THE WORLD BANK Transportation, Water, and Urban Development Department TW J OR5 FINANCING AGENDA 21: FRESHWATER February, 1994 A paper prepared for The United Nations Commission on Sustainable Development by John Briscoe and Mike Garn The preparation of this paper was funded jointly by the United Nations Development Programme and the World Bank. The authors benefitted from the comments of Gershon Feder. THE WORLD BANK Transportation, Water, and Urban Development Department TWU OR5 FINANCING AGENDA 21: FRESHWATER February, 1994 A paper prepared for The United Nations Commission on Sustainable Development by John Briscoe and Mike Garn The preparation of this paper was funded jointly by the United Nations Development Programme and the World Bank. The authors benefitted from the comments of Gershon Feder. Copyright 1994 International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 USA Printed August 1994 This document is published informally by the World Bank. Copies are available free from the World Bank at the address above. Contact Mrs. Mari Dhokai, Room S4-001, telephone 202 473-3970, fax 202 477-0164. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed and the presentation of the material are solely for the convenience of the reader and do not imply the expression of any legal opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation's of its boundaries or national affiliation. Executive Summary This paper takes the point of view that who do not have adequate sanitation "financing the freshwater activities of facilities, and, second, improving the Agenda 21" is principally a challenge of reliability and quality of service to those developing appropriate institutional and who do currently have access. A major financial arrangements. The essence of constraint in providing more people with such arrangements is that they ensure that better services has been the inefficiency and societies mobilize appropriate levels of inequity with which existing public resources for providing water-related financing has been used. Accordingly, an environmental services and that these indispensable ingredient in rising to this resources are used in the most efficient and challenge is ensuring that water and effective way possible. Accordingly, the sanitation supply organizations pay much paper makes no attempt to produce a "bill greater attention to consumers' demands, for implementing Agenda 21". Indeed, the and are structured in such a way that they paper provides evidence that the top-down are self-financed, efficient and accountable approach (which sets targets and standards to users. and then computes the bills for implementing such targets) itself has played As a consequence, in part, of the progress a counter-productive role. made in delivering water, sanitation and sewerage services, the quantities of The paper therefore attempts to describe, in wastewater generated in developing some detail, the characteristics of a "sound" countries have increased rapidly, and the water sector. Because the elements of quality of the aquatic environment has sound policies are similar in different sub- become severely degraded, especially in sectors, the paper does not deal with all urban areas and especially in low-income water sub-sectors (agricultural development, countries. This degradation poses a major most importantly, is not addressed), but threat to the health and well-being of urban illustrates the general case by focusing residents in developing countries. heavily on the provision of water supply and Accordingly, the "emerging new agenda" sanitation services, sustainable urban involves going beyond the household development and water resources service level, and improving the quality of management. the aquatic environment. The water supply and sanitation sector in The good news is that a remarkable developing countries faces two great consensus has emerged in recent years on challenges. The first is to complete the "old the water resources management principles agenda", which is (appropriately) heavily which have proved to be effective in focused on the provision of water supply industrialized and developing countries. and household sanitation services. These principles have been most clearly Although considerable progress has been stated in the pre-UNCED International made, major challenges remain in, first, Conference on Environment and serving the 1 billion who do not have an Development, with the "Dublin Statement" adequate supply of water and the 1.7 billion laying particular stress on "treating water as iii CSD Freshwater Financing Paper an economic good" and "managing at the have met this challenge more efficiently lowest appropriate level, with involvement shows that the key is the development of of stakeholders in all levels of sound, integrated institutional and financial management". arrangements at different levels (ranging from the neighborhood to the river basin to The bad news is that improving the quality the nation). The essence of the effective of freshwater resources is a complex and arrangements at all levels is that exceedingly expensive business. The stakeholders decide on how much they wish experience of many industrialized countries to spend on improving environmental reveals massive and costly mistakes in the quality at that level, and that available mobilization and allocation of resources for resources be allocated to those investments improving the quality of the aquatic which bring the greatest environmental environment. The experience from those (in benefit. developed and developing countries) who iv Contents Introduction 1 The State of the Sector, Part I: Services, impacts and environmental quality 3 The incomplete "old" agenda 3 The emerging "new" agenda 3 The State of the Sector, Part II: Costs of Services and how they are currently financed 8 The Cost of Providing Services: 8 How Formal Services are Financed: 10 Toward a Financially Sustainable Sector 15 The old view of sector financing 15 The new view of sector financing 15 How water supply services should be financed 17 How sanitation, sewerage and wastewater management services should be financed 18 Summary of the financing implications of "the new view" 23 Some common beliefs about the new approach to sector financing 24 Financing of Freshwater in Agenda 21 in Context 26 References 28 v I Introduction This paper was prepared at the request of sanitation; E-Water and sustainable urban the United Nations Commission on development; F-Water for sustainable Sustainable Development, as a background food production and rural development; and paper for the ad hoc Working Group on G-Impacts of climatic change on water Financing. The paper draws heavily on resources. This paper takes the position that work done in the World Bank, and, in attaching "price tags" to these activities-as particular, on the World Bank's recent was tentatively done in Agenda 21-is a Water Resources Management Policy Paper. misguided approach and that what is needed is articulation of clear principles which The paper assesses the financing challenges should underpin the financing of freshwater which have to be met by developing investments. To illustrate the approach the countries if water resources are to be paper focuses heavily on the water supply managed efficiently, if the quality of the and sanitation sector, sustainable urban aquatic environment is to be improved, and development, and water resources if water-related services are to be delivered management (which together comprise in a responsive, efficient, and equitable way. about 75 percent of the indicative financing specified in Agenda 21). The paper does The chapter on Freshwater in Agenda 21 not address the important area of water for deals with the following "programme sustainable food production. This paper areas": A-integrated water resources does, however, draw heavily on work done development and management; B-Water as part of the preparation of the World resources assessment; C-Protection of Bank's Water Resources Management water resources, water quality, and aquatic Policy Paper. ecosystems; D-Drinking water supply and CSD Freshwater Financing Paper The State of the Sector, Part 1: Services, Impacts and Environmental Quality The incomplete "old" agenda The quality of the aquatic environment is a global concern. The situation in cities in Both the number and proportion of people developing countries is especially acute. in developing countries who have access to Over the course of the Intemational adequate water and sanitation facilities has Drinking Water Supply and Sanitation increased dramatically. Figure I shows, for Decade (1981-1990) the number of urban instance, that the number of urban people inhabitants without access to adequate with access to adequate water supply sanitation actually increased by about 70 increased by about 80 percent in the 1980s, million. And even in middle-income and the number of urban people with countries, little sewage-just two percent in adequate sanitation facilities increased by Latin America, for instance-is treated. As about 50 percent. shown in Figure 2, water quality is far worse in developing countries than in These achievements notwithstanding, very industrialized countries. Furthermore, while large numbers of people remain unserved- environmental quality in industrialized an estimated I billion do not have access to countries improved over the 1980s, it did clean water, and 1.7 billion do not have not improve in middle-income countries and access to sanitation. And