Financing sanitation infrastructure

  • simon
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Financing sanitation infrastructure

In the recent past, domestic capital market has emerged as one of the most important infrastructure and services development financing in the developing countries. What is the potential and the opportunities for sanitation infrastructure and services financing by funds raised through domestic capital market in the developing countries? Are there any examples of countries where this has been tested?
How can this be modeled for sustainable sanitation services provision for the poor communities?

Simon Okoth
Senior Project Manager,
SuSanA Project Phase III, Stockholm Environment Institute (SEI)
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  • Marijn Zandee
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Re: Financing sanitation infrastructure

Dear Simon,

I don’t think I can really answer your questions; however, as I find the topic interesting I would like to ask you some questions to see if I understand your question correctly.

When you refer to using the local capital markets to raise funds, do you refer to the government borrowing money by issuing bonds to local (within country) financial institutes and individuals?

If so, on which kinds of products and services should the government spend this money? Conveyance and treatment of sewage and sludges? Or would you suggest they build toilets for the wider population?

Finally, I would be interested to know why you think the government should borrow money rather than raise taxes? The bonds the government issues will have to be paid back, so the tax money will have to be raised at some point.

I could imagine that when building, for example, a road a government could argue (correct or not) that it will lead to economic growth that will help pay off the loan (bonds) later. Perhaps here is the start of an answer to your questions. Would the markets belief that the investments in sanitation will yield sufficient economic growth to justify government borrowing?

Regards
Marijn

Marijn Zandee

Kathmandu, Nepal

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  • simon
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Re: Financing sanitation infrastructure

Dear Marijn

Thank you for your very interesting and interrogative reply to the topic I had posted on the potential of raising funds from the local capital market to finance sanitation infrastructure.

Just to take this topic further and delve a bit into the possibilities and complexities when looking at the sanitation -development nexus in the wake of SDGs, it is indisputable that Sanitation has substantial fitting blocks to the big development puzzle. For example, the contribution of improved sanitation to health, environment among others cannot be overemphasized. Likewise, the value of reuse of sanitation products in agriculture and energy is steadily rising. The critical question is whether governments and practitioners have been able to analyze the economics of improving sanitation at scale and what the returns on investments would be like.

Having that background, many projects have tried to build business models around sanitation services and to some extent, some of the models have worked and have shown elements of economic viability/sustainability. These models are usually established around a complete sanitation value chain. This means looking at sanitation as an open system with a set distinct parts that form a whole and involve many stakeholders. However, these models have not been able to be scaled up, mainly due to lack of finances and to some extent the national supportive policies and regulations.

One can now visualize the buildup to the question as to whether the governments can explore local capital market to raise funds and scale up the sanitation service delivery based on established business case that have been tried at project levels and seen to be working. Unlike the roads, here we see the complexity of justifying the return on investment to the would be lenders. But if you look at some of recent initiatives in Africa including Sanergy ( saner.gy/ ), and UBSUP ( forum.susana.org/167-market-development-...kenya?start=12#22797 ) in Kenya, you will see a lot of business sense that can justify borrowing.

How then can this work and what elements would the funds be invested in? Here, there are two options: 1) The government invest in the full system including provision of toilets to the household/landlords(landladies), emptying services, treatment and disposal (resale of sanitation products). In return the service recipients pay a standard regular monthly fee. The advantage with this is that the government is in control of standards of the facilities as well as the service. 2) The government invest the borrowed funds in improving the sludge management component of the sanitation system (which often the biggest challenge to sanitation improvement in urban areas) while the households improve their toilets and ensure that they meet the standard required for the subsequent emptying services to be done. The household will then be required to pay for the sludge management services. Here there will be need for enforcement of some regulations by the government to ensure that standards are kept by the household. in both cases the households must be willing to pay, a case which has been proven in many studies that households are always willing to pay for improved services.

Now, the question as to why bond financing and not taxes is that some countries are already having very high taxes and increasing tax for financing sanitation will only add to the tax burden of the citizens. Furthermore, there is an element of unfairness for those who already pay for their services to subsidize for others-what looks like double payment. Secondly, ring-fencing funds raised from taxes is not quite easy for governments as they can always use the funds to do other pressing activities including financing "elections". Thirdly and perhaps the most important is the volume of investments required for realization of sanitation for all by 2030 for some of the countries having the lowest coverage in the world. This money cannot be realized from taxes alone especially by the developing countries unless there is an option of blended financing where these loans finance a percentage of the investment and the rest albeit, to a lesser extent is financed from taxes.

To break the frontiers for the capital market financing for sanitation may not be an easy job. The governments have to package their arguments for this venture around sanitation markets with concrete business model and themselves (the government) as the surety for the bonds to limit the risk in the eye of the lender.

Just some points for thought!

Simon Okoth
Senior Project Manager,
SuSanA Project Phase III, Stockholm Environment Institute (SEI)
Email: This email address is being protected from spambots. You need JavaScript enabled to view it., This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: www.sei-international.org
Project link: www.susana.org/en/resources/projects/details/127
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