This contribution is by Lena Ganda Saptalena, SNV in Indonesia:

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Greetings, everyone.

Lena Saptalena from SNV Indonesia here. I have joined SNV since March 2018 and would like to try to exercise my opinion here.

I will try to answer the first 2 questions:
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?

Answer:

Unlike for-profit-businesses where financial health of a service could be assessed by common key performance indicators (KPIs) such as positive profit margin, positive long-term growth (increase in revenue is higher than increase in expenses), low debt ratio, etc., I think for sanitation services in developing countries there should be different indicators since it is very difficult to achieve common KPIs. Maybe these 2 things are most critical:
• Sustainability
• Affordability

To be sustainable, basically you have to be able to cover all costs (but not necessarily should be covered by revenue). Tariff that generates the revenue is limited by affordability. If some people cannot pay for the service, then the service will marginalize those who cannot afford the service (which is not aligned with SDG6).

To maximize revenue from tariff without marginalizing those in the lower/lowest quintiles, maybe it could be achieved in 3 ways:
• Cross-subsidies: by making segmented tariffs. Tariff segmentations from highest to lowest tariffs could be divided into:
o Tariff for commercial business, offices, etc. --> highest
o Tariff for households (HHs), public schools, etc.:
 Highest tariff: housing/ apartment at high land values
 Medium tariff: common HHs
 Lowest to none: those in the lowest quintile. As an illustration, as per March 2019, there are 9.4% (around 25 million) Indonesian still live below poverty line (per capita income is under IDR 425,000/month). Meanwhile, costs for sanitation access and services at SNV project cities (charged by public operator; private operators are much higher):
- In Tasikmalaya: IDR 125,000/ emptying
- In Metro: IDR 250,000/ emptying ** (see the next forum post which clarifies/corrects this)
- In Bandar Lampung: IDR 400,000/ emptying
- Cost to construct toilet: IDR 2,500,000 / unit (low tech)

• Cost to construct containment: IDR 4,000,000 / unit (low tech)
This is simply unattainable by the 2 lowest quintiles

• Applying cost of polluting
o Up to now, those that have containment pay for emptying. Those that don’t have containment pay nothing. This will send wrong message to people (“I invest for containment, I pay for desludging, and I got polluted by my neighbor, so why invest?”). This is especially important because, based on SNV baseline:
 In Tasikmalaya: only 10% population practice regular emptying
 In Metro: 17% population
 In Bandar Lampung: 11%

So, to be fair, there should be two tariffs:
 Tariffs for emptying
 Tariffs for polluting --> higher than the above (as incentive for HHs who contribute in constructing containment). However, if we apply this, people will think it’s ok to pollute the groundwater as long as they pay for the polluting fee. To avoid this, the revenue from polluting fee could be used for:
• Installment to construct containment (paid by “force” by those who actually can afford). Penalty for not paying could be: not getting administrative service from the municipality
• Covering the treatment plant “fixed cost”.
o In terms of O&M costs, there are actually variable and fixed costs. Variable cost is a function of number of customers. For example: fuel (to transport faecal sludge to treatment plant). Unless we apply scheduled desludging, we know that number of trips per day is fluctuating, and the use of fuel depends on that. However, there are fixed cost, for example, regardless of the volume of the service in a given month, treatment plant operators should be given salaries anyway. Some treatment plants are operating under capacity, therefore they do not receive enough revenue from desludging tariff (paid to public emptier by HHs) and from dumping tariff (paid by emptiers to treatment plant operator). Thereby, no enough budget to cover fixed costs

• Applying scheduled desludging where desludging fee could be paid as monthly installment

For the life-cycle costs along the sanitation value chain, it would be practical to make a matrix using the categorization provided in the original e-mail (unfortunately, at this time I am not able to prepare this due to time constraint).


Additionally, I would like to add that, an additional category of cost could be added. In Indonesia, people (city planners) often forgot the “software costs”, such as:
• capacity building costs,
• governance costs (here in Indonesia, to make regulation is also –very- costly; it is not enough to prepare a draft of regulation, the process to gain approval from city-level parliament costs a lot per regulation, thereby hindering the issuing of needed regulation),
• standardization costs (for example if you would like to apply an ISO standard, or to obtain certification for emptiers/ sanitation service providers, etc.)
• planning costs: it should include not just planning of infrastructure facility, but also preparing sanitation roadmap that should be updated every a few years, preparing SOP, socialization & testing of SOP, etc.
• R&D costs -> for example, if you would like to apply a reuse technology, then you need market research etc. While a city does not have to reinvent the wheel (for the type of technology), understanding the market in own city is very context specific and require some investment too

I would like to emphasize the importance of those costs, because, in fact, in Indonesia, as of today, there are 283 onsite treatment plants, but less than 20% are functioning. Therefore, while at the national level there are a lot of funds to be accessed by the local government, often the investment became a waste because the infrastructure could not be operated due to the missing factors as above (no SOP, no supporting regulation, etc).

