Financing Series

Financial Services for the Promotion of Poverty-Oriented Water Supply and Sanitation in Subsaharan Africa
Part 1: Desk Study Brigitte Biesinger | Maren Richter

Table of Contents
Executive Summary ..............................................................................................................iv 1 Introduction .........................................................................................................................1 1.1 Background ................................................................................................................1 1.2 Objectives of the Desk Study .....................................................................................3 1.3 Definitions...................................................................................................................4 1.4 Why is Financing POWS&S Different?.......................................................................7 2 Review of Available Literature and Summary of Main Topics ........................................9 3 Current Situation and Major Development Trends in Poverty-Oriented Water Supply and Sanitation (POWS&S) .........................................................................12 3.1 General Situation in View of the MDGs ....................................................................12 3.2 Typology in Water Supply ........................................................................................14 3.3 Typology in Sanitation ..............................................................................................16 3.4 Technical Challenges ...............................................................................................17 3.5 Politics, Regulatory Framework and Reforms ..........................................................19 3.6 Environmental Aspects.............................................................................................20 3.7 The Role of Subsidies in Water Supply and Sanitation ............................................21 3.8 Development Trends ................................................................................................22 4 Role and Importance of Small-Scale Service Providers and Type of Activities in POWS&S .............................................................................................................................23 4.1 Water Supply ............................................................................................................23 4.2 Sanitation .................................................................................................................26 4.3 Households as Small Self-Service Providers – HSSPs............................................27 4.4 Private Small Service Providers - PSSPs.................................................................28 4.5 Community-Based Small Service Providers – CSSPs .............................................30 4.6 Advantages and Constraints ....................................................................................30 4.7 Kind of Investments and Financing Needs ...............................................................32 4.8 Needs for Other Assistance .....................................................................................33 4.9 Financing Strategies of Small Scale Service Providers............................................34 4.9.1 HSSPs .................................................................................................................34 4.9.2 PSSPs .................................................................................................................34 4.9.3 CSSPs .................................................................................................................35 5 Demand for Financial Services in POWS&S...................................................................36 5.1 Effective Demand for Financial Services in the POWS&S Sector............................36 5.2 The Potential Demand of Financial Services for POWS&S Development ...............37 5.2.1 Housing Microfinance Loans ...............................................................................37 5.2.2 Short-Term Loans................................................................................................38 5.2.3 Investment Loans ................................................................................................39 5.2.4 Savings ................................................................................................................39 5.2.5 Other Financial Services relevant for POWS&S ..................................................40 6 Supply of Financial Services for POWS&S in SSA ........................................................41 6.1 Existing Situation and Trends...................................................................................41 6.2 Key Constraints and Need for Improvement at the Different Levels of the Financial System for Financial Service Provision in the POS&S Sector..................................42 6.2.1 The Micro Level ...................................................................................................42 6.2.2 The Meso Level ...................................................................................................42 6.2.3 The Macro Level and Enabling Environment .......................................................43 6.2.4 Other Constraints.................................................................................................44 6.3 Typology of Lenders relevant for POWS&S .............................................................44

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7 International Experience: Promising Approaches, Best Practices, Instruments/Tools and Promotional Concepts in the Financing of POWS&S .............46 7.1 Relevant Case Studies .............................................................................................46 7.1.1 HSSP Finance: Promising Approaches and Promotional Concepts....................46 7.1.2 PSSP Finance: Promising Approaches and Promotional Concepts......................46 7.1.3 CSSP Finance: Promising Approaches and Promotional Concepts .....................47 7.2 Innovative Approaches in Financing POWS&S: The Global Partnership on OutputBased Aid .................................................................................................................48 8 General Best Practices and Experience Relevant for Financing POWS&S.................50 8.1 Financial Services and Sustainability .......................................................................50 8.2 Water Supply & Sanitation and Sustainability ..........................................................51 8.3 Failure of Directed Credit for Agriculture ..................................................................52 9 Conclusions.......................................................................................................................54 9.1 Controversial Working Hypothesis ...........................................................................54 9.2 Preliminary Conclusions ...........................................................................................55 9.2.1 Supply – Demand Gap in POWS&S Financing and Key Constraints ..................55 9.2.2 Potential for the Development of Financial Services for POWS&S in SSA .........56 9.2.3 Outlook ................................................................................................................57 Annex Annex 1: Typology of Small-Scale Water Supply and Sanitation Operations and their Respective Investment Needs...........................................................................................I Annex 2: Case Study One...................................................................................................... VI Annex 3: Case Study Two.................................................................................................... VIII Annex 4: Case Study Three .................................................................................................... X

List of Figures Figure 1: Providers of WS&S ...................................................................................................4 Figure 2: Financial Sector Market Segments relevant for POWS&S .......................................6 Figure 3: Financial Services in POWS&S ................................................................................7

List of Tables Table 1: Typology of Unserved or Underserved Communities for Water Supply ...................15 Table 2: Typology of Unserved or Underserved Communities for Sanitation (35) .................17 Table 3: Categorizing Small-Scale Service Providers in Water Supply .................................25 Table 4: Household Sanitation Options in African Cities........................................................27 Table 5: Typical Examples and Investment Cost for Different Technical POWS&S Options .32 Table 6: OBA Pilot Projects in Water Supply and Sanitation .................................................49 Table 7: Controversial Statements about Role and Significance of Financial Services in POWS&S......................................................................................54

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Abbreviations
AGETIP AREQUAPCI ASM BMZ CBO CCAEP CGAP CSSP DFID DNH EU EUR EUWI G8 GPOBA GTZ HDFC HSSP HUDCO JMP KFW MBK MDG MFI MSE NA NGO OBA O&M ONEA POWS&S PPIAF PRS PSSP ROSCA SEDAPAL SEWA SME SSA SSP UEAEP UN UNDP UNICEF USD USV WHO WS&S WSP Agence d’Exécution des Travaux d’Intérêt Public Côte d’Ivoire’s Association of Water Resellers Association of Standpipe Managers Bundesministerium für Wirtschaftliche Zusammenarbeit und Entwicklung Community-Based Organisation Cellule de Conseil aux Adductions d’Eau Potable The Consultative Group to Assist the Poor Community-Based Small Service Provider Department for International Development Direction Nationale de l’Hydraulique European Union Euro European Union Water Initiative Group of 8 Nations Global Partnership on Output-Based Aid Deutsche Gesellschaft für Technische Zusammenarbeit GmbH - German Technical Cooperation Housing Development Finance Corporation Limited Households as Small Service Providers Housing and Urban Development Corporation Limited Joint Monitoring Programme on Water Supply and Sanitation Kreditanstalt für Wiederaufbau Maji Bora Kibera Millennium Development Goals Microfinance Institution Micro and Small Enterprise Neighbourhood Association Non-Governmental Organisation Output-Based Aid Operation and Maintenance Office National de L’Eau Poverty-Oriented Water Supply and Sanitation Public-Private Infrastructure Advisory Facility Poverty Reduction Strategy Private Small Self-Service Provider Rotating Savings and Credit Association Servicio de Agua Potable y Alcantarillado de Lima Self Employed Women’s Association Small and Medium Enterprises Sub-Saharan Africa Small-scale Service Providers Mali’s Union of Water Suppliers United Nations United Nations Development Programme United Nations Children's Fund United States Dollar Union of Sewerage Entities World Health Organisation Water Supply and Sanitation The World Bank / UNDP Water and Sanitation Programme

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however. Bulk investments in the WS&S sector. would always need big investments funded by other financial arrangements. Shortcomings in access and service quality disproportionally affect the poor. especially in rural areas and peri-urban settlements with high population increases. This definition also covers larger investments that may be beyond the scope of traditional microfinance. As these funds are decreasing for various reasons and the share of commercial financing is still very low. the WS&S sector differs from commercial (productive) sectors because water supply is regarded to be a human right and access to both water and sanitation are basic needs. future generations) which makes cost recovery difficult. SME finance. Especially sewerage has high externalities (environment. and housing microfinance. They normally work best under economies of scale conditions which implies high initial investment cost. The situation is particularly critical in countries of Sub-Saharan Africa (SSA). but is used in a broader financial systems perspective and considers different financial institutions or private actors. Up to now. more than 1 billion people or 17% of the world population have no permanent access to hygienically safe drinking water and about 2. for the purpose of this study “access to water supply and sanitation” focuses on better services for the poor (POWS&S) and the term “microfinance services” is defined in a broader sense that includes a wider range of technical solutions and different market segments. Nevertheless. Hence. To ensure these investments is another challenge. These targets are to be achieved by 2015. conventional and low-cost centralized water borne sewage systems as well as on-site facilities. DESK STUDY POWS&S FINAL REPORT (16-03-2007) iv . To adequately address the needs and capabilities of the poor is a major challenge. Financial Services for Powerty Oriented Water Supply and Sanitation 1 (POWS&S) From an economic and financial point of view. it is very clear that financial services have their limits as they can only address specific client groups and market segments. In adopting the Millennium Development Goals (MDG). the key question is whether the financial gap for WS&S in developing countries can be reduced by mobilising additional local financial resources. It is also central to the human rights and personal dignity of every woman. man and child on earth. Having in mind the above arguments.6 billion people or 42% of the world population still lack basic sanitation facilities. 1 Here. Intersections arise to rural finance. The financing of infrastructure and services in water supply and sanitation (WS&S) is one of the major challenges for achieving the MDGs. child deaths and gender inequality. i. WS&S projects do not and cannot only follow mere commercial considerations but have to be embedded in a coherent approach where subsidies are targeted and an adequate mix of financing concepts be sought. the countries of the world have pledged to reduce by half the proportion of people without access to safe drinking water and basic sanitation. often an important pre-condition to be met before smaller scale arrangements can step in or will make sense. the provision of financial services for POWS&S is not limited to conventional MFIs.e.Executive Summary Background The combination of safe drinking water and hygienic sanitation facilities is a precondition for health and successfully fighting poverty. Currently. with the base year set at 1990. Water supply and sewerage also are natural monopolies and therefore need to be regulated in order to balance the different interests involved. the term “sanitation” includes all types of excreta removal facilities. hunger. investments have been primarily funded by governments (public sector) and development partners. For all these reasons.

and as long as their staff is vulnerable to interference by officials in decisions related to their careers. the plots are too small and/or the underground conditions are not suited for on-site sanitation. This would not only help to redirect planning and decision-making toward communities with relatively weak political voices but also prepare a sound basis for the involvement of financial services. Lack of technical expertise PSSPs are mainly found in peri-urban areas where for various reasons the public utility is not operating. The main advantages of PSSPs are their ability to respond quickly to changes in demand. and to recover their investment and operating costs. performance and service quality. whether or not the utility’s service is up or down. Development partners should support reforms that enhance adequate regulatory mechanisms. As long as WS&S service providers have to rely on the state for budgetary transfers.e.WS&S Policy. (ii) private small service providers (PSSPs) and (iii) community-based small service providers (CSSPs). the potential of enhancing these activities through the provision of financial services to HSSPs is heavily under-explored in SSA. Broad policy and institutional reform is essential for reducing political interference in the day-to-day operations of WS&S utilities in many countries. Advantages and Constraints of Small-scale Service Providers The literature review clearly shows that in many developing countries so-called small-scale service providers play an important role in the provision of water supply and sanitation services. accountability. and rights of way (unprotected investment) DESK STUDY POWS&S FINAL REPORT (16-03-2007) v . the absence of political leadership and government commitment to allocate sufficient resources to the sector. and to undertake the necessary reforms in order to improve performance and service quality and to attract investments. to offer services needed by low-income families. According to their type. priority setting and pricing sector investments will continue to favour those with political connections – which almost never includes the poor. Effective regulation of the WS&S sector is another challenge in order to increase transparency. In many countries. to self-finance. i. area and level of intervention three market segments are suggested: (i) households as self-service providers (HSSPs). HSSPs make a lot of efforts to develop their own private water sources for drinking water supply or their own latrines for basic sanitation. In peri-urban areas with high population density. make management processes more transparent and less vulnerable to corruption. This applies also to SSA countries. Other constraints – often connected to the lack of credit access – are the following: Non-legal situation (illegality of settlements) Tenants (prevailing in peri-urban areas) for logical reasons do not want to incur major investments and (absent) owners are not interested in house improvements. The main constraints to expanding and improving their service levels are the following: Popular misconceptions about their pricing strategies and service quality Lack of recognition and communication with public authorities Weak policy and regulation in the water sector Hostile attitude of the (public or private) water utilities Lack of access to financing Insecurity of infrastructure they build on public lands. Several surveys also indicate that customers are quite satisfied with these services because they know they will get water virtually anytime and anywhere. and improve incentives for good performance. Regulatory Framework and Reforms One of the main constraints to expanding water supply and sanitation coverage is the lack of political will. especially in rural and peri-urban areas. However.

