Local taxation? What a crap idea!

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  • Guy
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Local taxation? What a crap idea!

Following on from Catarina’s excellent introduction to public finance at the national level, I’ve been asked to start a discussion around public finance for sanitation at the LOCAL level. Specifically, I’ve been asked to talk about the importance of local taxation for urban sanitation.

What I want to do is encourage debate: hear about YOUR experience and YOUR opinions. So I’ve decided to go about this in an unusual way. Rather than argue my own position in favour of local public finance, I’ve decided to argue the CONTRARY position. In this anti-public-finance manifestation, you can call me Joe! Here goes…

1) Local taxation in cities in Africa and South Asia generates only very small amounts of money. The amounts of money raised are simply not enough to resolve the capital investment needs of sanitation: that’s going to need central government money and donor money. Municipal revenues are very small, and allocations to sanitations are tiny.a There are rare exceptions like Lagos State, whose tax revenues rose from $190m in 1999 to over $1billion+ in 2011.b But that’s just an oil-rich exception: most low-income cities just don’t have sufficient tax bases.

2) Municipal authorities in low-income cities are typically bloated bureaucracies with significant corruption problems. Even if we can support them to raise more money, they don’t have the capacity to spend that money effectively. Much of it will be siphoned off into projects that benefit the elites, not the poor. See for example the excellent report by Boex & Edwards.c

3) Theory suggests that local taxation shouldn’t be redistributive. Rather, local taxes should be levied in direct proportion to the benefit that each taxpayer receives from local services.c So local taxation is not a good model for urban sanitation, which requires some sort of cross-subsidy to meet the needs of the poor. Transfers from central government are more suited to this sort of redistributive social goal.

4) Influencing municipal taxation is just too challenging. Increasing municipal taxation, and ensuring that revenues raised are spent progressively (i.e. on providing basic services for the poor, as opposed to pretty streetlights for the rich), is enormously complicated. The rich want to hold on to their money, politicians want to spend money in ways that make them look good: political economies are complex and resilient to change. At the same time, increasing municipal taxation may often require high-level national legislation, or even constitutional change. How can donors and donor-funded agencies hope to achieve change in the face of these daunting challenges? We should be focusing our attention on things we can actually change, like sanitation technology and small enterprise solutions. We’re not going to accelerate historyd and change the entire political economies of developing nations!

I could go on, but that’s enough for a short post I think. In summary: local taxes are a dead-end, let’s focus on more important stuff! It’d be great to get your views… you can agree with me (Joe) or you can agree with me (Guy). Either way I win, right?

It’d also be great to hear about examples of local tax revenue generation for sanitation. Do you know of interesting cases?


a “Municipal finance for sanitation in African cities” Norman G & Trémolet S, 2015
www.publicfinanceforwash.com/resources/finance-brief-3
b “Governing Lagos: Unlocking the Politics of Reform” de Gramont D, 2015
carnegieendowment.org/2015/01/12/governi...g-politics-of-reform
c “Triggering Increased City-Level Public Finance for Pro-Poor Sanitation Improvements” Boex J & Edwards B, 2015
www.urban.org/research/publication/trigg...itation-improvements
d “Universal water and sanitation: how did the rich countries do it?” Norman G & Bisaga I, 2015
www.publicfinanceforwash.com/resources/f...rich-countries-do-it
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  • Florian
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Re: Local taxation? What a crap idea!

I really appreciate that discussions on finance are initated here recently! And the little provocative way to trigger discussion on a not so easy topic is a nice idea, curious to see how it works.

Now to your post. Actually I'm not so clear what exactly you are talking about when saying "local taxation". Is it local taxes raised by the municipal government, or tariffs collected from municipal service providers? I assume you mean the first one, but your point 3 sounds quite as you mean tariffs, where users should pay for the service they get.

If we talk about taxes, then I think it really depends on the administrative and fiscal systems in place in the countries, and these can be very different. In centralised systems, basically all tax revenue goes to the central budget, and is then transferred down to local entities. In more decentralised systems, local governments have more autonomy in raising their own taxes and deciding on how to spend them. While I'm convinced that decentralised systems, in particular the ones with fiscal decentralisation, have many advantages, I also think centralised systems can work equally well. Or the other round, all the problems you mention in your posts, e.g. corruption risks or political difficulties for prioritising spending for the poor, could apply equally in central or decentralised tax and governance systems.

