of treated sewage) rather than up-front based on works budget Incentive to use cheaper and more cost-effective options Incentive to maintain good operational performance Funds transferred to escrow account: not used if utility not performing Results : 42 projects, reduced pollution for 6 million people ANA invested 60 mn, utilities (public & private) 184 mn

Presentation structure 17 Why is financing sustainable sanitation difficult? What is sanitation? Identifying critical financing challenges What could be done differently to enhance the sustainability of sanitation projects? Recap from KfW meeting on sanitation financing (Oct. 2009) Identifying potential ways of increasing repayable financing, lowering its cost and improving its reach What do we need to know in order to improve sanitation financing?

What do we need to know? 18 Understanding sanitation costs Software costs: including all the costs, evaluating the comparative effectiveness of software support Estimating lifecycle costs to guide appropriate investment (incorporating opex and maintenance costs) Improve and redesign M&E frameworks so as to keep track of critical financing information Sources of financing Assess drivers and constraints for investment at household level Explore the potential for using innovative financing mechanisms, such as micro-finance, OBA and CCTs Identify how public finance can be better targeted Leverage other financing sources (social investors, remittances) Evaluate potential for payments for environmental services

What do we need to know (continued)? 19 Understanding the potential for microfinance Micro-finance schemes have potential to leverage substantial private (hh) investments BUT limited and mixed experiences in sanitation (e.g. revolving fund in Vietnam) Need to understand why and how they can work to mobilize financing for MDGs with limited public funds: for households and for small-scale entrepreneurs Allocating financing at the right level based on benefits Where coverage is low, channeling financing to the utility may miss a large component of the sanitation market: financing households and small-scale entrepreneurs also to be considered Where coverage is high, need to better understand the potential benefits from increasing treatment levels (at the extreme, evidence of some declining returns to further tightening standards)