an estimated 2 declined sharply in low-income countries. million children die and billions become sick (see Table 1) each year because of In considering this nexus of service and inadequate water and sanitation facilities. environmental issues, it is instructive to consider the sequence in which people Furthermore, those who are not served often demand water supply and sanitation pay high costs, especially the poor in urban services. Consider, for instance, a family areas. These people often rely on vendors which migrates into a shantytown. Their who typically charge $2 to $3 for a cubic first environmental priority is to secure an meter of water, which is at 10 or more times adequate water supply at reasonable cost. the price which the served pay for water This is followed shortly by the need to from a tap in their houses. secure a private, convenient, and sanitary place for defecation. Families show a high The emerging "new" agenda willingness to pay for these household or private services (in part because the While the "old" agenda, focused on alternatives, as described earlier, are so household services, still poses very large unsatisfactory and so costly). It is natural financial, technical and institutional and appropriate, therefore, that they put challenges, a "new," broader agenda which substantial pressure on local and national considers both the provision of services and governments to provide such services. And environmental quality has emerged it is, accordingly, natural and appropriate forcefully in recent years. that the bulk of external assistance in the 3 CSD Freshwater Financing Paper Figure 1: Access to safe water and adequate sanitation in developing countries in 1980 and 1990 Billions served 2 69% 1.5 48t 87% - - - - 73 % - -- - - - - -- - 33% 70 ~~67%29 0.5 Water Sanitation Water Sanitation URBAN RURZAL 7711980 1990 early stages of development goes to meeting degrading effects of large amounts of waste. the strong demand for these services. The very success in meeting these primary There are a number of implications needs, however, gives rise to a second emanating from this description. It means generation of demands, namely for removal that the historic "bias" in favor of water (at of wastewater from the household, then the the expense of sanitation and sewerage) is neighborhood, and then the city. And, probably correct. The historic experience of success in this important endeavor, too, industrialized countries, and the gives rise to another problem, namely the contemporary experience protection of the environment from the Table 1: Effects of improved water and sanitation on sickness Disease Millions Median affected by reduction illness attributable to improvement (percent) Diarrhea 900* 22 Roundworm 900 28 Guinea worm 4 76 Schistosomiasis 200 73 * refers to number of episodes in a year 4 CSD Freshwater Financing Paper Figure 2: Dissolved oxygen levels in rivers in developing and developed countries DO in mg/l 14 [ low-income middle-income high-income coun tries countries countries ~ 12 10 ~~~~~~~~~~~~~ACCEPT- ABLE COLD 6 WARM 4 UNACCEPT- 2 X 0 1 | | ~~~~~~~~~~~ABLE Early Late Early Late Early Late 1980s 1980s 1980S 1980S 1980s 1980s All rivers Cleanest rivers Dirtiest rivers of developing countries demonstrates sanitation and sewerage, with most of this clearly that it is only when the first spent on sewage collection and only a small challenge (service provision) has been fraction spent on treatment. Boxes I (on the substantially met that households and the Orangi Pilot Project in Karachi) and 2 (on societies aggregating them pay attention to the provision of sewerage services to the the "higher-order" challenges of periphery of Sao Paulo, Brazil) demonstrate environmental protection. And it is thus graphically how forcefully poor people neither surprising, nor incorrect, that the demand environmental services, once the portfolio of external assistance agencies has primary needs for water supply are fulfilled. focused heavily on the provision of water (These examples also illustrate many other supply.1 For example, of World Bank points which will be referred to later in this lending for water and sanitation over the report.) past 30 years, only about 15 percent has been for For a more detailed discussion of this point, see page 95 of the World Bank's World Development Report, 1993: Investing in Health. 5 CSD Freshwater Financing Paper Box 1: How and when poor people demand sanitation services, and how to meet these demands: The case of the Orangi Pilot Project in Karachi, Pakistan In the early 1 980s, Akhter Hameed Khan, a world-renowned community organizer, began working in the slums of Karachi. He asked what problem he could help resolve. People in this area had a relatively satisfactory supply of water but now faced "streets that were filled with excreta and wastewater, making movement difficult and creating enormous health hazards". What did the people want, and how did they intend to get it, he asked. What they wanted was clear-"people aspired to a traditional sewerage system... it would be difficult to get them to finance anything else." And how they would get it, too, was clear-they would have Dr. Khan persuade the Karachi Development Authority (KDA) to provide it for free as it did (or so they perceived) to the richer areas of the city. Dr. Khan then spent months going with representatives from the community petitioning the KDA to provide the service. Once it was clear that this would never happen, Dr. Khan was ready to work with the community in finding alternatives. (He would later describe this first step as the most important thing he did in Orangi- liberating, as he put it, the people from the demobilizing myths of government promises.) With a small amount of core external funding the Orangi Pilot Project (OPP) was started. The services that people wanted were clear; the task was to reduce the costs so that these were affordable and to develop organizations that could provide and operate the systems. On the technical side, the achievements of the OPP architects and engineers were remarkable and innovative. Coupled with an elimination of corruption, and the provision of labor by community members, the costs (in-house sanitary latrine and house sewer on the plot, and underground sewers in the lanes and streets) are less than $100 per household. The (related) organizational achievements are equally impressive. The OPP staff has played a catalytic role- they explain the benefits of sanitation and the technical possibilities to residents and conduct research and provide technical assistance. The OPP staff never handled the community's money. (The total costs of OPP's operations amounted, even in the project's early years, to less than 15 percent of the amount invested by the community.) The households' responsibilities include financing their share of the costs, participating in construction, and election of a "lane manager" (who typically represents about fifteen households). The lane committees, in tum, elect members of neighborhood committees (typically around 600 houses) who manage the secondary sewers. The early successes achieved by the Project created a "snowball" effect, in part because of increases in the value of property where lanes had installed a sewerage system. As the power of the OPP- related organizations increased, so they were able to bring pressure on the municipality to provide municipal funds for the construction of secondary and primary sewers. The Orangi Pilot Project has led to the provision of sewerage to over 600,000 poor people in Karachi and to attempts by at least one progressive municipal development authority in Pakistan to follow the OPP method and, in the words of Arif Hasan "to have government behave like an NGO." Even in Karachi, the mayor has now formally accepted the principle of "internal" development by the residents and "external" development (including the trunk sewers and treatment) by the municipality. The experience of Orangi demonstrates graphically how peoples' demands move naturally from the provision of water to removal of waste from their houses, then their blocks and finally their neighborhood and town. 6 CSD Freshwater Financing Paper Box 2: How and when poor people demand sanitation services, and how to meet these demands: The case of the favelas of Sao Paulo, Brazil In the 1980s the city of Sao Paulo, Brazil, made extraordinary progress in providing all of its residents with water supply and sanitation services. In 1980 just 32 percent of favellas (low-income, informal settlements) had a piped water supply, and less than I percent had a sewerage system. By 1990 the respective figures were 99 percent and 15 percent! SABESP, the state water utility serving Sao Paulo, is a sophisticated technical water supply organization. Until the emergence of democracy in Brazil, SABESP had defined its role narrowly and technocratically. Specifically, it did not consider provision of services to the favellas to be its responsibility, since it was not able to do this according to its prescribed technical standards, and because the favellas were not "legal". Before the legitimization of political activity in Brazil in the early 1980s, SABESP successfully resisted pressures to provide services to the favellas. While SABESP was resisting this pressure, a small municipal agency (COBES) experimented with new technical and institutional ways of providing water and sanitation services to the poor. On the technical side this did not involve provision of "second-class" service, but of reducing the cost of providing in-house services by using plastic pipe and servicing of narrow roads where access was limited. On the institutional side it meant the community assuming significant responsibility for community relations, and for supervising the work of the contractors. As the military regime withdrew and was replaced by democratic politics, the pressures on SABESP to serve the favellas increased. Pressure from the communities on SABESP was channeled through the municipal agencies, responsive officials, and politicians (including the mayor and governor). Since COBES had shown how it was, in fact, possible to serve the favellas, SABESP had no option but to respond. In the context of the present discussion, the lessons from Sao Paulo are: (a) that once the poor have water services, then a strong demand for sanitation services emerges organically; and (b) that where institutions are responsive and innovative, major gains can be made in the provision of these services at full cost to poor people. 