SNV e-group discussion TOPIC 1: What do we see as sustainable cost recovery in city wide sanitation services?

  • Patricia77
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Re: SNV e-group discussion TOPIC 1: What do we see as sustainable cost recovery in city wide sanitation services?

Dear all,

Greetings from Central America. My name is Patricia Solórzano, I’m working in SNV as SL in WASH for Honduras and Nicaragua. It’s a pleasure to share with you the following comments on topic 1:

How do you assess the financial health of the sanitation services in a city? (Your city) What do you take into account in terms of life-cycle costs and along the sanitation value chain?

In Honduras, providers in at least 71 cities reach an average service coverage of 95% in water and 84% in sanitation. In most of these cities, peri-urban providers operate (usually Water Management Boards) that contribute to reducing the deficit of water service coverage. Sanitation coverage is complemented by individual solutions available on site for each user. In both cases there are no adequate records to project national sanitation coverage, but it is estimated that 70% of the infrastructure is obsolete (poor conditions), and only a third of the wastewater discharged by the treatment systems performs the disinfection process, which surely represents a high burden of pathogenic microorganisms the environment, especially discharged by those systems of domestic wastewater treatment. This is partly due to the fact that the costs of the tariff do not cover the part of the sanitation, therefore it is not possible to provide adequate maintenance or replacement of the infrastructure when required.

Which parts of the sanitation value chain and/or life-cycle cost do you consider should be covered by tariffs and where do you consider taxes or transfers should be used?

The subsidies that are basically covered by tax / transfers, should be in relation to the infrastructure and its maintenance, since it requires a higher cost and qualified personnel which is not generally found in water companies, only at a basic level in some cases. Then, what has to do with the technical costs of the workforce that operates the facilities, as well as what it incurs in the treatment of the same, and finally the administrative costs should be part of the rate that families pay, companies, etc.
Based on the fact that the financial sustainability of a service depends on the payment of the fee, mode of accounting and delinquency. If there is a certain level of financial sustainability, it is easier to ensure technical sustainability that includes monitoring and technical assistance once the infrastructure works are completed.

Why should those costs be covered by taxes and/or transfers in your view? How is this the “best use of public money”?

I will start from the fact that in the region the issue of sanitation is not a priority, with the exception of The Salvador where currently the government with state funds is investing in restoring the sanitation infrastructure. That said, a strong advocacy process must be done at the public and private level to encourage investment in the sector, since by not building new aqueducts it has an impact on: Urban Development, Economic Activity, Social Welfare and Security. Sanitation systems must become a key component of natural resource management for sustainable development.

The costs that should be covered is everything related to infrastructure, vehicles, and technical maintenance by qualified personnel. The issue of raising public awareness that this is a priority is the fact that governments have a responsibility to establish new approaches in internalization and creation policies that allow adequate legal environments and incentives, therefore, the best use of public money It can be in guaranteeing an efficient service in terms of sanitation infrastructure. Private companies can play a role by adopting and promoting innovative water efficiency solutions and technologies that can be replicated.

Best,

Patricia

Patricia Solórzano
SNV | Leader Sector WASH, Honduras-Nicaragua
Cel. (504) 31869610
Telf. (504) 2239-6938
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  • muench
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Re: SNV e-group discussion TOPIC 1: What do we see as sustainable cost recovery in city wide sanitation services?

The following contribution is from Kumbulani in Zambia:

+++++++++

Dear all
I am Kumbulani Ndlovu SNV WASH Sector Leader Zambia. Below my contribution on some of the questions.