Equally important.CSSPs are a widely recognised organisational model for rural water supply. they still have to cope with fundamental problems. which has many advantages related to social coherence. for the time being. Demand for Financial Services in POWS&S Investment costs of different WS&S facilities vary significantly among different countries. if financial services are available. It also limits competition. In this a task where the activities of FI’s must be DESK STUDY POWS&S FINAL REPORT (16-03-2007) vi . Therefore. housing. but can also go up to USD 3. Lack of funds to pay upfront capital investments and major repairs Lack of reliable savings possibilities As a conclusion. However. rehabilitation or upgrading of the system and deposit facilities for the collection of user charges and/or any other types of fees. The major constraints are the following: Lack of technical expertise in case of system breakdowns Lack of timely availability of spare parts close by Required payment schemes do not correspond to the seasonal fluctuation of their income. which may have negative and undesirable consequences for the quality of services. Nevertheless. and savings for water supply often compete with other basic needs (education. For the FI’s in order to overcome this entrance barrier and to explore this market niche solutions must be sought in substituting formal collateral requirements by other mechanisms.). Quite often. PSSPs usually obtain the investment funds from own savings or from the family or friends as well. They often participate in rotating savings clubs or tontines or depend on contributions from clients for larger investments. On average they amount from USD 15 to USD 800. The strategy to cope with such risks is to limit investments to a minimum.regardless of whether affordability is given or not. is to develop – together with the communities involved – adequate and affordable financing concepts based on viable technical solutions and to provide sensitization as well as training in financial and operational management on community level. especially regarding sanitation. family savings and informal loans from friends and relatives. However. health etc.000. Demand promotion should also be addressed. Therefore they rely on own sources. the notion of credit financing of rural water supply is competing with grant-based funding offered through NGO. Potential demand for financial services required from CSSPs include investment loans for the community share in capital contribution for new investments. several studies demonstrate that for the majority of poor HSSPs in SSA access to formal or semi-formal financial services in order to realize these investments is lacking. however. it has been observed that clients borrow for income generation purposes yet channel the funds into house improvements. it must be recognised that access to credits is just one constraint and cannot be addressed independently of other constraints.is one major constraint to new and expanding activities. empowerment of the poor and active participation of the community. Furthermore. It is assumed that the access to client-oriented loan products would enable a significant larger number of households to install WS&S facilities. most of the PSSPs are operating in an insecure environment. the lack of access to credits for capital investments – mainly due to the fact that the PSSPs are not able to provide collaterals . donor and government programmes . However. From a traditional FI’s perspective the overall frame conditions are not conducive to target the PSSP market segment and as a consequence financial products are not adapted. financing of major repairs. effective demand for credit depends on proper targeting of subsidies (policy issue) based on poverty analysis. This may be an indication for the high priority WS&S has for low-income households and mirrors the fact that suitable loan products addressing house improvements are not available in SSA. Legal and regulatory frame conditions are often unclear or nonexistent and the political and economic environment is unpredictable.

Preliminary Conclusions and Outlook 1. play an important role in order to prepare a sound basis for investment and financing and to mitigate the financial risks for the FI’s and their clients. The problem is aggravated further through several misconceptions of the financial service industry regarding POWS&S. in SSA countries the potential demand for formal financial services for POWS&S has not yet been translated into effective demand. the constraints of the financial system are not only related to POWS&S but have to be classified under the general problem of lack of access to financial services for the poor. Further constraints are lack of tenure security for home improvements of HSSPs. the illegal status of many PSSPs and the untargeted grantfinancing of CSSPs. therefore. Besides some rare exceptions. in Asia). To conclude. Supply of Financial Services for POWS&S Compared to other countries (e. Reliable data on potential markets do not exist and the WS&S sector has not found much attention from the financial sector in the past. It is also clearly demonstrated that effective provision and outreach of financial services would be an important key to success.complemented by additional non-financial services to be provided by other institutions (e. This requires demand promotion at the level of small-scale service providers on the one hand and an improved outreach of formal and semi-formal financial institutions with demand-oriented financial products on the other hand. (ii) could and should small-scale providers contribute to close the coverage gap in low-income areas and (iii) does the lack of access to finance constitute a major constraint for the activities of small-scale providers? The literature review has not provided clear answers to these questions and rather controversial hypothesis dominate the discussion. Controversial hypothesis still exists. WS&S sector institutions or NOGs). Conducive frame conditions. Because the POWS&S sector has not yet been identified as a potential market niche. however. Little information is available and investments in this sector are perceived as non-productive. the supply of the poor with financial services in WS&S lags behind in SSA. The financial sector focussing on the lower income market in SSA is still relatively young and in an early stage of development. especially in rural areas and informal settlements. outreach. is not offering financial products that meet the requirements of this clientele. the most important source of finance for HSSPs and PSSPs are still informal sources. (ii) little product diversification. and viability issues. The challenge is to replace the predominantly informal financing arrangements with more formalised financial services. However.g. The topic of this study boils down to the following central questions: (i) Could financial services in general play an important role in achieving the MDGs for water supply and sanitation. The vast majority of institutions in the region are in the start-up and/or consolidation phase yet and struggling with capacity. It is assumed that a multitude of investments could be pursued and hence MDG contribution enhanced if financial institutions and adopted financial products were available. the financial services industry.g. The experience reflected in literature mirror the intervention approaches for each sector but in most cases do not link the two DESK STUDY POWS&S FINAL REPORT (16-03-2007) vii . notably (i) low outreach. and (iii) low financial performance of the financial sector.

therefore. The aguateros from Latin America have shown that private small. Therefore. SEWA Bank in India has demonstrated in an impressive way that it is possible to provide medium-term finance in connection with a strong savings culture and an on-going relationship to the vulnerable poor population. They are currently tested by WSP and it is recommended to closely follow-up the progress. The tenor of available literature is that there is a huge potential. Financial services (e. 2. a savings track record and credit history. lack of financial services and funds for major repairs. OBA approaches. the ‘intelligent’ leverage of funds should be encouraged. SEWA Bank is a very established institution that has gained substantial experience in serving the vulnerable poor population. once both sectors take advantage of the opportunities.g. have a great potential to create the right incentives for successful implementation. The important role of community-run water and supply schemes is widely recognized but shortfalls of the past must be addressed. instead. An exemption is a series of publications by WSP-AF (World Bank/UNDP Water and Sanitation Programme – Africa) that has been active in linking the two sectors. recently tested by the Global Partnership on Output-Based Aid (GPOBA). Requirements are that technical and supervisory support for housing is clearly separated from financial services and that the tenure status or tenure security must be addressed at the same time if the potential demand for financial services shall develop. On the contrary. such as poor governance. a consensus has been found that the installation and upgrading of such systems must be leveraged with grant sources and to go along with intensive technical assistance and management training on community level. Their potential to mobilise local financial resources is large. Especially the experiences and lessons learned from using directed credits must not be replicated. Also.and sanitation-related equipment and facilities is widely recognised. The first example is the provision of home improvement loans to HSSPs. primarily because of quality and price reasons.and medium-sized water supply systems are a viable alternative for a solid water supply in areas where the public utilities fail to provide such service. traditional collateral and financial statements in place). It is a prerequisite that the regulatory framework recognises their operation as well as the fact that financial institutions provide financing to this clientele that may have outgrown the typical microfinance spectrum but at the same time cannot comply with the requirements of typical SME finance (e.areas.g. must be to support viable and strong institutions that could follow that path. The goal for a replication in SSA. The case also demonstrates that the sum of many smallscale operators can be more economical than the large-scale ‘economies’. DESK STUDY POWS&S FINAL REPORT (16-03-2007) viii . savings) can play an important role but must be designed carefully and must comply with the financial sector development approach. Especially at the household level the role of microfinance in the provision of financing for water. poor system maintenance. it is recommended that these hypothesis be a starting point for the two country studies and be looked into more closely when analysing the specific cases of Kenya and Uganda. It is important to outline that a ‘near legal’ tenure status may be sufficient and that traditional collateral is fully replaced by innovative financing technologies such as reputation. Promising approaches from worldwide experience have the potential for replication in SSA The desk study has analysed interesting approaches from worldwide experience that have the potential for replication in SSA. WSP is leading in testing new approaches. However. the water sector has still reservations regarding the role of PSSPs in water supply and sanitation. For the financing of community-run WS&S schemes.

At the same time. institutional. legal and regulatory frame conditions for the water sector would significantly contribute to such a linkage. DESK STUDY POWS&S FINAL REPORT (16-03-2007) ix . The water sector creates the right set of incentives for supporting entrepreneurial activity and the financial sector takes more responsibility in financing WS&S related investments in areas where a market demand develops on sound economic principles. Limited grant resources could then be targeted to the poor or leveraged with loans. Conducive political. Financial services for POWS&S will not require the creation of specific institutions or ‘windows’ but have to follow the widely accepted financial system development approach. The ‘marriage’ of the WS&S and the financial sector shows great opportunities for the creation of win-win situations The challenge to successfully link the two sectors depends on (i) a well-functioning financial sector and (ii) the ability of small-scale service providers to develop economically sound businesses. With the establishment of legal frame conditions that encourage market-led solutions and the promotion of demand-driven approaches.3. research and opportunity for exchange. an effective demand for financial services will develop. The creation of an exchange forum and a partnership between both sectors will allow to create a linkage that can address the opportunities and constraints from a multi-sectoral and more holistic perspective. especially at the level of HSSPs and PSSPs. the financial sector can increase its business volume directed to an economically active population that have never been reached before. Both sectors have not yet found together due to their mutual lack of information. The creation of win-win situations could have an interesting impact.

man and child on earth. In small towns as well as in rural areas.1 billion for basic sanitation (of which about 363 million persons live in SSA). These targets are to be achieved by 2015. Despite considerable progress in the nineties. A further segment in the water market are households as small self-service providers (HSSP) e. In adopting the Millennium Development Goals (MDG). According to UNICEF (65) the number of persons who must be reached in order to meet the MDG targets in 2015 is estimated to be 1. and have the entire management and financial responsibility for operation and maintenance. It is also central to the human rights and personal dignity of every woman. the countries of the world pledged to reduce by half the proportion of people without access to safe drinking water and basic sanitation.57 billion for water supply (of which about 359 million persons live in SSA) and 2.g. with the base year set at 1990. especially in Asia. they have only recently gained more acceptability as a viable alternative for developing and managing water supply and sanitation services in peri-urban areas. spring water) for drinking water supply or their own latrines for basic sanitation. child deaths and gender inequality. that have made water distribution or sanitation services their main source of income. There is a need for a better recognition of the present and potential role of small-scale private water service providers by governments and water authorities in national water and sanitation supply strategies as well as in the regulatory framework. hunger. responsibility for the establishment and operation of water supply systems is increasingly transferred to community-based small service providers (CSSP) whereby the communities are typically involved in the design and implementation of supply schemes.1 Background The availability of safe drinking water and hygienic sanitation facilities is a precondition for health and successfully fighting poverty. The situation is particularly critical in countries of SubSaharan Africa (SSA). contribute to the capital investments. Water supply and basic sanitation deficits are especially serious in rural areas and peri-urban settlements with high population increase. Although private small-scale service providers (PSSP) have long been an important part of the services infrastructure. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 1 . Households may also have established or may want to establish a connection to the water supply system provided by the urban utility company or the water user association. more than 1 billion people or 17% of the world population have no permanent access to hygienically safe drinking water and about 2. where a high proportion of the poor population still do not have access to drinking water and basic sanitation.6 billion people or 42% of the world population still lack basic sanitation facilities. through the development of their own private water sources (like wells. in many countries of SSA a large percentage of the urban poor get water and sanitation services directly from a range of small-scale private entrepreneurs. Due to shortfalls in public services. roof catchment.1 Introduction 1.

there exist many other bottlenecks on macro and meso level (institutional. microfinance institutions (MFI) have only little experience in medium and long-term financing of water and sanitation related infrastructure. investments in improving water supply infrastructure in developing countries have primarily been financed by the public sector. As the share of local financing is only less than 10% of the investment needs. the potential for increased supply of poor population groups with drinking water and basic sanitation so far has not been sufficiently exploited. In the report of the world panel on financing water infrastructure (70) the importance of the further development of local financial markets . the public sector in most developing countries is expected by far not to be able to provide the future financing requirements for the WS&S sector. There are arguments that the lack of access to appropriate financial services constitutes a major constraint for small-scale private service providers and households in order to broaden access to water supply and basic sanitation. The German Federal Ministry for Economic Cooperation and Development (BMZ) has commissioned GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit) GmbH to carry out this study on “Financial Services for the Promotion of Povertyoriented Water Supply and Sanitation in Sub-Saharan Africa”. Experience of the last years has shown that due to high financial and political risks the international private sector is likely to contribute only to a neglectable extent to the required investments in water supply and sanitation in poorer countries. especially in SSA. current investments must be increased by more than 30 billion USD to over 60 billion USD per year. In this context. respectively). As a consequence. in view of already existing budgetary problems. CSSP and HSSP engaged in water supply and sanitation services.The financing of infrastructure and services in the water supply and sanitation (WS&S) sector is one of the key challenges for achieving the MDGs. Demand-oriented financial products that are suitable for the financing needs of households and small-scale service providers are only available to a limited extent. political and regulatory framework).is highlighted for providing financing services to households.and especially the microfinance sector . Furthermore. an interdisciplinary concept is to be prepared aiming at the identification and strengthening of adequate financial services for the promotion of poverty-oriented water supply and sanitation through the local private sector relevant to the situation in countries of SSA. Especially in low-income countries or areas with low service coverage and ineffective public utilities small-scale service providers are of increasingly high importance. Step 2: Conducting case studies in two countries of SSA (these are Kenya and Uganda where the studies will be carried out in October/November 2006 and January/February 2007. a considerable potential is seen in closing the financing gap by mobilizing additional local financial resources. Currently. To reach the targeted objectives. Up to now. The study will be implemented in a process consisting of three steps or sub-studies: Step 1: Initial desk study with literature review and summary of information on the existing situation and experience in the provision of financial services to the water and sanitation sector. The main objective of the overall exercise is to support the efforts of developing countries and donor organizations in expanding the access to financial services to PSSP. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 2 . communities and small-scale service providers. However.