7 The State of the Sector, Part II: Costs of Services and How they are Currently Financed The Cost of Providing Services: Second are resource factors. Twenty-two countries today have renewable water What are typical service costs? resources of less than 1,000 cubic meters per capita, a level commonly taken to As shown in Table 2, costs of different indicate severe water scarcity, and an levels of service vary considerably. Of additional 18 countries have less than 2,000 particular note are (a) the modest increases cubic meters per capita. Elsewhere water in costs for urban water supplies when the scarcity is less of a problem at the national level of service is improved from a public level, but is nevertheless severe in certain standpipe to a household connection; (b) the regions, at certain times of the year and order of magnitude difference between during periods of drought. The effects of simple on-site urban sanitation systems and these "natural" factors are seriously conventional sewerage with treatment; and exacerbated by the widespread (c) the high absolute costs of conventional mismanagement of water resources, with sewerage. scarcity induced by the provision of large quantities of water at no or low cost for low- How are costs changing? value agricultural uses. Costs are also affected by the fact that cities have logically Real costs of water supply and sanitation first sought water where it is easiest and services are changing due to a number of cheapest to obtain. Finally, as cities grow factors, as discussed in greater depth in the so the "pollution shadows" around the cities World Bank's Water Resources often engulf existing water intakes, Management Policy Paper. First are necessitating expensive relocation of demographic factors. As the population of intakes. In Shanghai, for instance, water developing countries becomes more intakes were moved more than 40 urbanized, per capita costs rise. This is kilometers upstream at a cost of about $300 partly because a number of the low-cost, on- million. The compound effect of these site urban sanitation technologies become factors is, as illustrated in Figure 3, a large infeasible in dense urban settlements, and increase in the costs of capturing and partly because the aspirations of urban transporting water of adequate quality to people-as demonstrated in the Orangi cities and towns throughout the world. case-aim for a high level of service. Table 2: Typical investment costs for different levels of service Rural Urban Low Intermediate High Water supply -$lo, -$too' - $2003 Sanitation -$lo, -$255 -$350' 1 Handpump, or standpost 2 Public standpost 3 Piped water, house connection 4Pour-flush or ventilated improved pit latrines 5Pour-flush or ventilated improved pit latrines 6 Piped sewerage with treatment 9 CSD Freshwater Financing Paper Figure 3: How the costs of supplying water is increasing _man Mexico City Future 0.8 _ Hyderabad Cost 0.6 A rs 0.4 ka 0.2 ~~~Shenyang 0.2 _ I_L L L A - I L__L_ LLL. o 0.2 0.4 0.6 0.8 1. 1. 1. Current Cost Future cost is more than current cost LII Future cost is more than twice current cost U Future cost is more than 3 times current cost The efficiency with which financial * In Caracas and Mexico City an estimated resources are used 30 percent of connections are not registered. A recent comprehensive review of 40 years of * Unaccounted-for-water, which is 8 percent World Bank experience in water and sanitation in Singapore, is 58 percent in Manila and documents compellingly that costs are much around 40 percent in most Latin American higher than they need to be, because of the low cities. For Latin America as a whole, such efficiency with which available resources have water losses cost between $1 and $1.5 been used by water supply agencies in billion in revenue foregone every year. developing countries. The review, which * The number of employees per 1,000 water examined more than 120 sector projects over 23 connections is between 2 and 3 in Western years, concludes that only in only four Europe, around 4 in a well run developing countries-Singapore, Korea, Tunisia, and country utility (Santiago in Chile), but Botswana-have public water and sewerage between 10 and 20 in most Latin American utilities reached acceptable levels of utilities. performance. Financial performance is equally poor. A recent A few examples illustrate how serious the review of Bank projects found that borrowers situation is: often broke their financial performance * In Accra, Ghana, only 130 connections covenants. A corollary is that the shortfalls were made to a sewerage system designed have to be met by large injections of public to serve 2,000 connections. money. In Brazil from the mid-1970s to mid- 10 CSD Freshwater Financing Paper 1980s, about $1 billion a year of public cash How Formal Services are Financed: was invested in the water sector. The annual Levels of public financing federal subsidy for water and sewerage services to Mexico City amounts to over $1 billion a Two recent assessments by the World Bank year or 0.6 percent of GDP. provide a clear overview of public financing for the water and sanitation sector in developing Another World Bank study of projects launched countries over the past three decades. As shown between 1966 and 1981 showed that actual in Figure 4, the proportion of Gross Domestic outcomes fell short of expectations for reducing Product (GDP) invested in water supply and unaccounted-for water in 89 percent of projects, sanitation rose from about 0.25 percent in the in sales volume in 84 percent and containment Figure 4: Public investment in infrastructure in developing countries over three decades Percent of GDP 2f 1.5 0.5 - 0 1960s 1970s 1980s Water & Sewerage Power Transport of operation and maintenance costs in 74 1960s to about 0.45 percent in the 1980s. percent of cases. In short, the vast majority of Furthermore, although it was widely believed water supply agencies in developing countries that the allocation to the sector fell during the are high-cost, low-quality producers of services. difficult years of the late 1980s, a World Bank analysis of information from Public Investment Reviews in 29 countries showed that while public investment had, indeed, declined in this period (from 10.9 percent of GDP in 1985 to 8.7 percent of GDP in 1988), over this same period, investment in water and sanitation held virtually constant at about 0.4 percent of GDP. 11 CSD Freshwater Financing Paper Sources of financing for Relationship between formal services costs and pricing As will be discussed in more detail, sector The relationship between the cost of providing performance and sustainability depends not only services and the prices that are charged for these on the level of financing, but on the sources of services has major implications for the technical such financing. Experience shows and financial performance of supply unequivocally that services are efficient and organizations, and for the relationship of such accountable to the degree that users are closely organizations to the users it serves. Urban involved in providing financing for the services. consumers in most industrialized countries pay Or, stated another way, deficiencies in financing all of the recurrent costs (for operations, arrangements are a major source of the poor maintenance and debt service) for both water sector performance described earlier. and sewerage services. They also pay most of the capital costs of water supply and a large- A World Bank analysis has assessed in detail typically more than half-and a rising portion of the sources of financing for water and sanitation the capital costs of sewerage. projects assisted by the World Bank. Internal cash generation in efficient, financially- In developing countries, however, consumers sustainable utilities is high-67 percent in a pay far lower proportions of these costs. A World Bank-assisted water and sewerage recent review of World Bank-financed projects project in Valparaiso, for example. As shown in shows that the effective price charged for water Figure 5, there are wide regional differences in is only about 35 percent of the average cost of the relationship between financing and users. supplying it. As might be expected from the Africa has the longest way to go, with utilities discussion on sources of financing, the gap and local government providing only 17 percent between costs and prices was greatest in Africa of investment financing. In the other three and Asia, where