2) Which parts of the sanitation value chain and/or life-cycle cost do you consider should be covered by tariffs and where do you consider taxes or transfers should be used?
In the case of Zambia, in line with Principle 4 of the Water Policy (2010), user charges are to be set so as to achieve full cost recovery for water supply and sanitation services (operation, maintenance and capital costs recovery) in the long term. However it is acknowledged that in the short run, it will not be possible to finance asset rehabilitation and extension through user charges, but this can be done gradually. The Water Supply and Sanitation Act provides for NWASCO (Regulator) to develop guidelines for setting of tariffs for Water and Sanitation services. Accordingly in Zambia there is a PRICING FOR SANITATION SERVICES initiative seeking to enhance cost recovery and sustainability with a pilot being undertaken by the Regulator and 3 Utilities. The new tariff setting model is to consider the entire sanitation value chain as well as costs of investment and new investments. 2 types of tariff for sanitation proposed based on VOLUME and QUALITY.

The existing pricing model which is being reviewed has some of the following challenges amongst others:
- Sanitation tariffs are calculated as a percentage of the water bill
- Tariffs are set in such a way that only the water revenues are considered in covering the justified costs.
- % for sanitation is based on an estimate of the O&M costs and not the real costs
- With most of the systems not fully operational, it is noted that most costs are left out such as maintenance,
In March 2019, NWASCO published the JUSTIFICATION FOR TARIFFS INCREASE 2018 where more details can be found on the pilot with the 3 Utilities.
Since tariffs will not fully cover the costs for sanitation in the immediate, taxes and transfers will complement especially for huge capital costs (e.g. Waste Water and Faecal Sludge Treatment Plants).

3) Why should those costs be covered by taxes and/or transfers in your view? How is this the “best use of public money”?

The negative impact of poor sanitation in a nation like Zambia is huge, see box below. Taxes and/or transfers are for the common / public good. Therefore it is proper that these be used to address the sanitation challenge. It is noted that in Zambia, the sanitation sector in Zambia has been under-funded in terms of capital investments, large maintenance and operating expenditure leading to situations of dilapidated and in some cases abandoned facilities such as Treatment plants.

Adverse economic impacts of poor sanitation

Poor sanitation costs Zambia approximately US$194 million each year, equivalent of US$16.4 per person in Zambia per year or 1.3% of the national GDP. Approximately 8,700 Zambians, including 6,600 children under 5, die each year from diarrhea – nearly 90% of which is directly attributed to poor water, sanitation and hygiene (WASH) which results in an estimated US$167 million lost each year due to premature death. …………… An estimated US$16 million is lost each year in access time (time spend looking for a private location to defecate due to lack of private toilets) which falls disproportionately on women as caregivers who may spend additional time accompanying young children or sick or elderly relatives. Approximately US$10.6 million is spent each year on health care treating diarrheal diseases directly, and indirectly via malnutrition and other diseases related to poor sanitation………………An additional US$1 million is lost each year due to productivity losses whilst sick or accessing healthcare (including time absent from work or school due to diarrheal disease, seeking treatment from a health clinic or hospital, and time spent caring for under-5’s suffering from diarrhea or other sanitation-attributable diseases.

Source : www.wsp.org/sites/wsp.org/files/publications/WSP-ESI-Zambia.pdf


Regards

Kumbulani Ndlovu
WASH Sector Leader, Zambia

SNV Netherlands Development Organisation
7 Nkanchibaya Road | Rhodes Park | Lusaka | Zambia
www.snv.org

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  • marcpc
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Re: SNV e-group discussion TOPIC 1: What do we see as sustainable cost recovery in city wide sanitation services?

I'm Marc Pérez Casas from Dhaka, Bangladesh.

Sure, we should push for sustainable cost-recovery from emptying to re-use.

In my opinion, the user interface and containment should be full private investment by HH owner, and not supported by Government, except for extremely poor HH and slums. Investment within HH premises should remain responsibility of owner, while investments in public areas is Gov/Authority responsibility.

Investments (a) and (d) are huge, true, but we can advocate to be smarter. Bad examples in Khulna city: 1) Big FSTP that we, SNV, supported for 180 m3/day, but only 8 m3/day are being used since 3 years under operation. We could keep design but construct in incremental basis (2 cells at a time), but city authorities pushed for big one. 2) Huge investment for Sewerage system is coming from ADB (150 million USD), including 2 new FSTP, but as this loan need to be disbursed, the facilities must be constructed. Of course, those will remain unused and abandoned for years, until the FSM services increases.