The demand of financial services for POWS&S: the type of activities (by different service providers) and the nature of finance involved. how this is financed and the resulting demand for financial services. 1.Step 3: Summary of results from steps 1 and 2 and preparation of implementation-oriented concepts and strategies for strengthening financial services in order to promote water supply and sanitation services through the local private sector in countries of SSA. the demand for financial services in poverty-oriented water supply and sanitation (POWS&S) is analysed. instruments/tools. carried out by GTZ on behalf of the World Bank. In Chapter 5. followed by an analysis of the supply side in Chapter 6. key constraints and need for improvement and support on the different levels of the financial system in the supply of financial services to PSSP. It will analyze the water and sanitation markets (demand) and the existing possibilities for investment financing (supply).2 Objectives of the Desk Study As a state-of-the-art study the desk study will focus on the review and assessment of the relevant literature and data. needs. the German Government is closely cooperating with the World Bank in the small-scale irrigation sector in SSA. • • • • • The literature review is mainly based on published information sources including evaluations. The supply of financial services for POWS&S: the current situation and trends. best practices. In the context of strengthening financial services in the water sector in general. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 3 . importance and opportunities of PSSP. experience. reviews and reports by major donor agencies involved in the relevant sectors that are accessible through the Internet. The following issues will be analyzed and assessed in the desk study: • The current situation. The promising approaches. major development trends. Chapter 2 summarizes the relevant literature. CSSP and HSSP in the provision of water supply and sanitation services. The respective study is underway. This report is divided into nine chapters. and promotional concepts which might already be available from specific interventions in the financing of water supply and sanitation (globally and in countries of SSA). Chapter 1 describes the background and objectives of the study and defines major terms used. highlight the constraints and potentials for sector development and suggest widely applicable strategic approaches and promising avenues for the future. CSSP and HSSP. constraints and potentials with regard to water supply and basic sanitation (also in view of the targets set in the MDGs). Chapter 3 gives a brief overview of the current situation and major development trends in POWS&S. Chapter 4 describes the role and importance of small-scale service providers and the type of activities pursued by them in the water and sanitation sector and their financing strategies. The role. General microfinance experience and best practices for their suitability and relevance for the design of viable and sustainable microfinance services in the WS&S sector.

sell pumps).3 Definitions For the purpose of this study the following definitions are being used (18). distribute. (41): Poverty-oriented water supply refers to households in rural or urban areas not served by the water network of the public or private water utility system.as well as sanitation-related services (e. including some tested hypotheses from the literature that could serve as general guidelines for the two case studies. storage and purification technologies (e. the latter are rare in African cities). 1. the following figure confines the segment POWS&S is covering: Figure 1: Providers of Water Supply and Sanitation (WS&S) Water Utilities Public Utilities Large Private Service Providers (in some countries) POWS&S small-scale service providers: PSSPs CSSPs HSSPs Source: Own compilation Private Small Service Providers (PSSP) are found mainly in urban and peri-urban areas for both water. The MSE sector refers mainly to the category of enterprises DESK STUDY POWS&S FINAL REPORT (16-03-2007) 4 . including those squatting on land subject to flooding and other marginal or illegal sites or people living beyond the network’s reach. These enterprises are involved in production and supply chains that produce. Chapter 8 points out general experience and best practices that are relevant for POWS&S. companies that produce or distribute spare parts.g. Poverty-oriented sanitation refers mainly to rural or urban on-site facilities (latrines or septic tanks) or urban small-bore sewerage systems (in contrast to Latin America. drill boreholes. latrine cleaners) where the utility company – for various reasons – is not operating. investment required. sell and install water access. water kiosk operators. This category of PSSP covers a large range of activities and varies in potential. To put Poverty-Oriented Water Supply and Sanitation (POWS&S) in the context. PSSPs that are relevant for this study belong for the most part to the micro and small enterprise (MSE) sector. water carters. Conclusions are drawn in Chapter 9.Chapter 7 outlines international experience in financing POWS&S. other PSSPs provide services to support the delivery of water and sanitation services. In addition to these.g. and legality of operations. especially lowincome users who cannot afford a connection.

MSEs have usually low skills and simple organizational structures. Community-Based Small Service Providers (CSSP) or Community-Based Organisations (CBOs) are found mainly in water supply schemes in rural areas. These include both point sources and piped schemes. Microfinance clients need a diverse range of financial instruments to run their businesses. In this context. savings. that the scope of the study must be widened. water tankers) and even more for water supply schemes. however. In the provision of POW&S. or other natural sources such as springs or rivers. Microfinance is the supply of loans. This has not been common in Africa.that operate in the informal sector. communities are involved in the design and implementation of new schemes.g. pensions. stabilize consumption. possibly a CBO-based system in rural areas or a system run by an urban utility. Financial services demanded by the poor include loans. and shield themselves against risks. but also at the level of service providers such as CSSPs and PSSPs.000 (e. For most CSSPs. with little access to organized markets. but is used in a financial systems perspective and considers different financial institutions or private actors providing financial services in different country contexts for various market segments (41). build assets. a water service provision status is mandatory for PSSPs that provide water services to more than 20 households. insurance. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 5 . and other basic financial services to poor and low-income people. This definition includes not only financial services at the end-consumer level. the amount of investment that can range up to USD 40. education and technical training. The provision of financial services for POWS&S is not limited to conventional microfinance institutions (MFI). (9) Originally. Small and Medium Enterprises (SMEs) represent ‘firms’ in the more formal sense with an important number of employees. and have complete management and financial responsibility for operation and maintenance. SMEs that operate in the water sector are often supervised and regulated by the water authority 2. as in most cases the utilities have avoided providing private connections in poor neighbourhoods or informal settlements. the subject of the study was ‘microfinance services for the promotion of POWS&S in SSA’. ‘MFI’ is defined as all financial institutions that focus on the lower-income market such as 2 In Kenya for example. the investment costs are at least partially covered by subsidies. They normally do not have access to bank loans because they need smaller credit amounts. A household may also require credit to pay the connection fees to gain access to an improved system. In most developing countries. Households as Small Self-Service Providers (HSSP) may use their own private water sources. cannot give collaterals and are employed in the informal sector. savings. The definition below defines the spectrum to be covered: Financial Services for POWS&S defined for the purpose of this study are financial services that enable the poor and low-income population to access WS&S. formal credit. consumer credit. Microenterprises with a maximum of 10 workers constitute the main market segment for water and sanitation related services. and money transfer services. It has been realized. and their own latrines for sanitation. contribute to the capital investments. either gravity-based or motorized.

new housing construction and land acquisition. small distribution networks) – relevant for POWS&S – that may be beyond the scope of traditional microfinance. PSSPs and CSSPs). Traditional SME finance is handled predominantly by commercial banks and mainly focuses on larger companies with a relatively solid bottom line (large PSSPs). In contrast. therefore. Rural finance refers to financial services offered and used by people of all income levels in rural areas (rural HSSPs. Donor Brief N°15 Microfinance means financial services for poor and low-income people. While traditional SME finance covers some of the higher-performing SMEs. rather than financial services (11) and are not subject of this study. and it encompasses the lower income market (HSSPs and small PSSPs). Traditional housing finance is not offering products adapted to low-income people and. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 6 . microfinance usually covers the lower end (small PSSPs). expansion. The two latter still are dominated by subsidies. including SME finance. NGO-MFIs and community-based financial organisations. basic infrastructure. house improvement loans for HSSPs can be a very important source of financing for investments in POWS&S. is not subject of this study. consisting of loans to low-income people for renovation.commercial banks. The intersections are outlined below: Figure 2: Financial Sector Market Segments relevant for POWS&S FINANCIAL SECTOR RURAL FINANCE Housing Microfinance MICROFINANCE SME Finance Housing Finance Source: Adapted from CGAP. Because the activities to be financed cover a wide range of technical solutions and different market segments. financial cooperatives. Housing microfinance is a relatively new field in the microfinance spectrum. the definition shall also cover larger investments (such as trucks. rural finance and housing microfinance.

transmission lines. treatment plants. usually high initial investment cost of basic infrastructure (e. Financial services. boreholes. pumping stations. extensions) as well as inefficiencies of the public utilities (e. as defined above.g. are an instrument for financing HSSPs. small-scale producers) insofar as water supply is regarded to be a human right and access to both water and sanitation are basic needs. This means that WS&S projects do not only follow mere commercial considerations. water. dams. Other relevant aspects regarding financing the POWS&S to be taken into account are the following: For centralized urban water supply and sanitation schemes. periurban and rural areas. rehabilitations.g. 1. Peri-Urban and Rural Areas Source: Own compilation The end-users of POWS&S are poor and low-income households in urban. environmental impacts). PSSPs and CSSPs that provide water and sanitation services to poor and low income households where the public utility fails to provide such services.g. networks) have to be made in the first place. high DESK STUDY POWS&S FINAL REPORT (16-03-2007) 7 . A more detailed description of financing sources and institutional set-up of the water sector is given in chapter 3. The lack of funding to finance these investments (new investments. public health. Figure 3 also lines out that financing the public utility is outside the scope of this study.4 Why is Financing POWS&S Different? For the purpose of this study it has to be highlighted that financing POWS&S is different from financing other sectors (such as trade.Figure 3 defines the areas that are relevant for this study and where financial services for POWS&S can play an important role (yellow and red). In addition. Water supply and sanitation (sewerage) are also natural monopolies and normally work best under economies of scale conditions. Figure 3: Financial Services in POWS&S Donor Funds URBAN and Peri-Urban Public Budget RURAL Financial Financial Services Financial Sector / Capital Market Public Utility Services t CBO‘s PSSP‘s HSSPs CBO’s HSSPs Donor Funds Financial Services Combination of both + contribution in kind End Users of POWS&S: Poor and Low-Income Households in Urban.and sanitation-related activities have high (positive or negative) externalities (e.

however. The most important features of regulation include service and water quality. These aspects have to be considered for any financing strategy. the (public) sector expenditure needs to be restructured in order to improve delivery and coverage. Therefore. This. this is often not the case due to the above mentioned constraints. In an ideal case. this subject will be further elaborated. POWS&S could be perfectly provided by public (or private) utilities. trade. commerce) that are usually financed by typical microfinance institutions. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 8 . In some instances. donor funds) and/or private investors. however.unaccounted for water. again. This is the main distinction to income-generating activities (e.g. the problem has less to do with the absence of financing than with issues of how to spend available funds more wisely and sustainably. In the course of this study. low collection efficiency. These investment cost have to be financed either by the utility itself (cash flow. In reality. Nevertheless. high staff cost. completely beyond their control. This means that even if financial resources are available. efficiency aspects of the providers and protection of the customer (due to the monopoly situation). Another important aspect of financing POWS&S is quality – a question that is not addressed in the MDGs. financial and environmental point of view. In order to be effective and sustainable from an economic. Investments into water and sanitation are generally perceived as consumptive. by governments (soft loans. small-scale service providers operate where traditional utilities fail to provide access with conditions that satisfy the need of the poor or other unserved segments of the population. low tariffs) usually are the major constraint in terms of coverage. small-scale providers often depend on the availability of some kind of basic infrastructure. is a matter of political willingness and of improving the governance of the water and sanitation sector (68). the water and sanitation sector must follow clearly defined sector principles and should be regulated by an independent body (regulator). loans). which is. but are not subject of this study – as pointed out in figure 2.