the reliability and sustainability regions the proportion of financing mobilized of services is the weakest. by utilities themselves and from local government is higher. In Asia the supply Who benefits from public subsidies? institutions themselves generate relatively little financing, with domestic financing from central The justification for high levels of public and local government in about equal shares. In financing for water and sanitation services in the Middle East and North Africa utilities developing countries usually offered is the low themselves generate most of the domestic ability of poor people to pay for services. In financing in World Bank-assisted projects, practice, however, it is the rich, not the poor, whereas in Latin America the contributions of who virtually always benefit disproportionately the utility and local government are similar. from subsidized water and sanitation services. Unsatisfactory as these figures are, it appears that things are getting worse: Internal cash As described earlier, the unserved people, generation financed 34 percent of costs in particularly those in urban areas, pay much World Bank-financed projects in 1988, 22 higher prices for water. And it is the poor who percent in 1989, 18 percent in 1990 and just 10 are the unserved. Figure 6 reports the results of percent in 1991. a detailed assessment of who benefits from public subsidies of water supply and sanitation services in several Latin American countries. The results are striking and the conclusions clear-although subsidies are justified as "being necessary because poor people cannot afford to 12 CSD Freshwater Financing Paper pay," they end up heavily favoring the rich, with show that inequities are greatest where services the inequity directly related to the degree of are most heavily rationed (namely in the poorest rationing of the service. Inequity is, countries and for sewerage). accordingly, greater in low- than in middle- income countries, and greater for sewerage than Nonformal services for water supply. and their financing The cycle is clear. Where services are heavily The preceding discussion, mirroring most subsidized, service expansion is relatively slow, discussions on the provision and financing of both because available resources are used water supply and sanitation services, focuses inefficiently (because the supply organizations exclusively on what is done by formal are not directly accountable to their customers) institutions, with the emphasis on formal public and because of constraints on public financing. financing. In recent years it has become clear The consequence is that "the lucky ones" get that there is, especially where formal subsidized services while "the unlucky ones" institutions perform least adequately, a very who are not served pay an exorbitant human, large "underground" industry for meeting those social and financial price to get services. Data needs which the formal institutions do not meet. from Latin America (Figure 6) provide clear confirmation of the universal rule, namely that Consider the following examples. In Jakarta, "luck" is not a random outcome, but is the Indonesia, only 14 percent of the 8 million prerogative of the privileged. These data also people living in the city receive piped water Figure 5: Sources offinancing in World Bank-assisted Water and Sanitation Projects % of financing 100 80 - - - -- 60- 20 AFRICA ASIA MID-EAST/ LATIN N AFRICA AMERICA Utility Local Govt. Central Govt. External Sources 13 CSD Freshwater Financing Paper directly. About 32 per cent purchase water from services may be totally dwarfed by the informal, street vendors, and the remaining 54 percent especially in rural areas but even in some cities. rely on private wells. In Jakarta, furthermore, What is critical is the realization that this there are over 800,000 septic tanks, installed by "hidden" water and sanitation economy is local contractors, fully financed by households extremely important in terms of both coverage themselves, and maintained by a vibrant and and service. The nonformal sector offers many competitive service industry. In cities opportunities for providing services in an throughout the developing world, the reliability accountable, flexible way. When this is not of the formal water supply service is possible because of economies of scale, then unsatisfactory, and so households build in-house service by the informal sector offers a major storage tanks, install booster pumps (which can source of supplementary financing which can be draw contaminated groundwater into the water redirected if formal services can become more distribution system) and sink wells. In responsive to consumers' demands in an Tegucigalpa, Honduras for example, the sum of efficient and accountable way. such investments is so large that it would be enough to double the number of deep wells The existence of this "hidden water and providing water to the city. The size of this sanitation economy" has important implications "hidden" water economy often dwarfs the size for service provision. First, there is a high of the visible water economy. In Onitsha, demand for services which has not been met Nigeria, for instance, revenues collected by successfully by the formal sector. Second, water vendors are about ten times the revenues although some of these services are provided collected by the formal water utility! efficiently by the informal sector (such as tubewells in Pakistan), in other cases (such as And in rural areas, too, the "hidden" water water vending in the urban periphery) the costs economy is often huge. In Pakistan, for of service are exorbitant, in large part because instance, over 3 million families have wells the informal providers cannot take advantage of fitted with pumps, many of which are the large economies of scale involved in motorized. These are paid for in full by the transmitting water by pipe rather than by person families, and all equipment provided and or vehicle. serviced by a vibrant local private sector industry. The specific implication for the formal sector is profound and clear-there is an enormous The degree of distortion involved in ignoring reservoir of resources which can be drawn into the informal provision and financing of services the formal sector at reduced costs for all, as and varies greatly by level of development (as is when the formal sector is able to provide the obvious from the examples discussed). For services that consumers want in a responsive, prosperous urban areas, formal services are the accountable way. norm; for low-income countries the formal 14 CSD Freshwater Financing Paper Figure 6: The incidence of subsidies for water and sanitation services in Latin America Low-income Middle-income countries countries 10 1 -- -- - - - -- - - - -- - - - 6 )oninian Ratio 4 ------ - . _-PRO-RICH 2 0.5 1 _ PRO-POOR 0 1000 2000 3000 GNP/capita in US dollars WATER SUPPLY Low-income Middle-income countries countries 10 I 10 ___ ___g _______ _ _ 8 6 _ Lkuuay R atio 4 . - - - - - - - - - -- - - - - - - - - - - - - - - - - costa --2 -- _- .bca___- - _ _ PRO-RICH 015 - . | ] PRO-POOR r I 0 1000 2000 3000 GNP/capita in US dollars SEWERAGE 15 Toward a Financially Sustainable Sector An important backdrop to this discussion is * a comparison of these "investment the radical rethinking which has taken, and needs" with current levels of investment is taking, place in all aspects of economic in the sector. development policy and natural resource With this format, the conclusions, too, are policy. In this context, it is instructive to common and stress: characterize and contrast an "old view" of * the large "backlog" in services; sector policy (and the related financing * the slow pace of improving coverage; challenges) which derive from the central * the size of "the resource gap" if planning model which dominated coverage targets are to be met; and development thinking between the 1950s * the need for governments and external and the 1980s; and a "new view" that is support agencies to increase the emerging as a result of the central place resources devoted to the sector so that now occupied by efforts to introduce more targets can be reached. "market-friendly" policies, and by concerns of environmental sustainability. The calculations underlying Agenda 21 are typical of this approach: The old view of sector financing "The current level of investment... is about US$10 billion per year. It is The "old view" assumes that government estimated that approximately US$50 has the primary responsibility for financing, billion a year would be needed to reach managing, and operation of services. It is full coverage by the year 2000.... Such government's task to define the services a five-fold increase is not immediately which are to be provided, to subsidize these feasible. A new strategy is based upon services (especially for the poor), and to doubling of current investments to develop public organizations for the US$20 billion per year.... delivery of the services. And it is the function of external support agencies to To the advocates of the "old view," what is assist by providing the resource transfers needed is more strenuous advocacy so that necessary for providing such services. external support agencies and national governments will dedicate larger Over the past 20 years there have been proportions of available public resources to many assessments of the "financing needs the sector. for the water supply and sanitation sector" based on this "old view". These analyses The new