Those missing costs could be covered by Transfer (such as from NGOs, in form of capacity buildings, etc), but this resource is limited. Therefore, for districts/cities that do not receive Transfer, this could probably be covered by Tax (national budget in combination with city’s local revenue).


Also:

a) Initial investment – community engagement, project preparation, system design, site preparation and installation, commissioning etc. Also includes service extensions.

Who should pay for this? it depends on the district/cities financial condition. Some cities like Jakarta has high budget, they’re able to cover this from their own budget. For most district/cities: this should be paid by tax. In Indonesia, this is supported by national level, as long as districts/cities could meet readiness criteria: providing land, preparing environmental permit documents (three types, but generally the environmental impact assessment document types).

For household premises, this is invested by HHs themselves. Additionally, funds at province level are available to provide subsidy for toilet/containment. However, as we have seen in many studies, this is not a wise practice, unless directed for lowest quintiles.

Generally, as total investment cost for containment is very high, this could be paid through alternative financing such as payable loans.

b) Regular day-to-day operations – operation and maintenance of hardware, administration and management, community engagement, utilities, etc.
Who should pay for this?:
Variable costs: by emptying & disposal (segmented) tariffs
Fixed costs: by all (through polluting tariff/ polluting tax)

c) Intermittent maintenance – minor repairs and replacements (e.g. pumps), desludging, etc. required at relatively short time intervals
Who should pay for this?:
By tariff (users and non-users)

d) Major rehabilitation, replacement and asset renewal – major activities required at relatively long time intervals, such as repairs and replacements of aging infrastructure elements
Who should pay for this?:
Depending districts/cities condition. If able to finance this, by local tax (from LG’s revenue). If not, by national tax.

Capacity building costs and all other software costs:
Who should pay for this?:
Should be factored, but depending on district condition, could be paid from tax (own budget or national budget), or from transfer (grant etc from donors).

Best regards,

Lena Ganda Saptalena
Senior WASH Specialist

SNV Netherlands Development Organisation
Jalan Kemang Timur Raya No 66 | Jakarta 12730 | Indonesia
www.snv.org

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Hi,

I am Dorai Narayana, a freelance consultant working in the sanitation/ sewerage sector, primarily in the Indian Sub-continent. I used to work in the sector in Malaysia, both in a Municipality as well as a National Utility company. My views here stem from that experience.

As we discuss financial sustainability of the sanitation chain, looking in the perspective of City Wide Sanitation, and ask ourselves where public funding should be used (CAPEX & OPEX), we should remember the predominantly public goods nature of sanitation. In the initial stages (where most developing countries are), the importance or priority of sanitation is at a basic level, where the public health at household level is the primary driver. At this level, largely the benefits are to the user, and cost recovery from user can cover the basic costs. This would cover the toilet and a basic containment.

But as we start looking at slightly wider impacts: ground water, overflows to surface drainage, safely transporting the septage, treating and disposing, these are focussed on public health at a community or city level, as well as water resource protection. Here the public goods component is predominant, and the individual user perceives less benefit.

Containments such as the Johkasou in Japan, which was introduced as a gold class on- site system, is partly subsidised by Municipalities.

So I would think we should consider the different parts of the service chain from the perspective of the perceived benefits : by the individual user as well as other beneficiaries, as an indicator of how the costs should be apportioned. This apportionment ratio is likely to change over time, as awareness increases, and people take ownership of community space.

The sector being what it is, a wholly commercial approach is often unsuitable. It may be advantageous (more efficient) to involve the private sector on commercial basis for particular sections of the service chain, but not for the whole business. This should be complemented with a Government or utility level services to cater the unserved or underserved parts of the city.

Experience in Malaysia shows that affordability may not be the real problem, but rather that the user does not perceive benefit, and therefore does not see why he has to pay. Another thing we see in Malaysia is an “unwillingness to charge”. The government subsidises services rather than increase tariffs to appropriate levels.

For large scale infrastructure, such as sewerage and treatment facilities (both sewage and septage/FS) the “lumpy, upfront investment” and long term asset renewal/ rehabilitation / replacement costs are usually too high to be recovered from users. This is generally borne by Government out of tax revenue.

While the formula of 3-T is good for the recurring operational costs, an additional factor of potential revenue from ancillary sources such as resource recovery should also be considered, albeit to a small extent. And it should be remembered that the relative proportions of these would change over time.