A wide range of literature is available regarding this DESK STUDY POWS&S FINAL REPORT (16-03-2007) 9 . the countries of the world pledged to reduce by half the proportion of people without access to safe drinking water and basic sanitation. states that financial flows need to at least double and that they will have to come from financial markets. rural and private sector development but also to integrated water resources management and the environment. Meeting the financing challenge for water and sanitation: The vast literature focuses on how the financial means for achieving the MDG can be mobilized. the need was recognized to ensure that the poor are not excluded. through the use of well-designed mechanisms that help effectively target the poor.g. 2002). from bi. as water becomes more scarce. e. The subject is well covered. But it also addressed the issue of how to use aid funding as a lever for other forms of finance (user and private sector) and how to better promote the inclusion of water and sanitation in Poverty Reduction Strategy (PRS) processes and in budgetary support. With the exception of SSA. e. This has been proven by a lot of research done in Africa. but progress in sanitation is stalled in many developing regions. Meeting the MDG water and sanitation target: In adopting the MDGs. Therefore. for example. In addition. The “Camdessus-Report” (70). Water and sanitation for the poor: One of the most severe problems characterizing the agenda for sector finance is the fact that the poor often do not benefit from increased coverage and the existing WS&S services. by the WHO/UNICEF Joint Monitoring Programme on Water Supply and Sanitation (JMP).2 Review of Available Literature and Summary of Main Topics There is a growing body of research around POWS&S and financing. due to affordability concerns. the world is well on its way to meeting the drinking water target by 2015. The results so far are mixed. from governments. and from public development aid.g. whose main objective is to be a catalyst for action for the EU overseas aid family to more vigorously meet the MDGs for water and sanitation and for water resource management investigated key questions related to the efficiency and effectiveness of EU aid flows to the water sector (24). The European Union Water Initiative (launched in Johannesburg in September. The JMP’s estimates are critical for calculating rates of progress towards national goals and for highlighting priorities. especially those that target the underserved. including not only those related to urban. The literature available can be roughly grouped into nine thematic areas: Water and sanitation sector strategies: The growing awareness among policymakers in both developing and industrialized nations that improving water supply and sanitation services are the key to achieving broader poverty reduction goals. quality declines and environmental and social concerns increase. preferably in the form of grants. Latin America and Asia. and as the threats posed by floods and droughts are exacerbated by climate change. As a consequence.and multilateral financial institutions. from water authorities themselves through tariffs. has been accompanied by calls for more concerted efforts and additional resources from all stakeholders. the strategies (72) draw on broad thematic and corporate policies. many developing countries face daunting water resource challenges as the needs not only for water supply but also for irrigation and hydroelectricity grow.

including direct subsidies for access or consumption to consumers. particularly in peri-urban. WSP (42) identified three sets of pro-poor subsidy mechanisms: (i) use of access subsidies. rural and remote regions and in countries with failed or crippling public utilities. PSSPs are often viewed as (i) “temporary” – although many have been in operation for over 20 years. They make an important contribution to the achievement of the MDGs. minimum subsidy concessions targeted to reach the poor. they have only recently gained acceptability as a viable alternative for developing and managing small-scale water supply and sanitation services (18) (35). water supply and sanitation services have not been perceived as attractive by financial institutions because often they were regarded as having no direct link with income generation and the required maturity of loans is beyond the usual scope of short-term financing. most investments in water and sanitation have emphasized water supply plants.aspect. septic tanks. simple plumbing. (ii) “rent-seekers” – that take advantage of unreliable public services so as to gouge their customers. Nevertheless. with support from the Public-Private Infrastructure Advisory Facility (PPIAF). Assistance to financial intermediaries supplying the household credit needs to implement such options is seen by any practitioners as a promising approach to improving water supply and sanitation within poor communities. and (iii) “poor quality” – providing a service that does not meet technical and water quality standards. and main construction infrastructure external to the household (67). and to leverage their capacity in order to expand service coverage will be of more benefit to consumers than continuing to ignore them. For the immediate and perhaps also the mid-term future the only affordable solutions for many of these households are simple on-site facilities such as water storage tanks. has also been increasingly engaged in the design of private sector transactions because of their potential to impact. on the lives of the poor (48) Independent water and sanitation providers: PSSPs have long been an important part of water and sanitation service delivery. microfinance has focused on other sectors. So far. As an example. WSP. and support to pro-poor reforms. options ranging in cost from USD 70-500 per household. these installations have often created little beneficial impact on the lives of poor urban and peri-urban residents. As such. such as trade. it has received more attention within the water sector in recent years. positively or negatively. small-scale producers or micro entrepreneurs. Traditionally. efficiency and affordability. Household credit for water and sanitation: In developing countries. As the topic of financing water supply and services and sanitation has moved up the political agenda. Financial services for water and sanitation: Financial services for the poor and lowincome population has proven to be an effective tool for reducing poverty and helping poor people to improve their lives. (27) There is a large consensus that the potential to scale with local financing mechanisms for water supply and sanitation is not yet realised. These credits can also be channelled in form of a flexible house DESK STUDY POWS&S FINAL REPORT (16-03-2007) 10 . They recognize that many communities would go unserved if not by PSSPs and that working with these providers to establish measures to improve their quality. and small-bore sewers. (ii) improving the cross-subsidies and (iii) use of incentive-linked subsidies within the output-based aid (OBA) framework. pit latrines. wastewater treatment plants. Many practitioners now start to acknowledge the potential role of PSSPs in developing and managing private water supply and sanitation systems and in advancing local private sector development.

DESK STUDY POWS&S FINAL REPORT (16-03-2007) 11 . Rural finance for water supply and sanitation: The majority of the world’s poor live in rural areas. innovative systems that made water supply and sanitation more affordable and more technically appropriate for poor and crowded settlements. SEWA Bank in India) is documented for Asian countries whereas in Africa this approach still seems to be underdeveloped. Concerning water services in rural areas. technicians normally prefer to design and apply conventional technologies that are more familiar and safer for them and hence low-cost solutions are not aimed at in the first place. Examples from Latin America (e.g.g. Potential demand for finance falls into two main categories (41): (i) to meet the community share in capital contribution for new investments and (ii) to meet the cost of repairs or of rehabilitation or augmentation of services. and have complete management and financial responsibility for operation and maintenance. neighbourhoods were able to choose from a range of more simple.g. conventional high-tech systems. It is clear that national institutions and donors will not be successful in achieving their overall poverty reduction objective unless they address rural poverty and help to create better conditions in rural areas. at first a fair degree of outreach of rural financial intermediaries is necessary as a base condition. contribute to the capital investment (in cash. for interventions in this field up to now no interdisciplinary concepts are available through which the access to financial services of households or small-scale private providers could be promoted. However. However. And even where outreach exists. The Brazilian experience has also caught the attention of governments in other parts of the world and the challenge is to tailor this approach to conditions that may be very different from those in Brazil (73). However. in many countries governments have moved to community-based approaches and hence thousands of small. communities are involved in the design and implementation of new schemes. Brazil) show that cost-effective approaches combined with strong community participation can provide millions of people with piped water supply and sanitation at lower cost and can also be an integral part of local area or urban development. the potential of financing rural infrastructure through rural financial intermediaries is not yet fully realized and the topic is not well covered by the relevant donors. the lack of cash-flow history for a new CSSP makes it difficult to assess the risks of such lending. A range of related experience (e. All in all. kind or labour). for farming) and less on infrastructure. it has primarily focussed on productive credits (e. Rural finance is a necessary ingredient for rural economic growth. This can help widen the coverage of water and sanitation services in peri-urban areas and in small towns. Low cost technologies: In urban water supply and sanitation. Normally. However. the application of technologies that require lower investment and operational cost makes it more likely that financial resources will be efficiently used (80).to medium-sized water supply systems are operated by CSSPs. Instead of expensive.improvement loan.

To be effective. food. approaches. by and large. For instance. for many of the targets. and sub-national levels. inadequate financing. New York (59 ). technologies and financing mechanisms must be highly context specific. General Comment 15 is the first to focus explicitly on the right to water and the responsibilities that governments have in delivering clean water and adequate sanitation services to all. reliable water supply and adequate sanitation facilities. and affordable water for personal and domestic uses” (59). healthy people are better able to absorb the nutrients in food than those suffering from water and excreta-related diseases and in terms of the education goal. expanding access to domestic water supply and sanitation services. gender and health goals. In its General Comment 15. the scale of the problem is far greater for sanitation than for water supply. Strategies for water and sanitation need to be tailored to specific circumstances at the regional. institutional constraints. the low pay and status associated with work in the sanitation field as opposed to work in other sectors. as called for in target 10. national. and nearly universal cultural taboos surrounding discussion of human excreta. low effective demand among the unserved. the Committee on Economic. also shared by the authors of this study. and in urban and rural contexts. 3 DESK STUDY POWS&S FINAL REPORT (16-03-2007) 12 . costs. life. Social.3 Current Situation and Major Development Trends in Poverty-Oriented Water Supply and Sanitation (POWS&S) 3. reducing the incidence of water and excreta-borne disease among children improves school attendance. Success in bringing water and sanitation to poor communities – often living in very difficult circumstances – is an even bigger challenge and depends not only on technical ingenuity and financial resources. and also has a significant impact on other goals. Meeting target 10 is particularly vital in terms of the poverty. but also requires proper targeting to the poor and active involvement of the communities.1 General Situation in View of the MDGs 3 Expanding access to water and sanitation is a moral and ethical imperative rooted in the cultural and religious traditions of societies around the world and enshrined in international human rights instruments. acceptable. ‘Health. and dignity.6 billion) lack access to sanitation than lack access to water supply (1. it is difficult to imagine how significant progress can be made without first ensuring that households have safe. physically accessible. While the right to water has been implicit in the rights to health. more than twice as much people (2. Dignity and Development: What Will it Take. Compared to water supply. and Cultural Rights of the United Nations Economic and Social Council states that “the human right to water entitles everyone to sufficient. safe. In addition.1 billion) (59). The data of this report are the most reliable ones and its general approach and opinions are. meeting the sanitation target is far more difficult due to the lack of political willingness and commitment. will bring the international community closer to meeting a number of other MDGs. housing. On the other hand. interventions. Action plans rooted in generalities tend to be less This chapter is primarily based on the following document: UN 2005. in fact. Report of the Task Force on Water and Sanitation’.

In terms of access to sanitation. To meet the MDGs for water and sanitation would require the mobilization of substantial additional financial resources. which is the most reliable source of global water supply and sanitation information. The number of persons who must be reached in order to meet the MDG targets in 2015 are estimated to be 1. much of this for sanitation needs. another 43 are considered to be on track. Other estimates (e. The above data. the countries where access is poor and progress toward the goal is challenging include 19 in SSA (59).44 billion) lived in SSA. resources.5 billion people live in just two countries. The above-mentioned analyses also indicate that 25 countries have already achieved the MDG target for water.57 billion for water supply (of which about 359 million persons live in SSA) and 2. while 17% (0. and 26 % (0. This report. 25 countries are either lagging behind or even slipping in their progress toward the targets. most of those without access to sanitation lived in Asia (73% or 1. are aggregated and analyzed at the national level and hence can mask large swaths of people. And according to the European Union Water Initiative – EUWI (24) an additional USD 9 to 30 billion per year on top of current commitments is required to meet the water and sanitation sector MDGs. who lack adequate water supply and sanitation services and suffer from water and excreta-borne disease in an otherwise fairly well served country. however. among these 13 are from SSA. indicates that SSA is the region where coverage is lowest for both water supply and sanitation. The realistic assumption of the EUWI finance DESK STUDY POWS&S FINAL REPORT (16-03-2007) 13 . i. In 2002. such as Sierra Leone and Burkina Faso. Water Aid.1 billion for basic sanitation (of which about 363 million persons live in SSA).67 billion). as much depends upon the technologies adopted and country-specific preferences and conditions. insufficient data are available and it is likely that many such states would be included in this list.effective than those that take advantage of local opportunities and address local constraints.7 billion. Taking an average. for several of the poorest countries in SSA. In terms of access to water. The UN Task Force on Water and Sanitation (59) estimates that global financing cost range from USD 51 billion to USD 102 billion for water supply. The Human Development Report 2003 argues that these countries should receive the lion’s share of the world’s focus. typically in rural areas and urban slums.1 billion people without access to water supply lived in Asia (61% or 0. China and India. and assistance. would yield USD 68 billion for water supply and USD 33 billion for sanitation. The 2004 WHO/UNICEF Joint Monitoring Programme report (65) describes regional coverage for water supply and sanitation in the baseline year of 1990 and in 2002. There is a wide range of estimates about how much finance is required to meet the future needs of the water and sanitation sector. a total of USD 101 billion and an annual average of USD 6.g. The countries with the highest incidence of diarrhoea are also located in SSA (and Asia). there is no absolute cost figure. However.9 billion). the countries where access is poor and progress toward the goal is challenging include 13 in SSA (59). But it is important to stress that.29 billion) lived in SSA. most of the 1. however. In absolute numbers. Nearly 1. 68) come up with much higher figures: additional USD 8 billion for water supply and USD 17 billion for sanitation annually.e. and from USD 24 billion to USD 42 billion for sanitation for the period 2001-2015. which is the halfway point for the 2015 targets.