view of sector financing have followed a well-defined and often used format, comprising the following steps: In recent years the limitations of the * an assessment of "the proportion of the financing perspective implicit in the "old population which is served;" paradigm" have become painfully clear to * an estimate of the per capita investment many water and sanitation sector costs of providing services to those professionals (although they were becoming "who are not served;" increasingly clear to governmental * an aggregation of these costs, globally financing departments earlier). and by country and region; and 17 CSD Freshwater Financing At the most fundamental level, although accountable and environmentally-friendly complaints about "insufficient priority for way. the sector" remain common, a review of the record (see Figure 4 and accompanying Starting with this perspective, a remarkable, discussion earlier in this paper) shows that radically different, consensus has started to allocations to the sector from public sources emerge in recent years on policies in developing countries increased from (including financial) for managing water about 0.25 percent of GDP in the 1960s to resources and for delivering water supply about 0.45 percent of GDP in the 1980s and and sanitation services on an efficient, that these levels of public investment were equitable and sustainable basis. At the maintained even in the years of financial heart of this consensus are the two, closely stringency of the late 1980s. This related, "guiding principles" enunciated in privileged place at the table the 1992, pre-UNCED, Dublin International notwithstanding, and partially because of it, Conference on Water and the Environment, sector performance remains poor (in terms namely that: of the number of people served, the quality * water has an economic value in all its of service, the efficiency of the supply competing uses and should be organizations and the quality of the recognized as an economic good; and environment). * water development and management should be based on a participatory The invocations at international water approach, involving users, planners and conferences pleading for "increased priority policy makers at all levels, with to the sector" and the repeated decisions taken at the lowest ''commitment' to ambitious targets have appropriate level. become an embarrassment to sector professionals. The delegates at the pre- These principles are now being widely UNCED International Conference on Water adopted (for instance in the World Bank's and the Environment in Dublin specifically Water Resources Management Policy Paper rejected proposed targets and the pleas for and by the Development Assistance the resources to meet those targets. Committee of the OECD). The great challenges now facing the sector are Of greater significance, a sophisticated articulation of the details implicit in these understanding of sector financing has begun general principles and the translation of the to emerge in the sector. As is true for Dublin principles into practice on the development policies in general, this has ground. entailed a rigorous separation of wish from reality, with specific attention being focused The new consensus gives prime importance on the incentives which face individuals and to one central principle (long familiar to organizations. students of public finance) which should underlie the financing of water resources Possibly the most important element of this management and water supply and new understanding is that "sector finance" sanitation services. This principle is that is not a subject to be dealt with as a efficiency and equity both require that mechanical "requirement" (as was the case private financing should be used for previously) after the major policies are financing private goods and public decided upon, but rather a set of resources be used only for financing public considerations which are at the heart of goods. Implicit in the principle is a belief developing a sector which provides the that social units themselves-ranging, in services that people want in an efficient, this case, from households to river basin 18 CSD Freshwater Financing Figure 7: Levels of decision-making on water and sanitation Country River basin City Neighbourhood ,> / 4 < = ~~~~~~~~~Block Household agencies-are in the best position to weigh example, from a stream for use in a city, the costs and benefits of different levels of then other potential users of that water are investment of resources for benefits that denied the possibility of using the water. accrue to that level of social organization. The value of the most valuable opportunity foregone because of this water (known The vital issue in application of this technically as the "scarcity value" or principle to the water sector is the definition "opportunity cost") constitutes a legitimate of the decision unit and the definition of element of the total production cost of what is internal (private) and external water. In the most appropriate forms of (public) to that unit. And here it is useful to water resources management (discussed think of the different levels at which such later), charges are levied on users for this units may be defined, as illustrated in privilege. (As an empirical matter, the Figure 7. financial costs of water supplies to urban consumers and industries usually greatly To illustrate the implications of the exceed the opportunity costs. For low- "decision-making rosette" (Figure 7), it is value, high volume uses-specifically instructive to consider how water supply irrigated agriculture-this relationship is and sanitation services should be financed. frequently just the opposite-opportunity costs comprise a considerable fraction of How water supply services should total costs, especially in situations of water be financed scarcity.) The economic costs of providing water What of the benefit side? The provision of include (a) the financial costs of abstracting, water supply to households has several transporting, storing, treating, and different benefits. Households themselves distributing the water, and (b) the economic value a convenient, reliable, and abundant cost of water as an input. The latter cost water supply because of time savings and arises because when water is taken, for amenity benefits and, to a varying degree, because of the health benefits it confers on 19 CSD Freshwater Financing them. Because these "private" benefits from one city may pollute the water supply constitute the bulk of the overall benefits of of a neighboring city. Accordingly, groups a household water supply, the public finance of cities (and farms and industries and allocation principles dictates that most of others) in a river basin perceive a collective the costs of such supplies should be borne benefit from environmental improvement. by householders themselves. When this is And finally, because the health and well- the case, households make appropriate being of a nation as a whole may be affected decisions on the type of service they want by environmental degradation in one (for example, a communal tap, a yard tap, or particular river basin, there are sometimes multiple taps in the household). The additional national benefits from wastewater corollary is that, because this is principally a management in a particular basin. "private good," most of the financing for the provision of water supply services should be The fundamental axiom of public financing provided through user charges sufficient to prescribes that costs should be assigned to cover both the economic costs of inputs different levels in this hierarchy according (including both the direct financial cost of to the benefits accruing at different levels. inputs such as capital and labor and the This would suggest that the financing of opportunity cost of water as an input). sanitation, sewerage, and wastewater treatment be approximately as follows: How sanitation, sewerage and wastewater management should . households pay the bulk of the costs be financed incurred in providing on-plot facilities (bathrooms, toilets, on-lot sewerage The benefits from improved sanitation, and connections); therefore the appropriate financing * the residents of a block collectively pay arrangements, are more complex. At the the additional cost incurred in collecting lowest level, households place high value on the wastes from individual houses and sanitation services which provide them with transporting these to the boundary of the a private, convenient, and odor-free facility block; which removes excreta and wastewater from * the residents of a neighborhood the property or confines it appropriately collectively pay the additional cost within the property. However, there are incurred in collecting the wastes from clearly benefits which accrue at a more blocks and transporting these to the aggregate level and are therefore boundary of the neighborhood (or "externalities" from the point of view of the treating the neighborhood wastes); household. At the next level, the block. * the residents of a city collectively pay This means that households in a particular the additional cost incurred in collecting block collectively value services which the wastes from blocks and transporting remove excreta from the block as a whole. these to the boundary of the city (or At the next level, that of the neighborhood, treating the city wastes); services which remove excreta and * the stakeholders in a river basin-cities, wastewater from the neighborhood, or farmers, industries, and which render these wastes innocuous environmentalists-collectively assess through treatment, are valued. Similarly at the value of different levels of water the level of the city, the removal and/or quality within a basin, decide on what treatment of wastes from the environs of the level of quality they wish to pay for, and city are valued. Cities, however, do not on the distribution of responsibility for exist in a vacuum-the wastes discharged paying for the necessary treatment and water quality management activities. 