“The ability of low- and middle-income countries to mobilize additional, repayable financing and explore financial innovations is highly dependent on the ability of the sector to demonstrate that it receives and makes good use of existing funding.”
– Sanitation and Water for All, 2020, Water & Sanitation: How to Make Public Investment Work. A Handbook for Finance Ministers
Water, sanitation, and hygiene (WASH) are essential to the COVID-19 pandemic response. And, the performance and sustainability of the WASH sector will be decisive for how well and fast countries can recover and become more resilient in the face of climate change.
Considering this central role, why does the sector suffer so clearly from the “interlinked challenges of underinvestment and a poor performance record”? The WASH sector requires funding to at least triple to reach the Sustainable Development Goals. At the same time, every 10 per cent of investment that is lost to corruption implies annual losses to the sector in excess of USD 75 billion. Because the sector is particularly vulnerable to corruption, some estimate actual losses are many times higher. Low integrity, capacity issues and mismanagement make the situation worse.
Starting in early November 2020, ministers of finance from Sanitation and Water for All partner countries will gather to “develop and strengthen partnerships for smart investments in water, sanitation and hygiene”. They have the power and responsibility to coordinate more effective funding mechanisms and attract new finance. Thought leaders in the sector agree that the ministers’ ability to do so is linked to improving governance in the sector and making better use of existing funding. We argue that it’s high time we go one step further than good governance and also focus on integrity.
Because of corruption, money we cannot afford to lose seeps out of the water sector. Low integrity contributes to inefficient and unfair investments and undermines investor confidence by increasing risk. We must take the bull by its horns and aim for accountable and transparent governance, with proactive measures in place to prevent corruption and build integrity.
Lost money; inefficient, unfair investments
There are important integrity risks in the planning and design of WASH interventions and infrastructure developments. The actors involved, the location, the size, and technical specifications of an intervention are all elements that can be manipulated to suit vested personal and political interests. Procurement is another major risk area for integrity and corruption because of the size of financial flows involved.
Collusion between project owners and bidders, kick-backs, and bid rigging or suppression are relatively common examples of corruption in WASH infrastructure development. As a result, projects are more expensive than they should be and infrastructure breaks down prematurely, if it even becomes operational. More broadly, other typical examples of practices with low integrity include targeting interventions to sway votes, to provide business opportunities for friends, or in exchange for favours, irrespective of population or inequalities in service levels, and at the expense of those in need.
High integrity risks: low investor confidence
Key sector stakeholders like service providers or utilities, must become creditworthy and able to defend their financial management and performance track records to access new finance, including repayable finance and innovative finance from new players that are used to working with possibly more seasoned actors in other sectors.
However, abuse of political power to influence utility management is not uncommon. There are many red flags for investors, including: wasteful expenditure by boards of directors (often made up of political appointees), procurement issues, patronage in human resource management, financial irregularities, poorly kept records, or unclear mandates.
Concurrently, utilities are not necessarily subject to the same oversight and control mechanisms as many government institutions. Their financial plans and statements tend to be less openly available, and public participation and reporting mechanisms less developed. These are important risks that need to be addressed.
Making better use of existing funding and bridging the financing gap with integrity
- “Maximize value from existing public funding by incentivizing sector performance, improving subsidy targeting and promoting better sector planning and management.
- Mobilize more funding by setting up adequate cost recovery policies, reforming tariff systems, introducing earmarked taxes and establishing an array of options for cross-subsidization.
- Increase repayable domestic finance through mechanisms that reduce perceived risks and pool finance at national, municipal and household levels.
- Encourage innovation and least-explored new approaches such as climate funds and social impact bonds, to tap sources of finance rarely accessed by the water and sanitation sector.”
Integrity is an enabling factor in all these areas and finance and sector ministers can incentivise sector performance on integrity, for example with stricter corporate governance standards, public participation measures, public disclosure, effective oversight and complaint mechanisms, and transparency and controls on staff appointments.
Integrity measures can directly contribute to increasing financial efficiency by curbing corruption and mismanagement in the use of investments. They can also stimulate bigger gains by addressing perverse incentives and undue influence of special interest groups in intervention planning and design. Integrity can help build trust of users in duty bearers, a condition for tariffs to be understood and accepted. It can also help build creditworthiness of service providers, a condition to attract new financing.
Improved integrity is a critical underpinning of sustainable finance for the water and sanitation sector. Investments in the sector should be accompanied by investments in improving integrity and good governance.