DESK STUDY POWS&S FINAL REPORT (16-03-2007) 14 . However. unserved households tend to be poor and have limited voice in priority setting and resource allocation decisions. This report focuses on the aspect of mobilizing local financial resources as a strategy and contribution to meet the MDGs and the role that small-scale service provides could play in this context. One important aspect is that this sector generally requires huge and long-term investments. it is clear that financial services alone cannot solve the problem due to the specific characteristics of the water and sanitation sector. Across all six community types. broadly six typology categories of unserved or underserved areas can be defined as shown in Table 1. But potential niches for financial services do exist and they could be broadened and better explored. EUWI also identifies the constraints that explain why these resources may not be attracted to the water sector as greatly as they could. 3. but that the water sector in developing countries fails to attract and retain them. the Initiative instead proposes to use existing aid commitments more effectively by targeting them toward alleviating the constraints and. As a consequence. thus. EUWI identifies the following financing sources and mechanisms for the water and sanitation sector: User finance (via tariffs) Environmental charges Grants Loans Mixed credits and export funds Output-based aid Microfinance Bond markets Equity markets Direct private investment Public private partnerships and private finance initiatives Voluntary finance schemes Sector wide approaches and sectoral funds Nevertheless. But perhaps the most serious obstacle to the large-scale application of microfinance approaches to infrastructure is the ability of most potential clients to repay loans of the necessary size. In general. One of the limitations of using a microfinance approach for infrastructure includes the small-scale and narrow reach of most MFIs.strategy is that adequate sources of non-aid finance do exist to help meet the water sector MDGs. rather than lobbying for simply increasing the water sector EU aid.2 Typology in Water Supply As water supply coverage is a function of both demand and supply considerations. make these other resources of finance available for investment.

boreholes with pumps) 3 Medium density (small town) Supply from private household facilities. surface water sources • Limited public and private investment available • Policy vacuum 4 Medium density (small town) Supply from dysfunctional public networks • Inadequate resources and capacity for O&M of public system • Policy vacuum 6 High density (urban or peri-urban) Supply from shared public facilities • High proportion of rented dwellings • Challenges of collective action • Promotion of PSSP • Partnership between CBO + provider • Targeted subsidies and credit programmes Source: (35) This typology clearly shows that there is a wide range of problems involved when analysing the reasons for low coverage.Table 1: Typology of Unserved or Underserved Communities for Water Supply Community type 1 Dispersed rural Existing service Little or no service: supply from vendors and surface water sources Supply side • Limited public investment • Perception of poverty • High per capita cost • Limited investment in O&M and expansion • Perception of poverty Demand side • Poverty • Limited access to financial services • Challenge of collective action • Low demand (availability of alternatives) • Poverty • Limited access to financial services • Challenge of collective action for O&M • Low demand (availability of alternatives • Limited access to financial services • Demand captured by private household investment • Limited potential for use of voice • Unwillingness to pay higher tariffs for low-quality service • Higher-income households may exit system 5 High density (urban or peri-urban) Little or no improved infrastructure.g. vendors. policy issues DESK STUDY POWS&S FINAL REPORT (16-03-2007) 15 . In order to increase coverage. supply from vendors • Growth (newly incorporated areas) • Investment restrictions in unregularised areas • High per capita cost • Perception of poverty • Constraining standards • High per capita cost • Perception of poverty • Constraining standards • High proportion of rented dwellings • Insecure tenure • Challenges of collective action Policy responses and financing strategies • Capacity building • Combined agricultural and water projects • Partnerships with CBOs • Targeted subsidies • Capacity building • Combined agricultural and water projects • Partnerships with CBOs • Targeted subsidies • Programmes to strengthen supply chains • Policy development • Promotion of PSSPs • Management innovations (franchising) • Targeted subsidies and credit programmes • Capacity building for O&M • Policy development • Promotion of PSSP • Management innovations (franchising) • Targeted subsidies and credit programmes • Urban development policy reform • Promotion of PSSP • Partnership with CBO • Targeted subsidies and credit programmes 2 Dispersed rural Inadequate supply from existing facilities (e.

organized and financed by users. and the solutions have to be tailored to the specific situation. however. innovative low cost technologies are of utmost importance.3 Typology in Sanitation When applying the typology presented in Table 2 to the case of sanitation services. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 16 . the involvement of neighbourhood or community and even public levels is important. Subsidies may be justified but have to be clearly targeted to the poor. The key elements of the current discussion on sanitation are summarized in Table 2. whereas water supply commands considerable attention in the public policy and planning sphere. For large congested settlements. for instance.g. by social marketing) and influencing decisions made at the household level. despite the fact that sanitation represents a service with greater public-good characteristics than does water supply. based on poverty mapping). In poor rural areas.g. technology levels have to be designed according to the affordability of the beneficiaries.must be addressed in the first place. two interrelated observations can be made. Subsidies are often justified but have to be clearly targeted to the poor (e. especially when wastewater treatment is involved. With regard to limited affordability of the poor. 3. This view of sanitation services also leads to the observation that the key leverage points in expanding sanitation coverage should involve generating demand (e. First. The same applies to investment and financing strategies. in reality sanitation is often regarded as a private household matter.

new construction) • Innovative low cost technologies • Social marketing and education • Partnerships with CBO • Regulatory reform (standards. new construction) • Innovative low cost technologies 2 Dispersed rural Service from dysfunctional private facilities. new construction) • Innovative low cost technologies • Land tenure reform • Social marketing and education • Partnerships with CBO • Regulatory reform (standards. new construction) • Innovative low cost technologies • Land tenure reform • Social marketing and education • Partnerships with CBO • Regulatory reform (standards. open defecation 4 Medium density (small town) Service from dysfunctional private facilities 5 High density (urban or peri-urban) Little or no improved infrastructure: open defecation or use of facilities in other neighbourhoods 6 High density (urban or peri-urban) Service from shared public facilities • No institutional responsibility • Growth • Investment restrictions in unregularized areas • High per capita cost • Perception of poverty • Constraining standards • High per capita cost • Perception of poverty • Constraining standards • Limited funding and incentives for O&M • Limited access to financial services • Limited demand • Demand captured by private household investment • Limited access to financial services • Limited demand • Demand captured by private household investment • High proportion of rented dwellings • Insecure tenure • Limited access to financial services • Poverty • High proportion of rented dwellings • Limited access to financial services • Poverty • Challenges of collective action Source: (35) DESK STUDY POWS&S FINAL REPORT (16-03-2007) 17 . such as latrines 3 Medium density (small town) Service from dysfunctional public facilities.Table 2: Typology of Unserved or Underserved Communities for Sanitation (35) Community type 1 Dispersed rural Existing service Little or no infrastructure: open defecation Supply side • No institutional responsibility • Low priority and limited public investment • No institutional responsibility • Limited construction support • Limited private sector skills for O&M • No institutional responsibility • Limited resources available for O&M • Constraining standards for service improvement • No institutional responsibility • Limited construction support Demand side • Poverty • Limited access to financial services • Low demand • Poverty • Limited access to financial services • Low demand Policy responses and financing strategies • Social marketing and education • Partnerships with CBO • Targeted subsidies and credit programmes • Social marketing and education • Partnerships with CBO • Targeted subsidies and credit programmes • Social marketing and education • Partnerships with CBO • Regulatory reform (standards.

Simplified sewerage is an example of new sewer design that give users the same. neighbourhoods. It is also important to recognize that the provision of water and sanitation is an ongoing business that has to be understood and managed as such if it is to achieve and sustain its goals. Indeed. allowing households. One of the major problems in infrastructure design in developing countries is the adoption of technical design standards from developed countries without adaptation to local circumstances and affordability. Extending services to a dispersal rural settlement or dense urban community on marginal land. On the other hand. Technical designs should also reflect the new emphasis on local decision-making.e. for example. Although the amounts of water required for increasing access to safe drinking water supply are relatively minor compared to the amounts required for agricultural uses. But there are also promising initiatives. the consequences often include excessive loss of water through leakages and waste. And achieving environmentally acceptable sanitation solutions is a major technical challenge. This would certainly bring improved services to more households in the short term. Whereas inexpensive solutions are available in some cases (e. are equally important to explain the persistent lack of availability of WS&S in developing countries as are technical challenges. The adoption and replication of such best practices solutions is highly recommended wherever it is technically feasible. For example. the provision of safe and reliable services is often more technically challenging in poor communities than in rich ones. Climatic factors also shape a country’s ability to provide and maintain water supply and sanitation services for its citizens. as well as loss of revenues needed to run the system effectively. or at least acceptable. may involve serious design problems for water and sanitation engineers. many developing countries in the tropics suffer alternately from floods that damage infrastructure and droughts during which water sources run dry. rainwater harvesting). innovation and flexibility with technical standards will allow countries to expand access to sanitation more rapidly and cost-effectively. Brazil has made significant advances in adapting sewer design standards. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 18 . institutions and the overall frame conditions. in others costly infrastructure is required in order to control droughts and store water for the dry periods. But the role of technical considerations in expanding services should not be neglected. since increasing access to sanitation under conditions of water stress means that there will be more and more pollutants being disposed into less and less water. there are often situations in which the physical availability of water resources on a sustainable basis limits efforts to increase coverage (in so-called water stressed countries). and communities to choose from a range of technological options based on their preferences and willingness to pay – rather than requiring a uniform standard across an entire city or region. particularly in urban and peri-urban areas and some approaches may lead to environmental pollution. i.4 Technical Challenges One of the important lessons of the past several decades of international collaboration for expanding water supply and sanitation services has been that nontechnical issues. such as financing.3. Where a water supply system is poorly planned or poorly managed. standards of service at a fraction of the cost of using conventional sewerage design standards. For example.g.

e. with an independent source of funding. and often outside the formal sector. such as decentralization or elections. or a financial failure.g. Good regulation is critical where private sector participation is involved. i. and social capital can help pave the way for deeper. a severe drop in service levels. can also be opportunities. the absence of political leadership and government commitment to allocating sufficient national resources to the sector. and that the interests of both users and service providers are protected. At issue is the best way to make choices to meet specific local needs. priority setting. change is often triggered by a crisis. Political shifts. and investment will continue to favour those with political connections – which almost never includes the poor. thus. as well as enactment of civil service legislation to improve incentives for good performance are two examples of the type of reforms that can help redirect planning and decision-making toward communities with relatively weak political voice. numerous. in the water and sanitation sector. but also in public sector systems and particularly so in decentralized administrations (e.5 Politics. and to undertaking the reforms necessary to improve performance and attract investment. Broad policy and institutional reform is also essential for reducing political interference in the day-to-day operations of water and sanitation agencies in many countries. A key principle is to ensure that consumers are not made to pay for the inefficiencies of service providers.As a conclusion. that build capacity. Joint efforts of agencies to help to make financial and personnel management processes more transparent and less vulnerable to corruption. It is. Absence of a sound regulatory system and a strong regulator are generally held to be constraints to good performance by public as well as private sector operators. As long as water supply and sanitation service providers have to rely on the state for budgetary transfers. and as long as agency staff is vulnerable to interference by officials in decisions related to their careers. subsequent reforms. pricing. The authorities tend to be reluctant. an outbreak of disease. Such confidence building measures. The primary responsibility of the regulator should be to supervise operators. Regulatory Framework and Reforms One of the chief constraints to expanding water supply and sanitation coverage is the lack of political will. Regulating the quality of small-scale service providers is particularly difficult because they are diverse. many technological options are already available to expand coverage of water supply and sanitation in a variety of circumstances. such as drought. The overall aim of regulation is to ensure that such sector goals as MDG target 10 are reached. municipalities). The regulator should have a clearly defined mandate and authority. Two types of regulation are necessary: service quality regulation (quality and efficiency of service providers) and economic regulation (tariff-setting on the basis of agreed upon objective criteria). Timing is one of the basic challenges of the sector – how to make progress within one political cycle after decades of neglect or how to interest politicians in measures that are not likely to yield visible results during their term of office. hoping these providers will disappear soon and the official attitude DESK STUDY POWS&S FINAL REPORT (16-03-2007) 19 . both public and private. important to look for historic opportunities to make large strides and also to pursue buy-in around a few simple first steps that can yield short-term benefits. such as the possibility of privatization or donor pressure. trust. confidence is established to attract private investors in financing and service delivery. 3. It is also worth noting that.

such investments have not been followed by the development of community. Manual cleaners usually find a place to dump or bury waste nearby and suction trucks can transport waste beyond the edge of the city. and the environment. giving financing facilities to those who want to expand their activities. or emptied and the waste buried on the same lot. And more disturbingly. In general.ranges from hostility to neglect. lakes. Public health concerns are. e. thus. reuse or recycling of sewage effluents – can help create opportunities for progress where the entire challenge seems overwhelming and funds are limited. on the conditions that they would fulfil licensing or operating quality requirements. But in denser areas. As a result. 3. septic tank and feeder network effluents regularly flow into open streams and drainage channels.g. Breaking the full set of sanitation objectives into manageable steps – from the safe collection. Drinking water quality must also be safeguarded because it is essential for human health. since there are few authorized dumps. and unpleasant living conditions. For SSA. this seems of little concern to neither urban residents nor the authorities. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 20 . In most cases. Such an approach would treat small-scale providers as a valid long-term solution to be considered in full and to be taken into account when planning expansion of access to water and sanitation (5). that households are satisfied with the on-site sanitation facilities and find them affordable even at the lowest level of income. Policies of active encouragement are rare. Thus.or publiclevel sanitation infrastructure. most aspects of price and quality control are left to the market forces which can be harmful for customers’ safety and affordability. such as feeder and trunk sewerage systems. However. rivers. generally addressed in the immediate neighbourhoods. Pollution prevention has to be prioritised. Even in many cities of Latin America where relatively complete feeder and trunk sewerage systems have been constructed. because it is normally more cost-effective than the restoration of polluted waters. environmental damage. often affecting the poor who live downstream. only about one third of them have sewage treatment plants. they can be closed and a new one dug. as in many towns and recently settled peri-urban areas. This could be done by e. the disposal of septic waste represents a serious environmental problem in all ten cities in SSA studied by Collignon and Vézina.6 Environmental Aspects Many cities in the developing world have achieved a minimal level of sanitation service at the household level for millions of people. One solution might be a gradual tightening in minimum service standards. on-site reburial becomes difficult and another disposal site must be found. and disposal or reuse of human excreta to the treatment and disposal.g. storage. but environmental damage from untreated waste continues unabated. to convey the wastewater away from the community for treatment and safe disposal. These facilities are probably the most appropriate solution for urban areas where there are fewer than 300 persons per hectare. When the pits fill up. with some incentives placed on the providers to enter the formal sector and upgrade their service in the long run. the untreated sludge ends up dumped in ravines and low-lying areas. wetlands and associated coastal zones. however. creating public health risks. This means that water governance arrangements should protect ecosystems and preserve or restore the ecological integrity of groundwater. Collignon and Vézina (18) point out.