20 CSD Freshwater Financing the world. In the United Kingdom, the target In practice, of course, there are date for compliance with the water quality complicating factors to be taken into standards of the European Community is account (including transactions costs of being reviewed as customers' bills rise collection of revenues at different levels, astronomically to pay the huge costs and the interconnectedness of several of the involved (over $60 billion this decade). benefits). What is striking, nevertheless, is And in the United States local governments that the most innovative and appropriate are revolting against the unfunded mandates forms of sector financing (and service of the Federal Government. A particularly provision) follow the above logic to a pertinent case is the refusal of cities on the remarkable degree. Pacific coast to spend the resources ($3 billion in the case of San Diego alone) Box I presents the case of the financing of required for secondary treatment of sewage. sewerage services in an informal urban The National Academy of Sciences of the settlement in Karachi, Pakistan. In this case United States has advocated rescinding the households pay the costs of their on-lot "secondary treatment everywhere" mandate services, blocks pay the cost of the tertiary and developing an approach in which the sewers, blocks pool their resources to pay costs and benefits are both taken into for the neighborhood (secondary) sewers, account in the management of sewage in and the city (via the Municipal coastal areas. Development Authority) pays for the trunk sewers. This evocative "feeder/trunk" In a few countries a different model has distinction is now being applied on a much been developed. In these countries, larger scale to the provision of urban institutional arrangements have been put services in Pakistan. into place which (a) ensure broad participation in the setting of standards, and Box 3 presents the case of the financing of in making the tradeoffs between cost and condominial sewers in Brazil. Although the water quality; (b) ensure that available arrangements are not quite as refined as resources are spent on those investments those in Karachi, the same principle applies, which yield the highest environmental and applies successfully-households pay return; and (c) use economic instruments to for the on-lot costs, blocks pay for the block encourage users and polluters to reduce the sewers (and decide what level of service adverse environmental impact of their they want from these), with the water activities. company or municipality paying for the trunk sewers. Even when the appropriate These principles were first applied financing and institutional principles are immediately before the First World War to followed, however, very difficult issues the management of the Ruhr River Basin in arise with respect to financing of Germany's industrial heartland and have wastewater treatment facilities. In provided the underpinnings for the industrialized countries it is possible to management of the Ruhrverband ever since. discern two models which have been used. Learning from the experience of their In many industrialized countries the German neighbors, France developed a approach followed has been to set universal national river basin management system standards and then to raise the funds based on the Ruhrverband principles and necessary for financing the required have been applying it since the early 1960s. investments. As is becoming increasingly Box 4 describes the principles of these river evident, such an approach is financially basin financing and management models infeasible, even in the richest countries of 21 CSD Freshwater Financing Box 3: The condominial sewerage system in Brazil The "condominial" system is the brain-child of Jose Carlos de Melo, a socially committed engineer from Recife. The name "condominial" was given for two reasons. First, a block of houses was treated like a horizontal apartment building-or "condominial" in Portuguese (see Figure 8). Second, "Condominial" was a popular Brazilian soap opera and associated with the best in urban life! As is evident in Figure 8, the result is a radically different layout (with a shorter grid of smaller and shallower "feeder" sewers running through the backyards and with the effects of shallower connections to the mains rippling through the system). These innovations cut construction costs to between 20 percent and 30 percent of those of a conventional system. Figure 8. Schematic layouts of condominial and conventional sewerage systems CONDOMINIAL CONVENTIONAL SEWERAGE SEWERAGE t - U. Main sewer Street sewer House sewer * Backyard toilet | 1 Housing lot The more fundamental and radical innovation, however, is the active involvement of the population in choosing their level of service, and in operating and maintaining the "feeder" infrastructure. The key elements are that families can choose: (i) to continue with their current sanitation system; (ii) to connect to a conventional waterborne system; or (iii) to connect to a "condominial" system. If a family chooses to connect to a condominial system, it has to pay a connection charge (financed by the water company) of, say X cruzados, and a monthly tariff of Y cruzados. If on the other hand, it wants a conventional connection, it has to pay an initial cost of about 3X and a monthly tariff of 3Y (reflecting the different capital and operating costs). continued 22 CSD Freshwater Financing Families are free to continue with their current system (which usually means a holding tank discharging into an open street drain). In most cases, however, those families who initially choose not to connect eventually end up connecting. Either they succumb to heavy pressure from their neighbors, or they find the build-up of wastewater in and around their houses intolerable once the (connected) neighbors fill in the rest of the open drain. Individual households are responsible for maintaining the feeder sewers, with the formal agency tending to the trunk mains only. This increases the communities' sense of responsibility for the system. Also, the misuse of any portion of the feeder system (by, say, putting solid waste down the toilet) soon shows up in a blockage in the neighbor's portion of the sewer. This means rapid, direct and informed feedback to the misuser! This virtually eliminates the need to "educate" the users of the system in the do's and don'ts, and results in fewer blockages than in conventional systems. Finally, because of the greatly reduced responsibility of the utility, its operating costs are sharply reduced. The condominial system is now providing service to hundreds of thousands of urban people in Northeast Brazil and is being replicated on a large scale throughout the country. The danger, however, is that the clever engineering is seen as "the system". Where the community and organizational aspects have been missing, the technology has worked poorly (as in Joinville, Santa Catarina) or not at all (as in the Baixada Fluminense in Rio de Janeiro). and shows how resources for wastewater are crystal clear. Even rich countries treatment and water quality management are manage to treat only a part of their raised from users and polluters in a basin. It sewage-only 52 percent of sewage is also shows how stakeholders-including the treated in France and only 66 percent in users and polluters, as well as citizens' Canada. Given the very low starting points groups-are involved in deciding the level in developing countries-only 2 percent of of resources which will be raised and the wastewater is treated in Latin America, for consequent level of environmental quality example-and the vital importance of they wish to "purchase."' This system, improving the quality of the aquatic which obviously embodies the central environment, what is needed is a process principles codified in the Dublin Statement, which will simultaneously make the best has proved to be extraordinarily efficient, use of available resources, and provide robust and flexible in meeting the financing incentives to polluters to reduce the loads needs of the densely industrialized Ruhr they impose on surface and ground waters. Valley for 80 years, and the whole of France since the early 1960s. Against this backdrop, developing countries face an awesome challenge. The "old For developing countries the implications of agenda," namely the provision of water the experience of industrialized countries supply and household sanitation services, is clearly a relatively "easy" task if sensible 'With respect to the discussion in Sections A and B of financial policies are adopted, since the chapter on Freshwater in Agenda 2 1-on, respectively, Integrated Water Resources Management and Development, and on Protection of Water Resources. Water Quality and Aquatic Ecosystems-it is relevant to note that the administrative and technical budgets of the River Basin Agencies are also decided upon by the governing "Water Parliaments". 