As so often, I think the real question shouldn't be what is the right system (e.g. local vs. central), but it should be about how things are done.

But then, I'm not sure if this was actually the point of your post? ;)

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  • Guy
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Re: Local taxation? What a crap idea!

Hmmm, good points Florian. Let me clarify terminology: I won't respond on content yet, I'll leave that till later.

By "local taxation" I'm referring to taxes, not tariffs. As you no doubt know, the general distinction between taxes and tariffs is as follows: a tax is an obligatory payment, not directly related to a service received by you; a tariff is (generally) non-obligatory, and it is in direct proportion to the value of the services received. [Though of course we have to nuance this a bit. First, tariffs as charged may include rich-to-poor redistributive components, and those components can be considered essentially as taxes. Second, taxes may not have a direct tariff-like relationship to the service received, but politicians/technocrats may decide that this is how they should be spent.]

So local taxes for urban sanitation could include any of the following a) a sanitation tax raised by the municipality; b) a sanitation tax collected through water bills (= sanitation surcharge), and then disbursed either by the muncipality or directly be the utility; c) a sanitation tax component raised by some other means, e.g. as a component of property tax; d) general non-earmarked local taxes which are then allocated to sanitation. [And of course municipalities have other sources of revenue, apart from local taxes, including commercial revenues e.g. from land rental, and transfers from central government.]

I hope that adequately clarifies what I mean when I say "local taxes", if not let me know.

Cheers! - JoeGuy
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  • Florian
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Re: Local taxation? What a crap idea!

Thanks Joe, clearer now :)

I think most important is that when local level has the responsibility for water and sanitation services, that they actually have the funds to fulfil their responsibility. Very often this is not the case, in many countries, responsibility for provision of basic services has been decentralised from central to local levels, but not the budgets.

To some extent, I think that it is of secondary importance, whether the funds are raised by the local level directly via local taxes, or are transferred down from central levels after being collected as central level taxes. Where the money comes from doesn't matter so much, as long it goes there where it is needed.

But still I think fiscal decentralisation, autonomy in raising taxes and deciding how to spend it is good. Chances are higher that decisions on priorities are made according to the real needs of the people, if the decisions are made on a level close to people. A directly elected mayor is more likely to take care about the water and sanitation sitution in a city, than a head of water department in some ministry in the far away capital.

So in summary, I think that in principle, both responsibility and funding of water and sanitation should be as local as possible. However, in most developing countries, a lot of the funding for water and sanitation does not come from taxes but from international aid. International aid, be it grants or loans, enters via central levels. This is an important factor in many countries shaping the structure of financing systems, often leading to centralist approaches that are conflicting with the ideal of local responsability and financing of basic service provision.

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Re: Local taxation? What a crap idea!

Dear all,

As you know, parallel to this discussion on local taxation for sanitation initiated by Guy (or should I say Joe ;) ), we also have a discussion thread on “Public Finance at National Level” hosted by Catarina (see here ).

During the discussion on public finance at national level, Esther shared her experiences from the Philippines (post #13880). She writes:

“Regarding public funding for sanitation after the typhoon there was a large NGO presence in one of the poorer areas of the Philippines which has had a huge impact on policy and government. The Philippines has legislation in place that prioritises water and sanitation interventions at various, levels this was in place before the typhoon but not really adhered to. Due to the decentralised systems ultimate responsibility lies with the regional and municipal level authorities. However there are a number of funding opportunities from different government bodies like the Department for Social Welfare and Development and the Department of Health, which can be accessed to supplement the regional budgets. These can be challenging to utilise and many of the NGOs are supporting the municipalities to make the most of these opportunities but they do seem to offer motivation to prioritise sanitation at a certain level.”