In Jhenaidah municipality, emptying services are running by outsourcing model to local NGO, supported by emptying service tariff which covers the O&M costs (breakeven). Since July 2017, the municipality introduced the Sanitation Tax (under Bangladesh Municipal mode tax schedule 2014, clause 23) (the only case in Bangladesh), which charges additional 5% (can increase to 12%) of the asset valuation (holding) for Sanitation infrastructure. The potential collection for 2017-2018 was 31,414 USD. The first 6 months, only private holding were applied, but second half all included, thus 22,000 USD were collected. The expectation is that Sanitation Tax covers investments (a) and (d), while Emptying tariff covers O&M costs. Potential revenue from re-use yet not initiated.

So…
1. Which parts of the sanitation value chain and/or life-cycle cost do you consider should be covered by tariffs and where do you consider taxes or transfers should be used?
Answer: O&M costs from Emptying to Re-use, covered by tariffs.

2. Why should those costs be covered by taxes and/or transfers in your view? How is this the “best use of public money”?
Answer: If specific Tax for Sanitation can be applied, then is completely justified to cover investments. If this does not exist, I still think investment must be covered by taxes and transfers because with current culture of service tariff in the country, is not viable to think on full-cost recovery only from tariffs.

Best
Marc
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  • Antoinette
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Re: FW: [urbansan] Summary topic 1

SUMMARY TOPIC 1: WHAT DO WE SEE AS SUSTAINABLE COST RECOVERY IN CITY WIDE SANITATION SERVICES?

(The text below includes the summary for Topic 1 without the graphics. Refer to the attached pdf file to see the complete summary with graphics.)

Dear colleagues,

Last week we concluded the first topic of the discussion on “Sustainable cost recovery and equity in urban sanitation”. This first topic ran from 31st of October till the 6th of November, aiming to first understand what we see as sustainable cost recovery in city-wide sanitation services. There were 13 contributions, from 12 people from 10 countries: Tanzania, Bangladesh, Malaysia, Indonesia, Nepal, Zambia, Honduras, Mozambique, Rwanda and Uganda. Thank you all for your interesting contributions!

The discussion questions were:
1. How do you assess the financial health of the sanitation services in a city? (your city) What do you take into account in terms of life-cycle costs and along the sanitation value chain?
2. Which parts of the sanitation value chain and/or life-cycle cost do you consider should be covered by tariffs and where do you consider taxes or transfers should be used?
3. Why should those costs be covered by taxes and/or transfers in your view? How is this the “best use of public money”?

Below I will try to give a short overview of your contributions. Please accept my apologies for any misinterpretations.

Best,
Ant.

+++++++++++++++++

AD 1. HOW TO ASSESS THE FINANCIAL HEALTH OF SANITATION SERVICES IN A CITY?

For financially sustainable sanitation services, the life-cycle costs of all elements along the sanitation value chain should be covered, that is:

a) Initial investment – community engagement, project preparation, system design, site preparation and installation, commissioning etc. Also includes service extensions.
b) Regular day-to-day operations – operation and maintenance of hardware, administration and management, community engagement, utilities, etc.
c) Intermittent maintenance – minor repairs and replacements (e.g. pumps), desludging, etc. required at relatively short time intervals
d) Major rehabilitation, replacement and asset renewal – major activities required at relatively long-time intervals, such as repairs and replacements of aging infrastructure elements

As Lena Saptalena from Indonesia commented, for sanitation, especially on-site sanitation, this is almost a matrix with the sanitation value chain horizontally and the life-cycle costs vertically:

User interface Containment Emptying Transport/ conveyance Treatment Re-use/ disposal
a. Initial investment
b. Regular day to day operations cost
c. Intermittent maintenance costs
d. Major rehabilitation, replacement and asset renewal