23 CSD Freshwater Financing Box 4: Water resource financing through river basin agencies in Germany and France: The Ruhrverband: The Ruhr Area, which has a population of about 5 million, contains the densest agglomeration of industrial and housing estates in Germany. The Ruhrverband is a self-governing public body which has managed water in the Ruhr Basin for 80 years. There are 985 users and polluters of water (including communities, districts, and trade and industrial enterprises) which are "Associates" of the Ruhrverband. The highest decision-making body of the Ruhrverband is the assembly of associates, which has the fundamental task of setting the budget (of about $400 million annually), fixing standards and deciding on the charges to be levied on users and polluters. The Ruhrverband itself is responsible for the "trunk infrastructure" (the design, construction, and operation of reservoirs and waste treatment facilities), while the communities are responsible for the "feeder infrastructure" (the collection of wastewater). The French River Basin Financing Agencies: In the 1950s it became evident that France needed a new water resources management structure capable of successfully managing the emerging problems of water quality and quantity. The French modeled their system closely on the principles of the Ruhrverband, but applied these principles on a national basis. Each of the six river basins in France is governed by a Basin Committee (also known as a Water Parliament) which comprises between 60 and 110 persons who represent all stakeholders-national, regional, and local government, industrial and agricultural interests and citizens. The Basin Committee is supported by a technical and financial Basin Agency. The fundamental technical tasks of the Basin Agency are to determine (a) how any particular level of financial resources should be spent (where should treatment plants be located; what level of treatment should be undertaken, etc.) so that environmental benefits are maximized and (b) what level of environmental quality any particular level of financial resources can "buy." On the basis of this information, the Water Parliament decides on (a) the desirable vector of costs and environmental quality for their (basin) society; and (b) how this will be financed (relying heavily on charges levied on users and polluters). The fundamental financial task of the Basin Agency is to administer the collection and distribution of these revenues. In the French system (in contrast to the Ruhrverband) most of the resources which are collected are passed back to municipalities and industries for investments in the agreed-upon water and wastewater management facilities. 24 CSD Freshwater Financing consumers want and are willing to pay for be applied in many developing countries in these services. And yet only a handful of the near future. developing countries have been successful in meeting this "easy task" in an efficient, Summary of the financing responsive, and financially sustainable way. implications of "the new view" The "new agenda," which centers on management of wastewater and the In summary, the articulation of the "new environment, is a much more difficult and view" of sector financing represents a expensive one, and one in which successes radical departure from the old. Financing is (in terms of efficiency and financial seen not as an exogenous afterthought. sustainability) are few and far between even Rather, it is seen as central to the in industrialized countries. development of a sector which will provide people with the services they want and are What is heartening is that there is evidence willing to pay for, and to developing the that the right lessons are being drawn from right balance between environmental quality the experience of many developed and cost. The way in which investments are countries. Just five years ago the Baltic Sea financed matters for all issues-resource Clean-up was conceived of in classic mobilization, the efficiency of allocating terms-setting quality standards and then these resources, the efficiency with which determining what was needed to finance the assets are operated, and the accountability to needed investments. In this case (as in all customers and stakeholders-which are others), once the calculations were done it central to the development of the sector. became clear that the necessary money Indeed, if financing policies can be "got (over $20 billion) could not possibly be right," all of the other key sector issues- raised. In the Interministerial Conference involvement of users, the assignment of on Financing of the Baltic Sea Clean-up in responsibility for different actions to "the Gdansk in 1993, this approach was appropriate level," the development of abandoned for a far more productive one, accountable institutions, appropriate namely, ensuring that limited available standards, technology and service resources were invested in such a way as to selection- will more readily fall into place. develop financially sustainable, efficient Where the "new view" of financing is water and sanitation utilities, and to ensure adopted, the focus will be precisely on the that the limited resources for wastewater central sector problems,2 namely: treatment were allocated to the highest . managing water resources better, priority investments. taking account of economic efficiency and environmental Daunting as the "new agenda" is, there is sustainability; cause for hope. It is encouraging that . providing, at full cost, those delegates from over 100 countries agreed at "private" services that people want the International Conference on Water and and are willing to pay for (including the Environment in Dublin on the global water supply and the collection of relevance of the principles underlying the human excreta and wastewater); Ruhr and French water resource . mobilizing and using scarce public management systems. Even more important funds only for those services are the signs that the Ruhr/French system is (specifically the disposal and now being adopted, with appropriate modifications, in Spain, Poland, Brazil, 2 example, see the World Bank's World Venezuela, and Indonesia, and is likely to Development Report, 1992 on Environment and Development. 25 CSD Freshwater Financing treatment of wastes) that provide one level, where they are internalized.4 wider communal benefits; and And third, that a successively smaller and developing flexible, responsive, smaller number of decisions needs to be financially sustainable institutions made at higher levels. for providing these services, with a larger role for community There is clear evidence from the experience organizations and the private sector. of the World Bank that the (appropriate) concern with environmental quality can Some common beliefs about the easily lead to a supply-driven approach new approach to financing: which mandates investments on the basis of "technocratic criteria" and which ends up Finally, it is important to explore three serving the interests of consultants and commonly held beliefs which may impede contractors, but not the people to be served the adoption of the "new" financing or the environment in which they live. In perspective, such a context it has correctly been asserted that "externalities are the first refuge of Belief #1: The existence of scoundrels!" extemalities means that a demand- Belief #2: The new approach to based, participatory approach to financing does not address the sector development cannot work needs of the poor It is frequently asserted that a demand-based approach is fine for "private goods" but not A second myth about the "new" app roach to for "public goods" (such as environmental financing is that it does not take adequate quality), account of the situation of the poor and their need for subsidies. In this context, it is important to note that a central feature of the approach advocated in First is an empirical issue. Although this paper is respect for the capacity of virtually all developing country stakeholders to make the right decisions. governments contend that public funds are First, it should be noted that the principle and should be used to subsidize the 6 poor, which applies at the household level- the reality is quite different. Figure 6 shows namely, that the household is in the best who, in fact, benefits from subsidies for position to decide how to spend the water and sewerage services; it is resources available to it-can successively overwhelmingly the rich, not the poor, with be applied at greater and greater levels of the discrepancies; particularly pronounced social aggregation. (Remember that "the in poor countries. (This has appropriately household," too, is a social aggregation!) been termed "the hydraulic law of The aim is to solve the resource allocation subsidies"-the subsidies go with the issues appropriate to that level.3 Second, it service, and it will always be the better off should be noted that there is no appeal to and more influential who, public override the basic behavioral-based decision pronouncements notwithstanding, benefit process by appealing to externalities, but first. And it will always be the less simply a need to deal with extemalities at influential-the poor-who are at the end of any particular level by "kicking them up" 4The situation is similar for health benefits, as discussed in pages 92-95 of the World Bank's The critical concept here is that one party's World Development Report, 1993: Investing in externalities are another party's costs (or benefits). Health. 