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Innovative financing - and willingness to pay

'Innovative financing', and hybrid financing appear to be the fashion of the moment (the sector giving up on 'micro-financing' as a solution?). But any financing which includes commercial level cost of capital (even for a part of the overall financing) requires a much higher cost of capital than public providers are able to dream of generating through tariffs (see my other blogs about cost of capital). This is because tariffs, at the core, are all about willingness to pay that is ‘effective demand’, however much people might respond to willingness to pay surveys confirming the importance to them of improved water and sanitation.

In preparation our Ross and Franceys Chapter writing for ‘Equality in Water and Sanitation Services’ (Eds. Cumming and Slaymaker, 2018) book I tried to summarise my thoughts (please contradict and/or add to as you understand it from your experience) as:

  • Willingness to pay for basic water is limited – except where there is no ‘distant walking’ alternative, as in slums and in dry (dry season) rural areas where consumers respond by using less water than optimal for health and hygiene;

  • The contributory factor being that, against now accepted practice (the old practice of women’s time being valued at half men’s time in economic analyses), the consumer’s perception of the ‘opportunity cost’ of women’s time is way lower than we might like to think in too many low-income economies;

  • Willingness to pay for basic sanitation is even more limited – except where CLTS shaming has been (temporarily?) really effective;

  • Willingness to pay for improved piped to plot water is good for smaller schemes at the opex level for perhaps the upper three quartiles of income levels – but low for the lowest-income quartile of that community – difficult to cross-subsidise in more expensive smaller schemes, particularly where any water treatment is required;

  • Willingness to pay for improved piped to plot water is good for larger schemes (where access (connection charges) have been minimised by including in the ongoing tariff- not using expensive micro-finance for paying connection fees/costs ); this at the OpEx plus M&E (Mechanical and Electrical) CapManEx plus government/public sector cost of capital for perhaps three quartiles – but low for the lowest-income quartile who should be enabled to benefit from cross-subsidies available due to economies of scale making overall average tariff affordable for the average consumer;

  • Increasing block tariffs do not help the lowest-income quartile; though multiple metered taps and/or household registration are a way of addressing the previous donor generation’s solution of IBTs;

  • Where there is no willingness to pay, innovative (expensive) financing is not viable as a solution to the challenge as it makes service so much more expensive;

  • Willingness to pay determines not only tariff levels but also signals demand and therefore likely political response regarding use of scarce government budgets derived through taxes;

  • Willingness to pay for improved sanitation in rural areas is necessarily limited to manual pit/tank emptying and local disposal (dumping). Any higher level of treatment is a public good which requires public (local municipal) funding based on govt cost of capital financing;

  • Willingness to pay for improved, though on-plot, sanitation in lower-income urban areas is similarly limited to manual pit/tank emptying and local disposal (dumping); though mechanical pit-emptying can be ‘encouraged’ through bye-laws and focus on landlord’s duties. Any higher level of transport and treatment is a public good which requires public (local municipal) funding based on govt cost of capital financing

  • Price sensitivity with regard to water and sanitation is an order of magnitude higher than us rich outsiders perceive;

  • The level of ‘improvement’ to water and sanitation that is on offer through our expensive improvement schemes can be perceived as relatively unimportant by lower-income consumers with so many pressing demands on their limited cash resources;

  • High-income countries around the world have developed their improved water and sanitation systems through a) zero or govt supported minimal cost of capital and b) postponed depreciation/capital maintenance charges/costs and c) waiting until there was sufficient average willingness to pay from their citizens, due to increasing GDP per person, to move to the next level of improvement;

  • If high-income countries want lower-income countries to short-cut that economic development process then it will have to be supported by high-income country transfers to finance the capital-intensive aspects of wash, at zero cost of capital, whilst only requiring tariffs to cover OpEx and M&E CapManEx. The Indian approach of reducing OpEx charges still further by charging approx. half price electricity for ‘public water providers’ is a ‘clever wheeze’ which is very useful in squaring the willingness to pay circle, as is the inclusion in tariffs of on Mechanical and Electrical equipment capital maintenance expenses – the pipes and tanks and boreholes have a much longer life (usually!) …..

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