The concept of user AND beneficiary pays is a better approach, as the benefits of better sanitation become increasingly felt at community / city/ national levels such as improved overall health, less healthcare costs, increased productivity, economic benefits, tourism etc.

One other lesson is that the affordability of the individual user and the affordability at Government level should be considered when deciding the type of interventions: infrastructure and the level of services. This can then be improved incrementally in tandem with willingness to pay, and possibility of cost recovery.

On the Khulna examples of oversized facilities (we have these in Malaysia too) : what is driving these? Poor planning assumptions? Decision makers using wrong basis ? Lack of follow through to enforce the operationalisation ? Sewerage connections are extremely difficult. Yet we continue to build these massive facilities.

The Arusha example is telling, where people preferer septic tanks to sewer (because they will be required to pay for sewerage line connection). Tariff structures should be designed to incentivise people to go for the appropriate solution, from the City Planning perspective. Clearly here the perceived unreasonable connection charges are going to lead to a situation where the sewerage system will be underutilised.

Another lesson from Malaysia is that co-management of sewered and non-sewered sanitation has great advantages. Cross subsidy is possible, and co-treatment opportunities are opened up, reducing overall costs.

My answer to the questions are:
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?
The infrastructure and interventions should be planned and phased taking into consideration affordability at user level and Government level. Incremental improvements can be made as willingness to pay (both at user and Govt levels) increases. But it is unlikely that this is being done in a planned manner, especially lifecycle costs.

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?
Individual toilets/ containments may be at user’s costs. However where high performance individual systems are required to be used, a part of the costs may be subsidised.

The up-front city wide infrastructure (sewers, treatment facilities) as well as long term asset renewal/ rehabilitation/ replacement costs should be borne out of taxes. Recurring operation/ maintenance costs (at initial stages of basic systems) should be covered largely by tariff. However as treatment systems of increasing sophistication / performance are adopted, some subsidy of costs in proportion to the public goods benefit may be applied.

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 approach is to apply consideration of private vs public goods . The benefits perceived / accrued at the city / national levels should in general be borne from taxes. The benefits accruing in terms of public healthcare costs savings, improved economic activities, tourism and better beneficial use of water resources will justify this.

Dorai
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This contribution is from Yerry Noer Kartiko in Indonesia:

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Hello everyone.
I am so glad to join with this discussion group. My name is Yerri Noer Kartiko, I work for Environment Division in Metro City Local Government, Lampung Provinces, Indonesia. I am a Secretary of Environment Division. I will answer the three question mentioned above, according to my daily working experience in my position and also in my city.

The Local Government of Metro City has good potential source related to financial matters, There are a lot of financial schemes (framework) and sources. The financial sources come from National Government, Province Government, Local Government (taxes and retribution), as well as private (Corporate Social Responsibility) and public financing. The important thing is good awareness and willingness of policy decision making institution to allocate and provide a proper budget for sanitation sector. Nevertheless, sanitation has not been chosen as a top three priority in local development program. It can be assessed by making budget comparison among sanitation and other sectors. Therefore, it is a challenge to convince each policy decision making institution to raise their awareness and willingness into sanitation issues, particularly in local area. So, they can allocate and provide sufficient and proper budget for sanitation.

Every single person and institution who live in Metro City should participate, contribute and engage themselves into sanitation development. One of little steps that they can contribute is paying tax and/ or retribution. They also should be responsible to any sanitation challenge in the neighborhood, starting from their home.

We can consider some components s as the input to calculate the tariff of tax or retribution. They are technical and management costs. Technical cost includes vehicles, installation and machines (operation and maintenance costs), while management cost includes workforces (salary, risk, competency), material, time, and method.

These parameters are important to be covered by tax or retribution. Some reasons for this are: (1). To enhance public participation and engagement; (2). To make a balance condition among the money that provided and obtained by local government; (3). To provide enough money for running the system, both in normal and emergency condition, includes just in case when an accident or incident happen; (4). To educate people or public about responsibility and accountability in sanitation issues.

Thank you very much for your attention.

Yerri
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Hi,
Antoinette Kome from SuSanA partner SNV is currenty running an egroup discussion in their e-mail group called Urbansan. I have discussed with her that it would be nice to also bring the content to our discussion forum (for people to participate, learn and share and in way of archiving). So I am copying below her introductory e-mails. Later, I will copy posts that have been made in the egroup (except for those where the authors object). Feel free to add your own thoughts in this thread.

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Dear all,

I hope you will find time to reflect and write your views on the questions. These are:
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”?

Best,
Ant.

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


Dear colleagues,

Today is the first day of the discussion on “Sustainable cost recovery and equity in urban sanitation”. In this discussion we will explore financial sustainability along the sanitation chain and where public funding will contribute to greater equity. The discussion is a follow-up of the discussions that we held in September- November 2014 on Financing urban sanitation, and the subsequent paper with UTS/ISF (snv.org/cms/sites/default/files/explore/...arning_paper_0-2.pdf) .