The need for investment subsidies is also widely recognized in states or areas devastated by wars or catastrophes or in states that have a lot of catching up to do in investment (e. should be covered by tariffs. transition from public systems to pro-poor PSP arrangements which are often accompanied by large additional investments in bulk facilities). The right choice of affordable technology. However. it is also state of the art that any subsidies must be designed in a way that does not disturb market conditions (“smart subsidies”).7 The Role of Subsidies in Water Supply and Sanitation Improving water supply and sanitation is an important strategy to reduce poverty and to positively influence the health situation of the poor. One form of indirect subsidies could be average tariffs that are below average cost (including depreciation of assets) but this concept has proven not to be viable in the long run as it leads to the financial deterioration of any provider and hence its growing financial dependency from political decision makers. hygiene promotion. eventually some parts of asset renewal. and CSSPs. However. and is often paid by those least able to bear them (23). This applies especially to financial services for PSSPs. However. The burden of inappropriate cost recovery can be deadly. it is often argued throughout literature that the poor cannot afford to pay for access to adequate water sources and. even less. at least cost for operation and maintenance and. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 21 . the concept of applying cost recovering tariffs – at least in urban areas – has been generally acknowledged by governments and donors all over the world. however. However.g. From the authors’ experience. Therefore.3. in remote rural or in peri-urban areas where circumstances do not allow for commercial financing. In rural areas. The general sector discussion which is reflected in many publications. these subsidies should be targeted to the poor and should be designed in a way as to not disturb market mechanisms or endanger sustainability of the water and sanitation installations. for the time being some forms of subsidies seem to be necessary in order to reach marginal population strata. One of the key principles should be that financial services of must pay for themselves and therefore any form of justifiable subsidies in water supply and sanitation must be applied elsewhere. leveraging of loans by grants can be justified in order to increase access of the poor. Investment subsidies are justified as well for investments with high externalities (e. does not exclude the concept of direct subsidies under specific conditions. wastewater treatment in an ecologically fragile environment) or as a start-up in transition phases (e. not only for financial. former Soviet republics).g. Nevertheless. the authors are of the opinion that in many countries the application of cross-subsidizing tariff mechanisms (regional and/or between consumer groups) in order to increase revenues and at the same time to cater for the poor is still underexplored – and more efficiency in revenue collection could often do the rest. to adequate sanitation solutions. but also for ecological reasons (demand management). efficient provider management. community participation and user information plays a much more decisive role when talking about cost and the ability and willingness of customers to pay for water and sanitation services. this hypothesis has not been found to be totally true. For instance.g. HSSPs.

However. they have difficulties in providing coverage and access to the fast growing population as low tariffs do not allow for expansion of the existing WS&S systems. limited affordability and/or lack of awareness). especially in rural areas. demand management policies are not yet sufficiently in-built in tariff structures and the potential of cross-subsidizing is not fully explored. The lack of appropriate regulation often adds to the problem. water supply is often somehow guaranteed but sanitation tends to be neglected or left to the households that normally do not care (because of lack of ownership. This situation is reflected in policy and in many countries sanitation is gaining higher priority in the development and investment plans. Subsidies in WS&S investments are often applied without proper targeting mechanisms.8 Development Trends The literature reviewed does not indicate clear development trends with regard to POWS&S. illegal business). however. In principle.3. for instance. In many peri-urban areas. synergies could be created between public utility companies and PSSPs. It is in that niche where PSSPs grow. Tariff levels are by and large too low to allow for asset renewal/loan repayment and/or extension. high prices. sanitation is becoming a burning problem with regard to public health. this does not happen because of the bad image of these providers (bad service and water quality. This leads to the fact that loans compete with grants even if affordability is given. In many countries of SSA. In many countries. In practice. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 22 . the following general observations can be made: The role of PSSPs in SSA becomes more and more important as in many countries the public utility companies are still weak.

2. Instead. quite restrictive water law and regulation provisions were not successful. the aguateros did not finance their investments by loans (unfortunately. either by delivering it to households by cart or truck. where the water utility has not yet extended the piped network. The precarious nature of the installations and. The aguateros were actively involved in the public debates on water sector reforms. run by a (monopolistic) city-wide operator. In Latin America and the Caribbean. Half the examples cited were in cities or towns and the remainder in rural areas. their legal insecurity in the medium term. They even presented their own draft for a new water law and thus initiated quite controversial discussions. Investment cost. these providers seem to focus on “gap-filling” activities with many tankers operating in various cities. new water law and regulation that took place in the late nineties. literature from 44 countries with small-scale service providers was identified and reviewed by Kariuki and Schwartz (77). Across all regions. Paraguay is an interesting and much debated example for organizing water supply in peri-urban areas. Although potential clients for long-term loan financing. small town and rural. mostly “point source” systems or vendors. the so-called “aguateros” (55). These providers are especially active at the edge of the city where new settlements are being created.4 Role and Importance of Small-Scale Service Providers and Type of Activities in POWS&S 4. The aguateros’ developments are based on a total recovery of investment cost before three years (56) which implies quite a high financial burden for the customers.1 Water Supply In the drinking water sector. Haiti. is subsidized to a high DESK STUDY POWS&S FINAL REPORT (16-03-2007) 23 . In many African cities (18). their attempts in lobbying against the new. In South Asia. had been documented. In Latin America. coexists with a wide variety of small-scale providers who resell this piped water. the literature is silent about the reasons). the primary network.g. For details. including those squatting on land subject to flooding or other marginal sites. mainly peri-urban. it was the customers who had to pay a relatively high connection fee which was the aguatero’s principal income for amortizing the investment. In rural areas. Tens of thousands of (informal) providers. Bangladesh). Unfortunately. (56). but corresponds closely to the level of coverage and quality of service in a given country. especially in the outskirts of Asunción and Ciudad del Este where the urban public water utility does not provide any service and the relatively abundant presence of underground water has fostered the emergence of a special type of operators. water supply schemes are normally operated and maintained by community-based organizations (CBOs) that are obliged to pay tariffs in order to cover the related running cost. low-income countries had a larger presence of small-scale service providers. and where new. or by selling it from fixed locations such as standpipes or cisterns. where urban coverage tends to be high. Burkina Faso. particularly point sources and mobile distributors (e. these providers more frequently take the form of piped water systems. means that the investment must be paid off rapidly. low-income arrivals from rural areas are settling and possibly even trying to raise a few crops. But the small-scale providers often also cater to inner city residents who cannot afford a connection. above all. see chapter 7. The nature of these providers varies regionally. however.

Besides CBOs. In remote rural areas. this fact constitutes a real problem in accumulating funds for major repair works or replacements. and/or donor organizations. NGOs. One constraint. therefore solutions are often sought on an ad-hoc basis and down time can last for weeks – which has adverse impacts on hygiene and health. For the communities. however. this is not always the case as different donors have the tendency to finance different pump types (e. but so far none of them has really proved to lead to sustainable solutions. as banks are not available.degree by governments. service providers such as mobile area mechanics or small mechanical workshops who deal with repair works and spare part supply are other possible clients for financial services in rural areas. Burkina Faso).g. In order to meet these challenges. is that their business often tends to be not really viable from an economic perspective as business volume in low-density regions is little because regular spare part demand is often limited due to robust pump technologies (some spare parts are not fast turning items). In case of system breakdowns. cash-flow history is often lacking and savings cannot be secured. According to the source and technology parameters as well as organizational aspects. The Gambia. Unfortunately. various efforts to regroup the CBOs in associations (often assisted by government or NGOs) have been developed. Pump types should be standardized in rural areas in order to make stockkeeping and hence turnover of working capital feasible. the following classification system can be derived for urban as well as for rural water supply (77): DESK STUDY POWS&S FINAL REPORT (16-03-2007) 24 .

lessee. water quality testing. Contract with utility. Contract with utility. selfhelp group. rights of way (for own infrastructure and/or for network). performance incentives. tanker cleanliness. customer agreements. Tankers. business license. NA. or individual households and institutions. Organization Regulatory Issues B) Point Sources System Kiosk or stand post connected to the utility network. tanker association. title deeds. buying water in bulk at a special tariff. System Organization Tankers or truckers obtain water in bulk from the utility and deliver it directly to the customer – including public utility water storage tanks. institutions. informal sector. utility contract. by technology Dependant A) Piped Networks System Operator buys water in bulk from utility and develops distribution sub-networks connected directly to households and other users. lessee. Private company or individual. Sole proprietor. Sole proprietor. truckers or carters obtain water from a private well for distribution to households. performance incentives. customer tariffs. water quality. Independent Operator develops own water sources (wells or boreholes) and connects network to households and other users. CSSPs or neighbourhood association (NA). micro-enterprise. underground or aboveground storage tank) installed privately and operated on a for-profit basis. but installed publicly and handed over to a CSSP or NA for operation. business license. C) Mobile Distributors Regulatory issues Groundwater abstraction permit. Sole proprietor. water quality testing. bulk rates. water user association or CSSP. business licenses. customer tariff. Source: (77) DESK STUDY POWS&S FINAL REPORT (16-03-2007) 25 . communal cisterns. Regulatory issues Transport license. private land and housing developer. public utility water storage tanks or communal cisterns. informal sector. license/permit. b) Same systems. abstraction permit. Groundwater abstraction permits. cooperative. business license. Organization Individual. micro-enterprise. Transport license. a) Water point linked to own source (well or borehole. Water may be purchased from a tanker. tanker association. bulk rate. bulk rates. customer tariffs. CSSP.Table 3: Categorizing Small-Scale Service Providers in Water Supply Features. license. resale permits/licenses. tanker cleanliness.

g. One promising example. Burkina Faso has adopted an interesting approach to stimulate demand for sanitation and then meet that demand through small-scale providers. Technical solutions. but no information could be obtained as to whether financial services are involved or not. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 26 . Cultural factors and lack of hygiene promotion sometimes add to the fact that rural areas tend to be more underserved in sanitation than urban areas. e. in India with WaterAid and other NGOs that have successfully launched low-cost and low-subsidy micro credit schemes for rural sanitation in several areas. Small-scale providers also work in solid waste collection and rainwater drainage.g. most households in African cities (70-90%).2 Sanitation Financing urban sanitation is a global challenge with few sustainable success stories in developing countries. however.g. Rural sanitation is even less developed. manual latrine pit cleaners. private providers dominate the market and offer services tailored to customers’ needs and incomes for the tasks that households choose not to carry out themselves. organizational set-ups and modes of delivery are manifold and hence are regulatory issues. Investment needs and financing strategies also vary across the different categories. suction truck operators for septic tanks. There is a wide range of activities in this field. Among the most common cited explanations are that sanitation is too expensive and that poor people will only pay for water but not for sanitation. but these areas are not directly covered in this study. dependant providers are more vulnerable compared to independent providers as they rely upon delivery from public utilities that they cannot influence. water tanker operators or aguateros). However. when it comes to financing small service providers (e. and virtually all poor urban households deal with their own wastewater by building their own latrines or septic tanks or hiring others to do it. For instance. However. masons who build latrines. Independent providers are also more difficult to regulate as the quality of water they provide is not controlled by the public utility company. Since the public sector is generally not involved in this area. such as adverse ground conditions. and manual or mechanized drain and latrine ditch cleaning services. This technology that has been supported by the World Bank (79) and other donors consists of shallow and/or small bore sewer systems that have emerged as a result of adapting design standards of the conventional sewerage to suit the physical conditions of urban low-income settlements. The innovation has been to introduce a “sanitation services levy” on all water bills and to subsidize sanitation promotion and installations.The above table also helps in structuring the overall picture and to show dependencies between small scale providers and public utility companies. there are promising approaches. like e. kiosk operators or water vendors) face different problems than do SMEs (e. From a technical and financial perspective. high settlement density and high water consumption. 4. is the so-called “Sistema Condominial” that has been introduced and is successfully operated in several states of Brazil.g. Users finance approx. but their investment cost and hence their financial risk is also lower. 70% of the on-site sanitation. This makes interventions complicated as no “fits all solution” exists. This may be explained by the low population density and hence less evident hygiene or environmental problems perceived.

According to the squatting and technology parameters as well as clientele and cost aspects, the following classification system can be derived for sanitation (18).
Table 4: Household Sanitation Options in African Cities Technology option Clientele Construction cost (USD) Annual maintenance cost (USD) 10 (for hand) hired

Unlined pit The pit is dug by hand and is unlined, the opening is covered with boards. It is used for human wastes, wastewater, and organic garbage. Often closed and re-dug when full.

Residents of rural and peri-urban areas where plots are relatively large.

30 – 60

Unlined latrine with platform and soak pit An unlined pit is equipped with a cement platform, which may have a manhole cover. The soak pit is dug separately to receive wastewater and sometimes filled with large stones to prevent collapse. Cleaning is done manually. Lined latrine with platform The pit is lined and waterproof. Often used for wastewater as well as human waste, it fills up fairly quickly. When regularly cleaned, this type of pit minimizes pollution. Cleaning is generally carried out by suction truck. Latrine or toilet + lined pit linked to soak pit When a lined pit is linked to a soak pit for liquid overflow, the frequency of cleaning is reduced. The pit fills with fairly liquid effluent and its cleaning is generally carried out by a suction truck. Compacted solids may need to be dug out by a manual cleaner, possibly hired from the trucker’s staff. Septic tank + grease trap + soak pit/filtering trench An effective septic tank system includes at least two linked compartments. Waste passes first through a filter, which traps solids and greases, and liquid overflow passes into a separate soak pit. This system can be said to be self-purifying. The grease trap is cleaned manually on a regular basis. The septic tank can be cleaned only by suction truck (every 3-5 yrs). Source: (18)

Residents of periurban areas, where plot size permits.