When I read Esther’s post, I thought that what she describes here is actually really interesting with regard to linking the national with the local level (that’s why I am reposting it here). It is an example of how the local and national level intersect on the issue of sanitation. What Esther’s experiences also highlight, I think, is that when looking for “best practice” examples, it is important to be aware of the form of government in the respective country (i.e. centralised, decentralised, etc.)

My question would thus be whether other Forum Members have had similar experiences in other countries. Also, given that several posts on “Public Finance at National Level” stressed that raising funds is not the problem but that the real challenge is rather coordinating multiple institutions when distributing funds, I wonder whether the local and national level can successfully be reconciled at all? Or should we just give priority to the national level given that – in “Joe’s” opinion – local taxation is a crap idea anyway?

Best,
Katrin
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  • HAPitot
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Re: Local taxation? What a crap idea!

Dear Guy,

great arguments you (Joe) have presented! In fact: why are you talking about money from central government? Have people pay themselves (at least if they can)! And, one of the most important arguments in your favor: What people don't pay themselves, they don't value, especially when it comes to sanitation!

Some years ago, I was advising the Town Council of Adjumani in Northern Uganda, a rural town of about 35000 inhabitants, on water and sanitation (as an advisor sent by GIZ). At the time, what has catapulted sanitation coverage from 60 to more than 90% was the linkage of an (admittedly subsidized) water connection to a functional toilet. So, people were constructing toilets with their own money in order to get a water connection (with the investment costs predominantly paid by donors). In addition, we introduced a sanitation levy (surcharge) on the water tariff (I call it fee, you apparently call it 'tax') of originally 10%, later reduced to 5% in order to purchase the special parts for urine collection of UDDT toilets, which we promoted by making these parts available for free to the residents (admittedly a small 'subsidy' amounting to about 10 to 15 % of the costs of the toilets). This has also worked quite well, with more than 100 toilets built using private funds. One of the microcredit organizations was making small loans for toilets available, but people were prefering to pay with their own money.

In terms of servicing, there were private companies emptying pit latrines and septic tanks, and one official disposal site that was run by a private operator under the municipality (constructed with funds from GIZ) and an unofficial dumping site (cheaper). In addition, there was a small composting facility that was supposed to take wastes from local markets and the UDDTs, but it never took off because of organizational problems and low commitment on the part of the municipality (poor road access, etc.). You'll find more details in these photo documentations:
www.flickr.com/photos/gtzecosan/sets/72157630727680876/
www.flickr.com/photos/gtzecosan/sets/72157631160051774/

The argument in favor of a sanitation levy to promote ecological sanitation was that regular (unlined) pit latrines and the soakpits of septic tank systems are polluting the ground water that was pumped by the water supply system and the many hand pumped boreholes that were also in use, and that, therefore, ecological sanitation had to be promoted over the traditional toilet systems. With more than 100 UDDTs constructed, it is still a small beginning, given that several thousand toilets must be in use in the town.

In the meantime, the water supply system has faced a lot of technical problems and was not providing enough water when I was in Adjumani at the beginning of the year. The sanitation levy has also been canceled (given the shortage of revenues from the defect water supply system), but people were continuing to construct UDDTs. And the administration is saying they want to reintroduce the sanitation levy (I could imagine that people are now demanding it) as soon as the waster supply system is functioning normally again.

So, my conclusion is that people can do a lot themselves if the commitment (both with the local government and with the residents) and some level of professionalism are there. I think these are the key issues. Nevertheless, some consideration of how to reach the poorest of the poor also needs to be there.

Cheers,

Hanns-André
Hanns-Andre Pitot
M.Eng. Environmental Pollution Control
presently in Seesen, Germany
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  • cecile
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Re: Local taxation? What a crap idea!

Dear Joe / Guy,

I understand from your post that local taxation = municipal taxation (and it was clarified that it is different from the tarif).

How to get local taxation ? Either a general taxation (everyone) or a property taxation ? Then the accounts at municipal level should be separate to be able to track the money collected to make sure it is used for sanitation. This also means the municipality has the capacity to provision the amount of the taxes in view of future investments.

If there is a local taxation this means that the municipality offers a service or has a responsibility? What is the service that should be offered by the municipality? If the municipality collects a tax, does this mean that the municipality is responsible for capital expenditures, asset renewal and extension ? (O&M being covered by tarif)knowing that these investments are often shared by several municipalities.

