Photo by Sagar J. Gondaliya, WIN photo competition 2018 (top 10)

How can integrity help bridge the financing gap in WASH?

Corruption is draining water sector finances; looking away doesn’t help.

Globally, only seven in ten people had access to safely water managed water services and only four in ten had access to safely managed sanitation services in 2017. Water sector financing, however, is falling behind what is needed to make progress and achieve Sustainable Development Goal 6. Attracting new financing is a commonly acknowledged, major challenge for the WASH sector.

Sector analysts and stakeholders regularly point to poor governance as a major stumbling block for attracting investments (GIZ, 2018; World Bank, 2017). Corruption and poor integrity in the WASH sector are important elements of poor governance. Unfortunately they are usually only mentioned in passing as factors in the equation. They should be looked at in more detail. Conservative estimates indicate that the global water sector loses more than USD 75 billion to corruption every year. We cannot afford to disregard these figures.

An integrity lens provides a new perspective on the challenge of attracting investment. It points to a key precondition: to bridge the water sector financing gap, we also need to spend available money more efficiently and fairly. This is also a big challenge, but one we can tackle with targeted integrity measures.

 

Poor integrity contributes to inefficient investments

Through fraud, embezzlement, or bribes, money seeps out of the WASH sector instead of being used for its intended purposes. This is obviously inefficient. Unfortunately, there are no standard patterns of poor integrity and perverse incentives can be hard to spot.

The OECD identified procurement as the government activity most vulnerable to waste, fraud, and corruption due to the size of financial flows. Collusion between project owners and bidders, kick-backs, bid rigging, bid suppression are relatively common examples of corruption in all infrastructure development, including water and sanitation. As a result, projects become more expensive than they should be. They are not built up to standard and break down sooner than they should, if they ever even become fully operational.

There are also serious integrity concerns in the planning and design phase of infrastructure development, which can even be more damaging. The actors involved, the location, the size, and technical specifications of a development are all elements that can be manipulated to suit personal or political interests, regardless of technical, financial, or environmental sustainability and social impact.

For example, it is not uncommon for a technical solution to be designed by consultants who also bid to support the realization of the same or similar projects. This means these consultants have an interest in designing larger rather than smaller or simpler solutions. Political considerations and vested interests can also lead to infrastructure developments that are not appropriate. A typical example is when a bigger project is planned in a politician’s home region or used to sway opinions and votes. Large-scale investments can also be more attractive targets for corruption because of the bigger margins and opportunities for rent-seeking.

The development of many small projects can also be problematic. Evidence from Kenya shows that local government assemblies tend to equally split water budgets by voting geographies, irrespective of population or inequalities in service levels. Many boreholes and other small projects are then built, but they are often technically and financially unsustainable. In such cases, fewer and larger projects targeted at ‘leaving no one behind’ in underserved areas may be more efficient.

 

Integrity risks undermine investor confidence

“The […] point is governance. Not only of our policy-makers and regulators, but most importantly governance of public utilities, which are highly vulnerable to political changes.”

– Sergio Campos, Water and Sanitation Division chief at the Inter-American Development Bank

Senior water sector managers from the World Bank, the Inter-American Development Bank, and the African Development Bank have underlined poor governance and lack of transparency and accountability of utilities as major problems for their non-sovereign loan programmes to utilities. Utilities themselves must be creditworthy and able to defend their track record to access such loans which are not backed by central government guarantees. Integrity issues and suspicions of integrity issues are keeping too many utilities out of the running.

For example, red flags for investors include: wasteful expenditure by boards of directors (often populated by political appointees) and different forms of political transgression into procurement processes, management decisions and tariff setting (for example, keeping tariff unreasonably low especially around election times). Patronage in human resource management, financial irregularities, poorly kept records, or unclear mandates are equally problematic.

Such risks are related to institutional governance and controls. Other risks are related to the predominant model for utilities as fully or partially state-owned companies. These utilities face the real difficulty of balancing commercial viability and their role as instruments of public policy for water and sanitation. While (local) governments, as duty bearers responsible for fulfilling the human rights to water and sanitation, need to be able to exercise some level of control over how these services are provided, they are also prone to unduly use water utilities and asset development corporations for political or financial gain.

At the same time, these utilities are not necessarily subject to the same transparency, oversight and control mechanisms as other government institutions. Their financial plans and statements tend to be less publicly available, and public participation and reporting mechanisms less developed.

 

Integrity measures to improve efficiency and performance: integrity measures to attract financing

Integrity measures can directly contribute to increasing financial efficiency by curbing corruption and mismanagement in the implementation of investments. Integrity can also contribute to bigger gains by addressing perverse incentives and undue influence of special interest groups in the planning and design of infrastructure solutions.

Importantly, integrity can also contribute to building trust of users in duty-bearers — a condition for tariffs to be understood and accepted, and to building creditworthiness of service providers — a condition to attract new financing.

Integrity measures are needed at local and national level to strengthen sector governance, and also, and this is key for new financing, at the level of individual sector institutions and utilities in particular. Integrity measures are based on four key principles: Transparency, Accountability, Participation, and Anti-Corruption. They should be developed based on a risk analysis that identifies and prioritizes the specific risks stakeholders face. Contextualization is crucial.

Some key examples include:

Corruption is draining water sector resources. Looking away doesn’t help. Proactive, targeted integrity measures can support more efficient spending and help bridge the water sector financing gap. These measures must be built in to comprehensive water and sanitation sector investment plans and financing strategies, and become standard practice for utility governance. The first, and most urgent, step is comprehensive integrity risk assessments.