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Water and Sanitation Finance: Patching the Holes in the Bucket

Authors: Barbara Schreiner, Executive Director, Water Integrity Network; Tim Brewer, Water Witness International; Patrick Moriarty, IRC; Catarina Fonseca, IRC; Mary Galvin, Water Integrity Network

In a previous blog we argued that blended finance is unlikely to resolve the funding gap of the water and sanitation sectors. There are a number of reasons, including a lack of interest from investors, limited fiscal space in poor countries in particular, and the risks of foreign currency loans.

In this blog, we look at options for reducing the funding gap through better use of existing funding. The priority should be to use existing funds effectively and efficiently, before seeking further, perhaps risky, financing options. Pouring more water into a leaking bucket is seldom a good course of action.

Are we budgeting for corruption and mismanagement?

Global assessments of the funding gap have been calculated based on historical costs, the most comprehensive attempt being by Hutton and Varghese in 2016. They undertook an extensive data search, validated infrastructure costs for larger countries, extrapolated cost data from similar countries for those lacking data and then projected those costs in relation to meeting the delivery needs of the sector.

Such historical cost analyses provide a useful benchmark, but they include the hidden costs of corruption and mismanagement. Evidence suggests that by reducing these hidden costs, we can substantially reduce the funding gap. In this way, we can improve the overall financial and operational sustainability of the sector.

The costs of corruption are notoriously difficult to quantify – there is, after all, a strong incentive for participants in corrupt deals to keep the details hidden. Nevertheless, WIN in partnership with the Inter-American Development Bank identified corruption-related financial costs of up to 26% in the water sector in Latin America. UNODC cites figures of up to 25% of public funds generally.

These are startlingly large portions of total investment. Yet research by the International Monetary Fund (IMF) shows even higher figures, claiming wastage of 30 – 50% of infrastructure funds (not only water and sanitation) due to poor management. The message from the IMF is clear: “countries can end waste in public investment and create quality infrastructure with specific actions to improve infrastructure governance.

Mismanagement and non-revenue water

Mismanagement can be measured in different ways. In the water sector there is an obvious one: non-revenue water (NRW). Non-revenue water levels vary significantly around the globe, but most water practitioners accept that this is a significant problem that needs to be addressed. In Africa, for example, NRW estimates range from 29% in Uganda to 73% in Liberia. This comprises both physical water losses, and financial losses arising from corruption, theft, poor billing and poor revenue collection.

The two forms of NRW are not independent. Financial losses undermine maintenance and compliance budgets, leading to increasing physical losses and further financial losses. The systemic impact is a negative feedback loop that undermines services and water services providers. This is why reform in this area has the potential to be a powerful accelerator of progress. Stopping the negative feedback loop will have compounding benefits. Additional money raised for compliance and maintenance will generate more revenue and reduce operational costs (physical infrastructure that is well maintained breaks down less frequently and less severely).

Managing infrastructure better and improving revenue collection systems, with suitably defined tariffs to protect the poor, will go a long way to making water service provision more financially viable. This is a crucial step towards the delivery of affordable and sustainable services.

The city of Jackson in Mississippi, for example, was not able to issue accurate and timely bills, and had slow processes for identifying non-payment. They moved to a system that could generate more accurate water bills and improve billing, which improved their revenue collection by $10 million per annum.

The funding gap would be a lot smaller if we weren’t building corruption and mismanagement costs into the calculations, if we weren’t allowing them to continue in real life. It seems sensible then, that the priority should be on reducing corruption and improving infrastructure management – fixing the holes in the bucket before pouring in more water.

Failure to spend budgets

Reducing corruption and improving governance and management will not resolve all challenges. The water sector currently lacks the capacity, or will, to spend its existing meagre budgets. The World Bank found execution rates on public WASH budgets in a number of countries at about 70%. In other words, in a sector that constantly begs for more money, 30% of existing WASH budgets remained unspent at the end of the financial year!

Cumbersome centralised public financial systems mean that funds sometimes arrive only a few months before the close of the fiscal year. Contracts are then not awarded and work isn’t done as planned. It is hard to plead for more resources, public or private, if the sector isn’t spending the money it has available.

The wrong people are getting subsidised

To compound the challenges, subsidies do not always reach those most in need of support. A World Bank study found that, in ten low and middle-income countries, nearly 60% of subsidies go to the wealthiest residents. They estimate that well over $300 billion per annum in subsidies is not being used to meet pressing needs – to extend and maintain services to poor and marginalised communities.

In short: Water and sanitation service providers are failing to collect the money due to them. They are failing to spend the money they do have. And, they are failing to curb the corruption and mismanagement that waste significant amounts of existing funds.

Those that fall outside the calculations

Most of this discussion revolves around formal water and sanitation provision, through utilities, municipalities or government agencies. There are other challenges for informal and community delivery systems that fall outside public budgets and financial management systems. As long as they remain informal, they are prey to corruption and mismanagement, with little or no regulatory tools to protect them.

What can we do?

The message is simple. Before begging for more money, we need to fix the bucket! We need to prioritise the improved use of existing resources and we need investment and commitment to do so. To this end, we need:

  1. Governments, DFIs and donor agencies to invest more in improved revenue collection systems, together with operational capacity in public utilities, municipalities and ministries.

  2. Utilities and regulators to build strong anti-corruption mechanisms into their systems.

  3. A new vision for financing the sector, one driven by integrity and the optimal use of existing resources to serve the most marginalised first.

The technical knowledge about how to do much of this already exists. What is lacking is the political will (to drive meaningful change and reform) and the technical capacity (to implement it). Only intentional action by coalitions of national and local government, civil society, and service providers will deliver this sort of wholesale sector reform, or systems strengthening. Such action will also require senior level political leadership and protection.

Changing a culture characterised by corruption involves removing corrupting incentives and tacit acceptance of ‘how things are done’. This will depend on a public focus on accountability that is promoted from the highest political levels, is supported by sector players and civil society, and that welcomes public scrutiny and criticism.

The reality is, that even if we reduce corruption, mismanagement, and non-revenue water to more reasonable values, we will still struggle to meet everyone’s needs. However, to stand a fighting chance and to attract more investment, we must fix the bucket. Only then will we demonstrate that a strong system is indeed capable of providing quality services and, thus, is also a worthy recipient of increased investment – public or private.


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