26 CSD Freshwater Financing the line both literally and figuratively and Faced with constraints on public financing, who either do not get services or who suffer some countries have looked to the private most from poor quality services.) sector for financing of the massive investments required. There are many Second is an issue of income transfers to reasons-efficiency, innovation, and poor people. Although subsidies often work separation of provider and regulator- perversely in practice (as in the above case), suggesting that it is often appropriate to the transfer of resources to poor people is involve the private sector in the provision of obviously a legitimate (and desirable) these services. And there are an increasing instrument of public policy. In the present number of examples of private sector context the key is to resist the temptation to financing being mobilized for wastewater wrap those transfers up into the transfer of investments (especially for Build-Operate- particular types of services (which the poor Transfer schemes) in Mexico, Malaysia, may or may not value). Once again this Indonesia, and other developing countries. comes down to the question of trusting people-even poor people-to know how In the context of this discussion, there are best to spend the resources which are two major factors to be taken into account available to them. In practice then, where in assessing the role of the private sector in block grants are made to poor communities, financing of wastewater investments in these can, appropriately, be used by the developing countries. First, as shown in community to pay for water and sewerage Figure 9, public facility projects are often services, if these are the services which the "characterized by a long construction communities value most. (This is a period, followed by a gradual increase in the practice which is becoming fairly revenue extracted from the operation. The widespread in the social development funds result is that the investors may have to wait which have become common in developing 8 to 10 years before receiving their first countries in recent years.) dividend and may have to wait 15 to 20 years before obtaining a rate of return An issue of considerable importance for the comparable to that offered by an industrial poor is that of the difficulties they face in investment. In addition, the entire raising the capital required for the initial construction period may be characterized by costs of connecting to a piped water supply considerable uncertainty about the ultimate system. Studies in India and Pakistan have profitability of the investment (because of shown that connection rates can be potential cost overruns and because of the increased very substantially if water uncertainty about operating revenues). companies provide financing (not subsidies) During this period of great uncertainty, to poor customers for the costs of remuneration of the investor's risk should connecting to piped systems. This compare to that of venture capital and run at practice-of amortizing the costs of the level of 25 to 30 percent. In contrast, connections over, typically, five years-has when tariff levels are known following been practiced to considerable success in commencement of operation, revenues are Latin America for many years. not likely to vary as much as in an industrial project. The risk (and appropriate retum) is Belief #3: The financing problem can thus less.: be overcome by mobilizing financing from the private sector Three observations are relevant in this context. First (see Table 3), in the country 5Laurent Davezies and Remy Prud'homme, 1993 27 CSD Freshwater Financing with the longest history of private sector Financing of Freshwater in participation in the water sector-France- Agenda 21 in Context the bulk of privately-operated water supplies are privately financed (concession The verdict on the "old" top-down, populist, contracts), but the majority of privately supply-driven financing policies is clear: operated sewerage is publicly financed despite the good intentions which underlie (affermage contracts). Second, where these policies they have failed on all counts capital markets are relatively shallow-as is -they are inequitable, inefficient, and the case in most developing countries-the unsustainable. The overwhelming transition from public financing to long- supporting evidence notwithstanding, in term private financing is going to take time certain political fora, populism and good and ingenuity. And third, because the intentions still hold sway. investment costs are so large, cost recovery frequently has to be scheduled over a Consider these two examples. The 1990 number of years. New Delhi Consultation (the end-of-the- Table 3: Private and publicfinancing of privately-operated water and sewerage services in France (approximate) Water supply Sewerage Affermage (public financing) 30% 70% Concession (private financing) 70% 30% All delegated management 100% 100% Water- Figure 9: The time profile of expenses and receipts for typical infrastructure investments RECEI PTS AND EXPENSES Industry TIME o years 20 years 30 years After Davezies and Prud'homme, 1993 28 CSD Freshwater Financing Decade event) declared that the driving freshwater exceeded the total volume of principle should be "some for all rather than official development assistance! Instead the more for some," a noble intention which Dublin delegates focused on defining the 6 had manifestly failed in practice. What is two key principles which had proved to be particularly striking is that such a effective in managing water resources. The declaration was made just as the result was a document-the Dublin counterproductivity of such policies was Statement-which has proved to have leading many developing countries to take a widespread acceptance and applicability and less romantic, more pragmatic, and more has come to frame the debate on water productive policy position. resources policies in many external support agencies and countries alike.7 And what Next consider the freshwater sections happened to the Dublin principles in the (Chapter 18) of Agenda 21, the outcome of political atmosphere of UNCED? The core the United Nations Conference on principles which Dublin had articulated and Environment and Development. The prioritized-specifically "water as an preparatory technical meeting (the economic good" and "responsibility at the International Conference on Water and the lowest appropriate level"-disappeared as Environment, held in Dublin) was attended guiding principles. Instead the Chapter on by delegates from over 100 countries. Freshwater (Chapter 18) of Agenda 21 Many of the delegates were veterans of comprises long list of unreachable and previous international water conferences unfundable targets, with no fewer than 184 and were acutely aware both of the activities advocated in this chapter alone! seductiveness of the populist positions The hopeful sign is the way in which these which had prevailed at such conferences, policy pronouncements are playing in and of the ultimately counterproductive developing countries and with external nature of those positions. The delegates at support agencies. The rhetoric of the Delhi Dublin resisted the standard calls-for Declaration is being disregarded even in unachievable targets, for additional India (which had pursued the "some for all resources, for unimplementable laundry rather than more for some" policies for lists. In particular, they drew attention to decades). And Chapter 18 of Agenda 21 is the total impracticality of the draft seldom read or even referred to while recommendations on financing (which numerous countries and external support formed the basis for the discussions on agencies are showing the way by developing financing in Agenda 21), where the volume participatory, efficient, and financially and of external resources "required" for environmentally sustainable policies of the sort described in this paper. 6 Interestingly, nowhere had the "some for all rather than more for some" maxim been followed more closely than in India, the country which hosted the 7 A few examples. The "Dublin Principles" underlie New Delhi Consultation. In India this approach the recently formulated World Bank Water led to a "low level equilibrium trap," in which, in Resources Management Policy Paper, and provide the name of equity, service quality, willingness to the benchmark against which the OECD countries pay, revenues, etc., were all low. The end result have agreed to assess their water resource was poor service for tthose who had service and no assistance strategies. The principles are being service to those who the policy was ostensibly implemented in a concerted fashion by many designed to benefit! (Singh et al, 1993) bilaterals, most notably the Nordic countries and Interesting, too, is the fact that the Indian the French. And several governments in government itself now recognizes the developing countries-including the states of Sao counterproductive nature of these policies and is in Paulo and Ceara in Brazil, Venezuela, Poland, the process of abandoning them (Government of Peru-are basing their new water resources policies India, Ministry of Urban Development, 1993.) on the Dublin Principles. 29 CSD Freshwater Financing References DANIDA. 1991. The Copenhagen Report, Project and the Process of Change in Orangi." Implementation Mechanisms for Integrated Orangi Pilot Project, Karachi, Pakistan. 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