The 'Five T's' of funding
Updated: Jun 23, 2020
Working on the 2020-2025 Business Plan for Guma Valley Water Company, and conversations following the publication of 'Referee!' for WSUP, it strikes me again that OECD's excellent and well used 'Three T's of funding (using 'financing' to refer only to repayable sources of money, loans etc.) through Tariffs, Taxes & Transfers can be extended in everyday practice not only to a 'fourth T' - which I suggested in the 2009 World Water Forum represents 'Timing' - that is water utilities extending the presumed life of assets by delaying Capital Maintenance Expenditure (CapManEx), not always the best way but 'good enough' perhaps - but also a 'Fifth T' (cheating a bit here!) of 'cosTs'.
Which is a well-accepted point of course but sometimes we can lose sight of it amidst everything else. Believing that ‘Transfers’ are critical to the timely expansion of ‘piped on premises’ services (do look at Country Tax/GDP ratios if you hope that ‘Taxes’ are the solution in low-income countries; middle-income? Then taxes start to play a significant role …). I am pleased to have worked on MCC funded projects which generously support utilities through grants but we still have to be aware of long-term sustainability of the services enabled.
The Depreciation charge on a commercialised utility’s Balance Sheet & Income & Expenditure Statement is there to deliver ongoing serviceability of the fixed assets. However, if donor funded assets, tending to be more expensively procured, are included it can appear to distort the necessary Depreciation charge to self-fund Capital Maintenance Expenditure (CapManEx). In just the same way that if assets have not been revalued over years in a country experiencing significant levels of inflation then the Depreciation charge can be meaningless.
To ensure affordable Tariffs therefore, in the absence of Taxes, then Transfers are required, then the Timing of asset maintenance becomes critical whilst the underlying ‘cosTs’, of fixed asset creation AND renewal, have to be kept under control.
Donor supported fixed asset creation can lead to remarkably expensive assets, conventionally procured assets can incur significant additional costs of corruption - and, whilst Guma Valley's impressively low cost 'spaghetti connections' deliver 'piped on premises' water connections to households at lowest costs, they also lead to a never-ending battle of leaks and, of course, ingress of polluted water during intermittent supply periods - particularly where the spaghettis are laid inside, 'looped along', surface water drains.
The best solution to this conundrum of 'cosTs' that I have come across is described in Silver Mugisha's excellent 'Sustaining High Performance Public Enterprises' 2019 book - describing how internally designed (no consultants) network extensions with 'community labour excavating trenches (with specifications provided by NWSC) and the corporation then delivered and laid the pipes. this helped to lower the cost of investments and fast-tracking implementation' p36). Which leads to meaningful but low-cost additions to the Fixed Assets Register/Asset Management Plan, allowing for an appropriate 'sustainability charge', acceptable to regulators, within the tariff-setting and should follow through to reduced CapManEx in the future.