50-100

15-20 (manual cleaner hired every year)

Residents of urban areas, where small plots require reusable pits.

150-300

30-50 (suction truck once a year)

Residents urban areas

of

300-800

30-50 (suction truck once a year)

Public buildings (schools, offices)

Residents of highincome housing (villas). Unaffordable to most households.

800-3,000

15-20

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4.3 Households as Small Self-Service Providers – HSSPs
Unlike cities in the industrial North, where there is often a single source of water serving all residential and most industrial customers, in many cities of the South there are a wide variety of water suppliers (18). Besides individual connections to the public utility network, people can get water from own wells, from their neighbours’ wells or connections, from springs, from collecting rainwater, from water carriers, hand carters, carters using animal traction, standpipes and boreholes with manual or electric pumps. Hence, any analysis of access to water must go beyond the households served by the public utility network, especially for low-income users who often decide on a daily basis where they will get water – whether from more expensive, better quality sources (e.g. standpipes or a neighbour’s connection) or from less expensive, sometimes less clean ones (e.g. wells, springs, rivers, stored rainwater). The choice depends on household income and time available and on where water is available (distance). Sometimes it costs more to buy water from a door-to-door carrier but using the time saved to earn money may more than cover the difference in water cost. The choice of water supply depends also from rainfall, network down time and quality factors (taste, clarity of the water) and sometimes social (relation to neighbours) and cultural factors. Another interesting business for microfinance are private house or yard connections to poor households - although these households do not necessarily belong to the poorest population who, because of affordability, is obliged to use standpipes. Therefore, the issue of subsidies and adequate technological standards has to be carefully investigated. In any case should credits to finance house connections not been subsidized, but partial grant financing in line with the above mentioned example from Burkina Faso (levy on water bills to subsidize parts of the installations) could be a viable solution in order to increase coverage in water supply. However, grants should be ceiled (e.g. 30% maximum) in order not to undermine market mechanisms. Recent experience from South Asia (62) show that the active participation of consumers in financing housing infrastructure (including water supply and sanitation) is widely recognized as a key component of long-term sustainability of services. For the poor, an increased financial stake can guarantee improved delivery and operation of services. To facilitate such financial participation, poor communities or individuals often use small-scale credit services and there is evidence of the enormous potential of microcredit in improving service delivery at the lowest income levels. In SSA, however, microfinance to HSSPs are still much less developed compared to South Asia. This might be explained by a less active microfinance sector in general, but also by the strong prevalence of cultural habits and alternative credit sources (family credits, traditional tontines, money lenders) and perhaps lower purchasing power.

4.4 Private Small Service Providers - PSSPs
PSSPs today serve millions of people throughout the world despite the existence of (public) water utilities. These providers work for profit and they mostly operate in areas inhabited by the poor. This is not surprising considering that it is the poor who tend to be neglected by the formal system and are the ones who are often not connected to the water network. It is the scarcity situation in which the PSSPs
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operate and thrive. They generally cater to those not served or underserved by the water utilities. In some countries they also serve households that cannot afford a formal connection to the network due to the related high cost. PSSPs usually use low technology and charge rates that are much higher than those charged by the water utility. They survive because they are flexible in their approach and are responsive to consumer demands. They provide assured service and are even willing to change payment patterns to suit their customers. Normally, water supply is a mandatory function of either the central state or its decentralized bodies (municipalities, provinces, districts, etc). The task of water supply is undertaken by public water utilities (or private under different private sector participation arrangements) – central or municipal – that are often unable to serve the entire population within their jurisdiction due to numerous problems. These range from lack of funds, inadequate infrastructure, high population growth, inefficiency in provision of water, high levels of unaccounted for water, pollution and/or depletion of water sources (66). The net result is that citizens get inadequate or even no water at all from public utilities even in the areas served by them. Hence, they are obliged to find their own solutions to survive. It is this situation that creates a conductive environment for the PSSPs to operate. They bridge the gap between demand and supply and provide water to unserved and water scarce areas. In general, they operate informally and invest private funds in the business. Given the water supply situation in many cities, they recoup their investment within a few years. In Africa, for example (41), over half of the residents in urban areas depend upon non-utility sources of water, and 80% depend on non-utility sanitation solutions. Collignon and Vézina (18) found that e.g. in Kayes (Mali) revenue collected by the independent providers of water is double that collected by the utility. And in Ouagadougou and Bobo-Dioulasso (Burkina Faso), independent providers collected revenues half of those collected by the public utility (ONEA). This gives also an indication of their financial strength and hence the potential demand for credit, which often remains unfulfilled. It must, of course, be recognized that access to credit is just one constraint and cannot be addressed in isolation from other constraints, such as the need for transparency in contracts with users and the public utility, legal aspects (title deeds, licenses), efficiency in billing and collection, and regulation to ensure their due performance (water quality, service quality) and a fair competition (53). PSSPs cover a large range of activities and vary considerably in business potential, technologies applied, cash flow, investment required, and legality of operation. With regard to water supply, they are involved in production and supply chains that produce, distribute, sell, and install water access, storage, and purification technologies. In sanitation, they work even more independently from the public utilities as these usually cover only a very limited range of the population in urban areas and none in rural areas.

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4.5 Community-Based Small Service Providers – CSSPs 4
In many countries of the South, governments have moved to CBOs as the providers for water services in rural areas. Small- to medium-sized operations running into thousands of schemes are found in different countries. These include both point sources and piped schemes, either gravity-based or motorized. It is likely that motorized piped schemes would have greater need for credit and financial services. For most CSSPs, communities are involved in the design and implementation of new schemes, contribute to the capital investments, and have complete management and financial responsibility for operation and maintenance. However, it has to be recognized that community-based water supply schemes often failed because of lack of managerial and technical skills, lack of access to banking institutions (for savings) and lack of access to technical assistance and spare parts’ supply in case of system breakdown. In addition, the concept itself bears an inherent dilemma as the community members are users and service providers at the same time: as users they prefer low tariffs and as service providers they should strive for higher tariffs that allow for proper operation and maintenance (O&M), including some asset renewal.

4.6 Advantages and Constraints
According to Collignon/Vézina (18), the main advantages of small-scale service providers – especially PSSPs in SSA – are their ability to respond quickly to changes in demand, to offer services needed by low-income families, to self-finance, and to recover their investment and operating cost. Several surveys also indicate that customers are quite satisfied with PSSP services because they know they will get water virtually anytime and anywhere, whether or not the utility’s service is up or down. As the sector is very competitive, users know that they can choose between different small-scale providers and this competition keeps value for money high. The (poor) user also appreciates being treated as a valued client, is spared administrative hassles, and has not far to go to be in touch with its – often neighbourhood – PSSP. The main constraints to expanding and improving their service levels are the following: Popular misconceptions about their pricing strategies and service quality Lack of recognition and communication with public authorities Weak policy and regulation in the water sector Hostile attitude of the (public or private) water utilities Lack of access to bank loans Insecurity of infrastructure they build on public lands, and rights of way (unprotected investment) Regarding the refuting popular misconceptions or objections raised to the involvement of PSSPs in the water and sanitation sector, Collignon/Vézina found out that none of the statements was supported by their ten-country study. For example, the quality of water provided by PSSPs was found to be practically the same as that of water from the mains, where it was drawn, and better than that of water drawn and carried home by household members in uncovered basins.

4

Information from (41)

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unrealistic price ceilings prescribed). As a result. PSSPs are therefore obliged to finance their investment through more traditional means – family savings. they still have to cope with fundamental problems.g. empowerment of the poor and active participation of the community. which makes it sometimes hard for them to survive. housing. Normally they find the funds they need. CSSPs are a widely recognized organizational model for rural water supply. the urban informal sector should be served by measures to improve bank loan administration policies and procedures and to broaden loan eligibility terms in order to respond to the market demand. trucks) that can serve as a collateral for the loans. i. money lenders. As Collignon/Vézina point out. Transaction cost for family and tontine funds often involve reciprocity. saving clubs (tontines). contributions in kind equal to the amount borrowed. The major constraints are the following: Lack of technical expertise in case of system breakdown Lack of timely availability of spare parts close by Required payment schemes do not correspond to the seasonal fluctuation of their income and savings for water supply often compete with other basic needs (education.e.) Lack of funds to pay upfront capital investments and major repairs Lack of reliable savings possibilities The potential of improving water supply and sanitation through the provision of household credits (for housing and infrastructure) to HSSPs is heavily under-explored in SSA. Because there is no risk sharing when using traditional financing sources. What they would like most of all is a fair institutional and legal environment that would be favourable to more investment and expansion of their activities in response to their clients’ demand. Other constraints – often connected to the lack of credit access – are the following: Non-legal situation (illegality of settlements) DESK STUDY POWS&S FINAL REPORT (16-03-2007) 31 . the savings in the cost of credit could be passed on to their customers. especially to moneylenders. except for purchasing equipment (e. They would also appreciate better coordination with city authorities and water companies. PSSPs tend to minimize their risk by investing in short-term improvements (6-12 months). At a first glance. they prefer to make a number of sequential smaller investments rather than take advantage of economies of scale. This is also a strategy to limit their investment risk due to unclear legal situations. Hence.Besides the unsatisfactory or even non-existent dialogue between the PSSPs and the water utilities. which has many advantages related to social coherence. PSSPs are not looking for grants and do not expect social security benefits but they are unhappy with the lack of recognition from municipal and water company officials for the value of the services they provide. another striking aspect of the water and sanitation sector in African cities is the weak regulatory capacity. This leads to unfavourable working conditions for PSSPs (too high standards required. Nevertheless. and suppliers’ credits. financial constraints seem to be of less relevance but it is also mentioned that the modern banking sector does not offer loans to the PSSPs. especially with regard to PSSPs. but they pay a high effective interest rate for capital. health etc. If PSSPs’ access to commercial bank credit could be expanded.

there may not be demand for credit. As legitimacy increases. 3% of investment cost approx. 5% of investment cost approx. 3% of investment cost approx. Lack of technical expertise As a conclusion. Table 5 (see also chapter 4. 4. It also shows that the range of investment cost varies considerably. And as the investment amount increases. If the scale of investment is very small. 2% of investment cost 30 – 60 150-300 300-800 800-3. potential for credit increases as well.500-15. In peri-urban areas with high population density. as own savings or help/borrowing from relatives or friends are often sufficient. Table 5: Typical Examples and Investment Cost for Different Technical POWS&S Options Technical option Investment cost (USD) Annual maintenance cost (USD) Water Supply Handcart for water transport Water truck Standpipe Borehole & standpipe & electric pump Borehole with handpump Small network with metered household connections Sanitation Unlined pit Lined latrine with platform Latrine or toilet + lined pit linked to soak pit Septic tank + grease trap + soak pit/filtering trench Source: Annex 1 and own compilation 50-135 7. however. Investigations show (41) that the legal status of small-scale providers and the scale of capital investment have a strong influence on the selection of specific finance solutions.7 Kind of Investments and Financing Needs The potential demand for finance from small-scale providers is affected by their location (urban/rural). the environmental circumstances (water availability) and the type of technology required.000 50-700 37. 5% of investment cost approx.Tenants (prevailing in peri-urban areas) for logical reasons do not want to incur major investments and (absent) owners are not interested in improvements. the plots are too small and/or the underground conditions are not suited for on-site sanitation.000 (per km) marginal approx.000-19. Another decisive factor is the scale of investment needed – there is greater demand for finance from activities requiring larger investments.000 10 30-50 30-50 15-20 DESK STUDY POWS&S FINAL REPORT (16-03-2007) 32 . formal sector commercial credit products become more relevant.000 3. it must be recognized that access to and effective demand for credit is quite complex and interdisciplinary approaches are required in order to mobilize financial services for POWS&S.400 12.2 and Annex 1) presents some typical examples and investment cost for different technical POWS&S options. using financial products for small investments.

and integrating private and public service systems. such as how to negotiate successfully with the public sector. small-scale operators have established a growing number of professional and trade associations through which they can address common problems and advocate common interests (18). e. Providing technical advice regarding low cost technologies in water and sanitation in order to allow for making informed choices is also vital to the CSSPs.. Providing advisory services regarding better financial management has also proven to be successful. Collignon and Vézina point out (18) that PSSPs are rather interested in quite specific kinds of practical training. mechanical workshops or suppliers of spare parts is one example of how to organize proper operation and maintenance in remote areas. In a number of African cities.Examples from e. This approach has proven to be useful in improving service delivery and reducing operating cost for the Water Users’ Associations that chose to subscribe to the CCAEP services. Financial audits by an independent agency may also be helpful for urban PSSPs. Normally. And donors can support them with technical and financial assistance.8 Needs for Other Assistance Survey data collected on small-scale providers (18) (63) indicate that besides financing there are needs for additional services or assistance in order to allow for a more effective and efficient development of their business. in Mali where a specialized unit (Cellule de Conseil aux adductions d’eau potable – CCAEP) is sponsored by the Water Ministry. how to conduct market surveys. how to prepare a loan application or specific technical topics. often local NGOs specialized in that area.4. technical assistance related to the operation and maintenance of rural water supply schemes has proven to be crucial regarding the sustainability of projects. technical support as well as community motivation and assistance linked with the public administration is provided by non-financial institutions. India show that for HSSPs and CSSPs access to technical advisory support is vital for the success of credit provision for infrastructure and many MFIs were found to provide loans along with support services for collective infrastructure projects in the informal housing sector.g. In addition. 5 MBK was strongly supported by WSP-Africa. These include Mali’s Union of Water suppliers (UEAEP) Côte d’Ivoire’s Association of Water Resellers (AREQUAPCI) Benin’s Union of Sewerage Entities (USV) Ouagadougou’s Association of Standpipe Managers (ASM) and The Kibera Kiosk Operators Association in Kenya (Maji Bora Kibera – MBK 5) (64) As long as these associations remain genuinely representative of the group they can play a key role in improving professional practices and the quality of service delivery promoting technical innovation. Governments and municipal authorities can support such associations by recognizing their legitimacy and by negotiating with them to establish fair conditions to do business. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 33 . The creation of networks of local area mechanics.g.