However, the additional complication is of course that in a city, there may be several, interconnected sanitation value chains. Like Fred Lyimo from Tanzania explains, there is 7.6% sewer in the city centre, on-site household sanitation and also other services like public toilets. Hence in some cities, the above matrix might be multi-dimensional…

But let’s go back to the question how to assess the financial health of sanitation services in a city. Many of you pointed out that this is very difficult to nearly impossible. First of all, due to the fragmentation of responsibilities along the sanitation value chain, especially for on-site sanitation. Unlike piped water supply, ownership of assets along the sanitation chain may lie with different entities. Furthermore, as Nadira Khawaja from Nepal writes, finances and management is sometimes intertwined with other services (not ringfenced for sanitation) and key stakeholders may be reluctant to share financial information. For example, private sector provides might not want to show profit to avoid taxes. Hence you suggested alternatives for assuring the financial health of sanitation services:
• Focus mainly on the financial health of big infrastructure (Fred Lyimo)
• Make sure that the type of infrastructure to be build, considers the financial capacity of users and government (Dorai Narayan from Malaysia)
• Use proxy indicators – such as sustained quality service- to assess whether sanitation services are financially viable (Nadira Khawaja)
• Focus rather on sustainability and affordability of the service as a whole (Lena Saptalena)

However, Ika Yuniarti from Metro in Indonesia suggested that the problem is not so much the financial health of services, but rather the unclear institutional framework, the lack of willingness-to-pay and the need to adapt service models for sanitation so that polluters are also paying. That is, not only the ones who receive the service should pay, but also the ones who do not want to connect to sewer or those who do not maintain their septic tank properly. For example, Fred shared the low willingness to connect to sewer from some households in Arusha, as they feel that having a septic tank will be cheaper. Lena and Dorai also advocate for charging the cost of pollution in addition to the cost of service.

Marc Casas from Bangladesh explains that one of the main bottlenecks for financially health sanitation services is undue spending. He provides the example of oversizing of treatment plants while the demand (required load) is not yet there and tends to develop slowly over time. Dorai states this oversizing also happened in Malaysia. Another issue is the disbursement pressure in the construction of large infrastructure, which leads to high treatment capacity in view of low demand. The challenge, as Lena explains, is the plants are operating under capacity, hence receive less revenue from tariff and are unable to cover their costs according to plan. In Indonesia there are now 283 sludge treatment plants of which about 20% is functional. Aside from the above factors, there are also challenges in relation to “soft ware elements”, such as regulation, standardization, planning, preparation of SOPs etc. The lack of consideration of those elements in the costing, jeopardizes the effective and efficient use of infrastructures.

Looking back at the question, it seems that 1) there is still a way to go in most cities in order to have an overview of the financial health of sanitation services, 2) we have not entered the methodological side of the question.


AD 2. WHICH PARTS OF THE SANITATION VALUE CHAIN AND/OR LIFE-CYCLE COST DO YOU CONSIDER SHOULD BE COVERED BY TARIFFS AND WHERE DO YOU CONSIDER TAXES OR TRANSFERS SHOULD BE USED?

As mentioned in the introduction to the topic 1, sanitation costs can be covered by tariffs, taxes or transfers. Tariffs are only paid by the people directly benefitting from the service, and sometimes the value of the tariff depends on use. Hence people tend to consider this fair: you pay for the service that you use.

Taxes, however, are paid by all irrespective of use of the service. Hence if we use taxes – from all- to pay for the services of a specific group, we are basically subsidizing this group. When you subsidize one group with the money from all, there needs to be a good reason to explain why this is fair.

In response to the above question, Kumbulani Ndlovu from Zambia explained that according to principle 4 of the Zambian water policy (2010), user charges should be full cost recovery. Meaning they should cover the entire chain as well as all life-cycle costs. However, at the moment this is not yet possible, so the idea is to introduce this gradually.