At that time, we discussed specifically the life-cycle costs of large infrastructure, that is: the initial investment of that infrastructure, cost of day-to-day operations (c) expenses for intermittent maintenance, and the cost of a renewal. We discussed whether in people’s experience this comes from tariffs (user payments), taxes or transfers (from national government or other). We also explored the options for using repayable finance to cover any of those life-cycle costs. I’m a bit divided whether or not I should give you more background on this discussion, as I realise not everybody in the group now, was engaged at that time. However, I also want us to move forward in this topic, therefore I will share the full summary of that 2014 discussion in a separate mail today.

One of the recurring messages in the 2014 discussions and paper was that we should strive for “Sustainable Full Cost Recovery” of sanitation services as opposed to simply full cost-recovery of services. Sustainable full cost recovery would consider taxes and transfers, in addition to user charges to cover the life-cycle costs. That’s widely accepted in the sector, already proposed by the Camdessus panel in 2003. The main question is how city authorities, and perhaps responsible utilities, can operationalise this concept of sustainable full cost recovery in their city. What does it mean in practice? Related to that is the question about what is the best use for public funding and thus where full cost recovery by tariffs should be demanded.

We are now looking at the entire city sanitation service, not only the large infrastructure. This means, along the sanitation value chain, in all parts of the city and reaching all people, considering that all the related infrastructure has its own life-cycle costs. Hence the first topic is called: “What do we see as sustainable cost recovery in city wide sanitation services?”. This topic will run from today 31st of October till next week Wednesday 6th of November.

The discussion questions are:
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”?

I realise that these are all challenging questions, and I am really looking forward to your views. Of course, you are welcome to discuss only one or two of these.
You can contribute by replying to this email. As always, please do mention your name, organisation and country in you reply, and please refrain from sending attachments which will be moved to the Egroups website and are less likely to be read by people.
For your reference, I have included below some basic concepts from the financing paper.
Best,
Ant.

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Dear colleagues,

This November SNV is conducting a learning activity called “Sustainable Cost Recovery and Equity in Urban Sanitation” as part of its knowledge and learning component of the programme: Urban Sanitation & Hygiene for Health and Development.
The learning activity consists of:
1. A preparatory email discussion running on this Egroup platform from tomorrow week Thursday 31st of October till the 20th of November
2. A face-to-face workshop, which will take place in Jakarta, Indonesia from Monday 25th till Thursday 28th of November
3. Follow-up activities in countries, depending on country priorities
While the face-to-face workshop will have a limited number of invited participants from SNV’s programme cities, the Egroup is open to all. In this email I will explain how the Egroup discussion works.

FOR WHOM IS THE EGROUP DISCUSSION?
The discussion is for all people interested in urban sanitation and hygiene in Asia, Africa and Latin America. We are giving preference to people from local and national governments who are currently working in the sector, but there are also professionals from many development organizations and banks. Currently there are 372 people in the urban san Egroup. If you would like someone else to join, please ask them to send a mail to: urbansan+subscribe@snvwash.groups.io

WHAT WILL WE DISCUSS?
Financial sustainability of services along the sanitation chain, and where public funding should be used to ensure sustainability and greater equity. The discussion will build upon the 2014 discussion and paper about financing urban sanitation. The difference is however that last time the focus was more on repayable finance mechanisms, whereas this time the focus is on making to role of decision makers to ensure sustainable services for all and make the best use of public money.

To explore this issue, we will discuss 3 topics and each topic will run for one week. At the end of the discussion, we’ll make a summary paper as input for the workshop. Below are the three topics. The discussion on the first topic will start tomorrow.
Topic dates Topic
Topic 1 31/10- 6/11 What do we see as sustainable cost recovery?
Topic 2 7/11- 13/11 Strategies for greater equity in targeting public funding
Topic 3 14/11- 20/11 Tools and limitations of tools

Only part of the people in the Egroup will participate in the learning event. Therefore we will be sharing the report of the learning event and the different materials on this forum as well.

HOW DOES IT WORK?
On the first day of the discussion, you will find some questions in your inbox. Everybody is invited to share their ideas, comments and examples, responding to the Egroup message. All experiences and opinions are welcome and please don’t be shy to contribute.
Please write your message in the main email text and not in an attachment, because some participants are based in remote locations with limited internet speed. Egroup automatically stores attachments on the website, so people would need to go there to read your attachment.
At the end of the week, all messages of the block will be processed and integrated into a chapter of the summary document. This will be the same for all 3 topics.
Looking forward to hear from all of you over the coming weeks!

Best,
Ant.