Financing sanitation infrastructure - by funds raised through domestic capital market in the developing countries?

  • 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
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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

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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)
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  • Marijn Zandee
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Re: Financing sanitation infrastructure

Dear Simon,

Sorry it has been a while, but I was busy.

As I understand it, you see the lack of funds in governments as a major reason they do not invest in sanitation. This is likely to be true in some cases; however, the question is whether borrowing on the local capital market is the most appropriate response. In many ways taxation and government borrowing are similar in that the loan a government takes has to be paid back with tax money later. So all the borrowing does is to allow the government to spend a big lump all in one go. The question is whether many governments in developing countries could roll out a sanitation program so fast that it requires a lump of cash big enough to justify borrowing.

As regard to ring-fencing. This is always a difficult topic. Economists tend not to like it because it is considered as introducing many inefficiencies (spending becomes to rigidly programmed). However, many others see ring-fencing as a way to express commitment. When it comes to government borrowing, I don't know if there is a way in which the government can actually make a credible commitment to spend the money they borrow on sanitation projects, or whether it would just end up in the larger budget.

Just some thoughts from my end.

Regards
Marijn

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  • simon
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Re: Financing sanitation infrastructure

Hi Marijn,

Great to hear from you and thanks for keeping this tricky debate alive.

Yes, besides governments not having funds to invest in sanitation, historically, the inability of entities including governments to evaluate sanitation markets opportunities including the population's sanitation needs and the willingness to pay for whatever preferred options have always hindered productive thinking around how to finance sanitation service provision.

There is need to view the population without access to safely managed sanitation as a market base for sanitation investments. They (governments) and other sector stakeholders have reluctantly viewed the population without sanitation as a market base for sanitation services upscaling. If a genuine economic analysis was to be carried out that reveals what governments loss in terms of spending on impacts and outcomes related to lack of sanitation (The World Banks analysis of the cost of lack of sanitation) against the cost recovery potential of investing in sustainable sanitation services, then borrowing from domestic capital markets would be a viable option (cost-benefit analysis). More so for the poor developing countries. This venture can easily be self-servicing!

Secondly, the question of how fast these programmes can be rolled out and at what scale is important. Here I see the role of policy, standardisation and enforcement as well as the international conventions (SDGs) being key to this. The race against time and proper planning based on factual analysis of the market can allow investors to assess the viability of engaging in sanitation services provision and if the policy environment is conducive for the market then lump sum investment will be justified.

The reality is that, governments' notion that sanitation is a service and that every citizen has a right to sanitation have limited the governments' thinking towards market based approaches in sanitation and hence lack of credible justification to borrow and commitment spend on sanitation investments. They have simply agreed to some of the failures in sanitation service delivery based on unsustainable approaches thus exposing themselves and the sanitation sector practitioners as not being innovative.

Lastly, with ring-fencing of funds, the question is how vulnerable is sanitation sector and so how far behind has the sector been lagging? As a sector that has proven to be important for overall development and livelihood improvement, it would be important to safeguard against resources that would be useful for upscaling. This should not be a measure for all sectors but only a response to situations where priorities are easily shifted away from vulnerable and non-lucrative sectors.

Just thinking!

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,

Let’s think some more on this important topic.

I am hesitant to say that improving sanitation can be done in a way that all financial costs can be recovered. Yes, if a full social cost benefit analysis (SCBA) www.who.int/water_sanitation_health/publications/2011/ch11.pdf is done, you are likely to find that the benefits are greater than the costs. However, many of these benefits do not generate a flow of money to the company, government or utility that provides the sanitation service. For example, improving sanitation quite possibly leads to higher labor productivity as people take less sick days. However, this benefit does not accrue to those implementing the sanitation project. In economist speak, it is an externality en.wikipedia.org/wiki/Externality . To stay in economists-speak. If an economic analysis (including externalities and wider social benefits) is carried out, sanitation is profitable. However a financial analysis (as done by a firm that is interested in making a profit) is likely not to yield a positive result. (It could for parts of the sanitation chain, but I really doubt it will be for treatment and safe disposal/re-use).

In my view, the fact that many of the benefits of improved sanitation accrue to wider society is a strong argument to finance some of it with taxation or user fees. (With a cross subsidizing mechanism where the rich pay more than the poor.) Having said that, I don’t think governments should pay for toilets for everyone. (Semi) centralized treatment, where the population density requires it, is a logical candidate for government funding (both infrastructure investment and operation). Emptying and conveyance services (non-sewered) are somewhat of a grey area here, which a well regulated private sector can probably implement most efficiently.

Some time ago we had a forum discussion (based on a discussion paper Dorothee Spuhler and I wrote) about a way the market for sanitation services should probably look like in an “ideal” world. forum.susana.org/167-market-development-...ments-wanted?setGT=0 . Though it would be good to improve and update the paper based on the forum feedback, I would still support a lot of the ideas about sanitation markets expressed in it. At any rate, it will provide some more background to my answers above.

Let’s keep this conversation going. I would also like to hear from others!

Regards

Marijn

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