You basically all stated that:
• All life-cycle costs of user interface and containment should be paid by the users.
• The O&M costs of direct services should come from tariffs.
• Costs for treatment and re-use should come from taxes and transfers
Hence the matrix would look more or less as below (see legend at the bottom):

User interface Containment Emptying Transport/ conveyance Treatment Re-use/ disposal
a. Initial investment
b. Regular day to day operations cost
c. Intermittent maintenance costs
d. Major rehabilitation, replacement and asset renewal

Directly covered by owner
Tariffs
Taxes or transfers

You did add a few caveats.

First of all, Marc, Dorai, Nadira all stated that there could be public funding (taxes or tariffs) for the user interface and containment if the users are extremely poor or the government demand a very high-quality containment like the Jokhasou in Japan (see picture below). Nadira did however caution to consider perverse incentives and long-term effects on governance of the type of subsidies.

Secondly, Yerri Noer Kartiko from Indonesia emphasizes the importance to calculate the right tariff or tax needs, considering technical and management costs, but also other costs like those for enhancing public participation and engagement, to keep systems running even in an emergency, and the costs to educate the public. In this sanitation value chain visualisation, such costs are not so evident, and risk being forgotten. This is also valid for the “software” costs mentioned by Lena. Kumbulani shares that in Zambia a special pilot has started between the regulator and 3 utilities to define “Pricing for sanitation services”.

Thirdly, tariffs should provide the right incentives and be affordable. Cross-subsidies, as explained by Ika Yuniarti from Indonesia and others, can help to distribute costs according to level of use and payment capacity. Another measure might be the introduction of polluter pays models. Chemisto Ali from Uganda shares a case where the tariffs are low because the private sector does not abide by the regulations.

Marc gives the example from Jhenaidah where the municipal sanitation tax is generating the fund for investments and major rehabilitation (a and d). Nadira provides an example of taxes from planned housing estates generate funding for those costs.

Patricia Solorzano from Honduras and Horácio Quembo from Mozambique explained that in theory such large investments should come from taxes and transfers, but that in practice the budget allocated is minimum due to the low priority of sanitation.

Finally, in the long run, Dorai says, there can be a small revenue from sales of re-use products that could be considered.


AD 3. WHY SHOULD THOSE COSTS BE COVERED BY TAXES AND/OR TRANSFERS IN YOUR VIEW? HOW IS THIS THE “BEST USE OF PUBLIC MONEY”?
As Getachew Belaineh from Rwanda pointed out, in answering this question it’s important to consider that the value of life-cycle costs should always be compared against the level of service. Those levels of service can be different across a city, which may affect the justification whether or not to cover investment and major repairs from taxes and transfers.

You gave many different answers to this question. These are the reasons you gave:

- Because the money isn’t there in tariffs and the cost is high
A number of people simply said that the initial investments and major rehabilitation, replacement and asset renewal should be paid from taxes and/or transfers because the tariff cannot cover it.

- Because it’s a public benefit
Dorai suggested to differentiate between private and public benefit. While the benefit of basic sanitation is mostly private, he says, safely managed sanitation has a much wider public health benefit. However, Kumbulani explained the negative effects of a lack of any kind of sanitation in terms of public health and economic development. Patricia also pointed to the public health risks.

- Because the asset ownership is public
Kambole Mwambazi from Zambia also explained that the ownership of the assets will be retained by the state, or only be transferred to the utility upon meeting certain conditions (besides mentioning that poor sanitation affects the most vulnerable people most).

- Because it’s a government duty
Horácio stated that it is the obligation of the government to provide sanitation, and this is why such high infrastructure costs should be covered from public money.

- Because it will be a destruction of capital
Getachew explains that in practice it may not always be possible to cover the operation costs from tariff, and that subsidy is needed to avoid losing the infrastructure investment. He provides the example of waste treatment plants in Kigali and three secondary towns where the operationalisation is becoming difficult.

Antoinette Kome
Global Sector Coordinator WASH

SNV Netherlands Development Organisation

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