French experience (36 000 municipalities, responsible for water, sanitation and hygiene) rapidly showed that the municipalities had to come together into intermunicipal organisations to ensure financial sustainability. Therefore a common model is intermunicipal management of sanitation (and often water).It can be a through direct management (a intermunicipal public organisation) or delegated to a private partner in charge of operating.

Local taxations are be used to participate in capital investment, extension and asset renewal but it is often not enough (subsidies are required from the national level, the regional water agencies and the European Union.

The tarif is supposed to cover O&M.

One of the disadvantage of this system is that there is an inequality in the amount of the tariff and in the amount of taxes depending on where people live.

In any case the French experience shows that the intermunicipal level probably a more appropriate level to raise taxes for sanitation and that there is still a need for funds from the national level to support local investment.

Cécile
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  • ggalli
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Re: Local taxation? What a crap idea!

Dear Joe/Guy and others,

Great discussion, thanks for this. Due to my limited experience I will merely provide a point of discussion.

When I read all these contributions I see great ideas about what can be done in urban sanitation and how to finance this. Being a forum of a community of experts, one can expect these contributions. However, I see very little of how to get local views/opinions/plans etc. on board. For me this is very important, as one can expect that no one will want an increase in taxes, especially for something which they see no value or have no say in the plans. In other words, 'no taxation without representation'.
One of the reasons why sanitation is under-financed is that it's politically uninteresting. The reason behind this, is that frankly most people don't care where their faeces go. This must sound crazy to us sanitation fanatics, but let's be real about it.

In my view this means that there is a need to build a collective consciousness around sanitation and a critical mass desiring change before we even start to think about how to finance sanitation, which taxes to increase and who would manage these funds. Clearly this is a long process and it is far easier for any 4-year development programme to work directly with decision makers(well easy is maybe not the right word). The risk of bypassing this essential first step will be that such externally-led projects rapidly vanish once the 'experts' are on the flight back home.

Frankly, I think that for the moment, we should waste our time figuring out which exact combination of taxes and tariffs is best or whether cities should work together or not. I don't mean to be cynical here and I do appreciate the various contributions with examples, but these solutions are always home-grown and can only work if they work in practice, not on paper. Rather, I would suggest to find out how we move people towards prioritising sanitation, creating a citywide vision for a clean environment and holding their municipal institutions responsible for this. Once this public push for sanitation is there, then we can arrive with technical, financial and managerial expertise.

I'm curious to your thoughts on this.

Best,
Giacomo
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  • Marijn Zandee
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Re: Local taxation? What a crap idea!

Dear Giacomo,

'no taxation without representation'

I think we should not forget that the opposite "No representation without taxation" is also true in a sense. If people do not pay (municipal) taxes, or only a marginal amount. Why would they have the right to demand that their municipality takes care of their waste in an adequate way?

I fully agree that people will be more inclined to pay tax for services which they actually demand. But I doubt that your pathway of mobilizing the population to pressure their municipalities is viable. For one, it assumes that people can actually pressure their municipalities, which in many places I think they only can through (violent) protest. Is it reasonable to expect people to take to the streets and demolish public property in order to demand sanitation?

Further, based on my experience in Kathmandu, I am not convinced that people would refuse a local tax (sales tax?) in order to have a decent waste management system and shit free rivers. I think the problem is more that they would not trust the political leadership and the civil service to actually give them value for their money.

Ok, some of what I wrote above may be formulated a bit sharp, or be controversial for some. And it definitely does not offer solutions :P . See it as a contribution to keep the debate going.

Regards

Marijn
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Re: Local taxation? What a crap idea!

Dear Marijn,

I think that what you say actually makes a lot of sense (not so sure about the rioting part though).
So on the one side citizens have to demand services. But then again they do not trust local politicians to provide these services. 'Seeing is believing'. What we have here is the same catch-22 explained in the other forum thread on public finance: we need public finance for a lasting service, but we need to have a proper service before people will pay for it.

So we need to first provide services and then on the basis of this mobilize tax collection to keep this going. In my view this means that in the initial phase there may be a role for international transfers (e.g. aid money). In this initial phase the financial sustainability needs to organised at local level through taxes and tariffs.

One very important side-condition is that international transfers are coordinated and harmonised. This means, 1) no more loose pilot projects that do not work through a public ministry; and 2) an initial phase would probably need to last more than 2-3 years. If it's structural change we're after we need to realise that it will take a sustained effort. 3) But once the initial phase is over, it's over. No more other donors jumping in just to keep the project going. In this way there will be no incentive whatsoever to mobilise internal financing and there is no accountability of policy makers to their own citizens. This needs to agreed and communicated from the start by all parties.

Best,
Giacomo
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Re: Local taxation? What a crap idea!

Dear Giacomo,

That we end up in the same catch-22 as the other thread is perhaps not surprising. When I read Joe's first post, I felt that most of the points he makes could, without much re-writing, be made for taxation at the national level as well in less developed countries.

Without wanting to deny the populations of developing countries of all agency, I feel that maybe the key to breaking the circle lies with the elites which control countries. As was argued in the other thread, a lot of the required money may be found in state / municipal coffers, provided it would be earmarked for sanitation. For me one of the key questions is how to motivate elites to embark on a project of municipal sanitation? (Followed by the question of how to help them do it in a viable and sustainable way?)

For example, sanitation in the cities of Europe first gained traction after the the big Cholera epidemics in Paris and other cities. At the time, the burden of this disease was probably more "democratic" than it would be nowadays. Anyone could get it and no one could get treatment. Whereas nowadays access to good healthcare and RO filtered water means that elites (including me) are shielded from the worst effects of water borne disease. Therefore, in Europe of the 1830s elites had much more of a stake in starting urban sanitation projects than the elites in cities in developing nations have now.

After this somewhat philosophical aside, maybe we should encourage people to move the discussion back towards the merits of taxation at the local level for sanitation :unsure: ?

Regards

Marijn
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  • Sowmya
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Re: Local taxation? What a crap idea!

Dear All,

Great discussion. I am not well-versed in macro-economics, a few thoughts regarding point #3 in Guy’s introductory post (#13885 dated 26 June 2015) viz., should taxes for sanitation be redistributive (I am not making a distinction between local and central taxes because, as Florian states in his post (#13890 dated 26 June 2015), both central and local taxes can have the same advantages and limitations):

3) Theory suggests that local taxation shouldn’t be redistributive. Rather, local taxes should be levied in direct proportion to the benefit that each taxpayer receives from local services.c So local taxation is not a good model for urban sanitation, which requires some sort of cross-subsidy to meet the needs of the poor. Transfers from central government are more suited to this sort of redistributive social goal.

  1. Use of taxes to finance sanitation systems: Taxes could be used to bridge a timing mismatch, revenues mismatch and / or underwrite funding in a sanitation project. A financially sustainable funding structure (for sanitation or other services) is where the beneficiary population pays all the costs (infrastructure creation + O&M) at the time it is incurred. However, this might not always be possible for operational, technical, ethical or other reasons. There could be a timing mismatch (cannot collect the costs of building a sewer line upfront – requiring an “investment”) or a revenues mismatch (costs > affordability). Further, a project’s investment and O&M expenses may be fully covered by user tariffs and other revenues (such as, revenues from sale of fertilizer / energy generated on conversion of excreta) as per business plan but any project carries significant risk until the infrastructure has been built, operated and revenue collection reaches expected steady state. Therefore, financiers may require their funding to be underwritten by an external revenue source (ie., if the project revenues are inadequate to repay the investment and / or O&M expenses, another revenue source not generated from project will be used for repayment). Taxes could be used to bridge any of the above (timing mismatch, revenues mismatch and / or underwrite funding).
  2. The three major expenditure heads of building and operating / maintaining a sanitation system are infrastructure creation, O&M and software (ICT, systems strengthening, creating markets for fertilizer / energy produced from sanitation, increasing stakeholder participation, etc). Of this, hardware and O&M constitute the majority of expenses. While infrastructure creation requires upfront funds / cash outflow, O&M is contemporaneous (timing – happens along with) with actual usage. Taxes can be used to finance any of the above costs. Where taxes are used to finance sanitation, it is important to determine the extent to which such taxes are / are not redistributive.
  3. When taxes are not redistributive: Taxes are not redistributive where there is perfect overlap between taxpaying population and beneficiary population (ie., beneficiary population = taxpaying population). In this case, a major issue could be that of participation: can the government unilaterally decide the choice of technology (without consent of the users)? For instance, can the government build a sewer line from taxes collected when alternative sanitation systems with equal or greater benefits are available?
  4. When are taxes redistributive: Taxes are redistributive when (i) there is mismatch between who the taxes are collected from and who the beneficiary population is (ie., who benefits from the expenditure financed by the taxes) and (ii) such taxes are used to bridge a timing mismatch (viz., funding required for investment but user tariffs and other revenues from beneficiaries are adequate to repay investment) or revenues mismatch (costs > affordability and therefore the taxpaying population is paying for the beneficiary population). Where taxes are redistributive, it constitutes transfer payments . Is my understanding correct?
  5. Issues when taxes are redistributive to bridge a timing gap: Does the allocation for santiation constitute the best use of funds (amongst competing uses of funds, for instance, vaccination, education, national defence) at the time when the expenditure is incurred? What is the rationale and evidence base? Important note: Where taxes are used to bridge a timing mismatch in a sanitation project, the taxes are “repaid” to the government’s common funding pool and is available for investment in other projects after the repayment period.
  6. Issues when taxes are redistributive to bridge a revenues gap: To what extent is the transfer payment justifiable? What is the minimum cost per capita and minimum investment requirement to build and operate the entire sanitation chain (from toilets to treatment and conversion of excreta into fertilizer / energy) given the different sanitation options available? What is the transfer payment (present and future) required for a given sanitation technology?
  7. Some instances where a transfer payment could perhaps be more easily justified:
  • Equalize interest costs between funding sources: Where the financing costs for the beneficiaries could be different based on the funding source, a transfer payment (viz., taxes not paid by the beneficiaries) could be used to lower the financing costs. We need to consider both funds availability and the cost of funding (viz., interest costs). Interest costs vary according to the institution type (banks / financial institutions / microfinance institutions (MFIs) / informal or unregulated financiers such as money lenders) and loan parameters (priority sector, operational costs of the loan type, credit rating, etc). For instance, the interest cost of a priority sector bank loan is usually the lowest while that of MFIs is likely to be the highest. Priority sector loan funds available with banks may not be adequate to meet the sanitation financing costs to meet the 100% ODF goal with the entire sanitation chain completed. MFIs can be a good source of funding and there are successful stories of sanitation financing by MFIs in India, as Frankie and Goufrane point out ( #13968 & #13972 dated 1 & 2 July 2015 respectively). We could incentivize uptake of MFI funding by subsidizing the financing costs (lower interest costs to the borrowers to that of a bank loan or a priority sector loan).
    Advantages: The MFIs would have part of their financing costs guaranteed / underwritten as well as make their funding more attractive to borrowers (this could also have the secondary positive effect of spreading the MFI model by familiarizing unbanked / hard-to-reach population to the concept of micro-finance), borrowers would have the responsibility of repaying the loan by themselves but have lower interest costs and the government / system has access to larger funds base to meet sanitation’s infrastructure and O&M expenses. A win-win for a comparatively small quantum of transfer payment.
  • Transfer payments can be used to underwrite project’s repayment instead of being the primary source of revenues for repaying investment and / or meet O&M expenses.
  • Where taxes are used to bridge a timing mismatch and there is no overlap between beneficiary and taxpaying population, it only means that taxes collected from a group are not being used to immediately benefit that group (and, hence, a transfer payment of sorts). However, the taxes are “repaid” from user tariffs or other project revenues after a time and so, becomes available for other projects. Therefore, the taxpaying population is foregoing the benefits for only a limited period of time.
[/ol]
Warm regards,

Sowmya
Sowmya Rajasekaran
Director
Verity SmartLife Solutions
www.veritysmartlife.com
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