9. Most enterprises contacted during the surveys have never had borrowed from the banking sector. Micro-entrepreneurs often participate in rotating savings clubs or tontines.9. education. either in low-paying jobs or as traders and producers of goods and services. The entrepreneurs usually obtain the amount of finance from own savings.9 Financing Strategies of Small Scale Service Providers 4. Investment cost of different facilities varies significantly among different countries but amount on average from USD 15 to USD 800. However. 4. Nevertheless.1 HSSPs Populations of poor urban and peri-urban areas differ widely by income. basic water storage facilities and a pit or bucket latrine may be installed. 4. (iii) HSSPs are often characterized by low-income levels. the following features are prevailing: (i) most HSSPs are involved in the cash economy. the connection to a centralized system or investment in a large storage tank. (67) Literature generally acknowledges the progressive investment process of low-income households. In a context where financial services are available. The next stage might be a well. In a first stage. family savings and informal loans from friends and relatives mainly cover such investments.1). lack of tenure and/or ownership of the house. This applies not only to microenterprises but also to larger enterprises holding public sector contracts such as suction truck owners that require substantial investments. from the family or money lenders. With regard to house improvements (that may include WS&S) investments often take place incrementally rather than as a one-time investment in a full range of facilities. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 34 . cost for technical and financial assistance and/or community promotion should not be borne by financial institutions but rather by specialized NGOs or independent agencies – preferably on a grant basis. the availability of affordable facilities and costeffective technical solutions is a precondition for it.000 (see Annex 1). assets. it was frequently observed that clients borrow for income generation purposes yet channel the funds into house improvements. but can also go up to USD 3. This may be an indication of the high priority WS&S has for low-income households and mirrors the fact that suitable loan products to address house improvements are not available in SSA. own sources. and age structure.As a concept. Collignon and Vézina (18) point out that PSSP’s ability to raise funds in the informal sector to finance equipment and infrastructure investment is one of their key characteristics. In the absence of formal or semi-formal financial services. (ii) most activities take place in the informal sector. Sanitation can be upgraded from a pit latrine to a flush latrine and connection to an individual or communal septic tank or to a centralized sewer system.2 PSSPs Most PSSPs start out without any institutional help. irregular income streams. The financing of larger investments such as vehicles or small water distribution networks is – in the absence of term loans – often to a high degree financed by contributions or advances from clients (see also the example of ‘aguateros’ in chapter 4.

Beside other important constraints (e. though this would require a clear government policy on community contribution and a ceiling on capital subsidy associated with some notion of basic service levels and related technologies.3 CSSPs CSSPs operate water supply schemes mostly in rural areas. Most of the PSSPs are operating under informal conditions and have to face all kind of insecurities (e. quite high amounts of savings from user charges accrue over time (e. they need deposit facilities and current accounts to better manage their finances.6). But the low degree of outreach of financial institutions in rural areas often leads to nonpayment of tariffs or even robbery of the accumulated money. This demand can be divided into three main categories (41): New investments to meet the community share in capital contribution: In general.4 and 4. in the northern part of Mali: one million EUR for approx. The strategy of many service providers to cope with such risks is to limit investments to a minimum. efficient billing and collection systems. Only some rare cases have been reported. regulation to ensure competition. In addition. The low share represents the perception of a lack of affordability.g.9.000 households with water. Such supply up to 1.g. sustainable access to credit would enable an increase of the community contribution without any adverse impact on affordability. which may have negative and undesirable consequences for the quality of services and expansion (for details. Latent demand for finance for these activities can be seen in two contexts: (i) transfer of water schemes from centralized agencies to CBOs that need to be rehabilitated prior to transfer and (ii) availability of timely finance in case of major repairs and extensions.000-2. contribution in kind (labor or local material) may also be required. see chapters 4. where the completely self-funded. Further. there is certainly a high potential demand for financial services at that level. Legal framework conditions are often unclear and political and economic framework conditions are unpredictable. schemes can subsidies are of a lack of schemes are Although no specific financing strategies of CSSPs could be identified from the literature review. 50 village water schemes) seeking for safe deposit possibilities. most countries provide subsidies to meet the capital cost of rural water supply schemes and only a minimal community contribution to capital costs is required. provided to meet the capital cost which reflects the perception affordability. Capital cost vary considerably between different countries and the range of activities. However.g. 4. theft of equipment. Deposit of savings generated from user charges: If water tariffs are paid regularly (which is also aimed at in rural areas). eviction from their premises). DESK STUDY POWS&S FINAL REPORT (16-03-2007) 35 . the lack of access to credit for capital investments is often one of the main constraints to new and expanding small-scale water and sanitation providers. transparency in contracts). In many countries.Financial services are required for capital investments and O&M management. usually ranging from 5 to 10 percent. Investments in major repairs/rehabilitation/extension: In most countries government subsidies are only available for new investments but not for meeting the cost of repairs or rehabilitation/extension.

5.1 Effective Demand for Financial Services in the POWS&S Sector Effective demand is the demand generated when a client is both willing and able to purchase a good or service. technology and its total cost including cost of operation and maintenance. The ability to repay a loan under agreed conditions is also important. PSSPs: profitability and liquidity related to the investment. Low priority for investments and/or improvements into sanitation. and (iii) reliable support services. The following two chapters reflect the authors’ perception on the effective and potential demand for financial services in POWS&S and shall also define the terms and concepts used in the subsequent studies (country case studies and concept study). Possible reasons are: Non-awareness of possible advantages. the reasons are found on three levels: The willingness of different market segments to use financial services for WS&S is not fully developed at present. Insecure business perspective of PSSPs due to unclear regulation in the water sector.5 Demand for Financial Services in POWS&S Literature gives only few details on the demand for financial services in POWS&S. The ability to repay the loan further depends on (i) financial and managerial capacities and capabilities. mainly because an effective demand has not yet developed and most investments are hitherto financed through informal or own sources – as outlined in chapter 4. The factors that determine the ability to repay a loan for WS&S mainly are: HSSPs: household income and cash flow of the entire household. household income. tariffs and effectiveness of collection with regard to user charges. Insecure legal status of HSSPs regarding tenure and ownership of property. According to the author’s analysis. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 36 . particularly for CSSPs. the availability of affordable technologies. Unfamiliarity in dealing with banks and other financial intermediaries. External factors that determine the potential demand are: Limited outreach or non-availability of financial services in most countries of SSA – as one of the major constraints for the use of financial services in POWS&S. Physical insecurity of equipment. Expectance of subsidies. the demand for financial services for POWS&S has not yet been translated into effective demand. Bias against formal financial institutions. CSSPs: percentage of community share/amount of subsidies involved. In the countries of SSA.9.

housing microfinance loans are basically relevant for HSSPs that want to improve their WS&S facilities. households will not spend more than 15 percent on shelter. The case studies in Kenya and Uganda will most probably bring more clarity to the topic. PSSPs. (11) Literature suggests that the demand for housing microfinance is high. Non-availability of affordable equipment. CSSPs. The following chapter outlines different financial products that can increase the outreach and scale of small-scale service providers according to the author’s assessment. In the framework of this study. guarantors and real guarantees but are often unsecured. 5.Financial services are not client-oriented and/or do not correspond to the specific needs of HSSPs. 5. it is not possible to verify the above reasons and to derive a conclusion. Literature does not detail the required financial products for HSSPs. (iv) collateral requirements may include compulsory savings. An important constraint for the low-income population to invest into home improvements is insecure land tenure. land security is essential. (ii) the term is usually 2-24 months for home improvements and 2-5 years for land purchase or house construction. (30) DESK STUDY POWS&S FINAL REPORT (16-03-2007) 37 . Lack of land tenure and ownership of houses. while chapter 6 will describe the supply situation. (v) the target clientele are low-income people.1 Housing Microfinance Loans Housing microfinance mainly consists of loans granted to low-income people for renovation or expansion of an existing home. poor families do not possess formal proof of land ownership. without some assurance regarding security of occupancy as owners or renters. While formal land titles are not necessary in housing microfinance. The most experience in this relatively new field has been gained in Asia and Latin America with home improvement loans that are designed to help households to finance incremental improvements to their homes. (iii) the delivery method is rather individual lending than group methodology. and basic infrastructure.2 The Potential Demand of Financial Services for POWS&S Development The three client segments that are relevant for POWS&S have different requirements with regard to financial services. (11) In the context of this study. salaried workers or micro-entrepreneurs and/or home workers primarily in urban and peri-urban areas with established track record. construction of a new home. MFIs around the globe are reporting that clients already use a good portion of micro-enterprise loans to home improvement. PSSPs and CSSPs. In most countries of SSA. Microfinance home improvement loans are the central aspect for WS&S investments of HSSPs. non-existent supply structures. Key features of housing microfinance loans are: (i) the size is generally 2-4 times larger than average working capital loans.2. The following chapter will outline the potential demand for financial services. The chapter also defines the different product categories of financial services that are relevant for POWS&S. (11) Even when income increases. lack of technical knowledge.

000 in SSA. (iii) significant presence of women. At the same time. Small investment loans may also serve HSSPs for 6 Loan term < 1 year DESK STUDY POWS&S FINAL REPORT (16-03-2007) 38 . (iv) the collateral requirements may include compulsory savings. guarantors. PSSPs and CSSPs for working capital of enterprises. a special credit line or an overdraft would be provided not only to reduce transaction cost but also to serve PSSPs in the most efficient way. Timely availability and flexible financing mechanism are essential. salaried workers or entrepreneurs. rarely satisfied in the WS&S sector in SSA. Most often. and for consumption. depending on their business. very few institutions are offering housing microfinance loans and the demand remains mostly unfulfilled and/or is not yet fully developed. (ii) the term is usually 1-12 months. (iii) adapted loan appraisal techniques. access to home improvement loans is a result of an on-going relationship with innovative financial intermediaries that have already reached a high level of institutional strength and financial viability. Housing loans however are following the basic concept that original microfinance working capital loans are based on: (i) loans remain uncollateralized. Seeing the large number of informal loan arrangements in the WS&S sector. it is assumed that the demand for short-term loans is very high but however. (iii) a regular repayment schedule. for small investments. real guarantees. (ii) savings remain important. 5. short-term loans are the most important source of finance of small-scale service providers. An important finding of CIVIS (Shelter Finance for the Poor) is that housing finance loans are in essence a variant of ordinary working capital loans with the following distinctions: (i) longer terms. Ideally. In SSA. Therefore. Short-term loans can be an important source of finance for small-scale service providers: Working capital loans are important for PSSPs in pursuing their business. but are often unsecured. Short-term loans are required by HSSPs.HSSPs demand home improvement loans that are tailored to the way they build but and also adopted to their repayment capacity.2 Short-Term Loans Short-term loans 6 are the most important product of financial intermediaries and most often constitute the main proportion of the portfolio. (v) the target clientele are low-income people. The access to working capital can increase size and scale of operations. usually weekly or monthly (iii) the delivery method is following an individual lending or group methodology. the basic lending methodology rewards a client’s good repayment performance by providing access to longer-term and bigger loans.2. rehabilitation. extension of existing business of PSSPs or CSSPs. Short-term investment loans can be an important source for investments in equipment and/or facilities. repair. Key features of short-term loans are: (i) the size of average working capital loans varies among different countries and between different client segments but ranges typically between USD 50 and USD 1. PSSPs may apply for working capital loans several times a year. (ii) larger amounts.

the availability of short-term loans will enable them to gradually expand their business or activity and to access larger loans with longer duration in a mediumterm perspective. savings can play an important role in collecting and depositing user charges. Investment loans are important in the following areas: CSSPs: community share in capital contribution. This practice has the advantage that the clients will continually increase their financial management skills. (v) the target clientele are low. where clients start with small loans that will increase after timely repayment of the former loan. The size of the investment loan widely depends on the technology and type of equipment and on the percentage of the borrower’s contribution in the case of community schemes.to medium-income people. shortterm loans may be an adequate source to finance even larger investments. (ii) the term is usually 24-60 months for medium-term loans.2. Savings services can play a critical role. more than five years for long-term loans. clients DESK STUDY POWS&S FINAL REPORT (16-03-2007) 39 . In combination with savings.3 Investment Loans The financing of the initial purchase of equipment and/or construction of facilities is a potential demand in the POWS&S sector that is not yet developed in SSA. which allows spreading the repayment of investment costs over several years. major repairs and replacements. 5.4 Savings In general. Only rare cases have been reported where investment loans for WS&S were extended on commercial terms. (iii) the delivery method is rather individual lending. buffering them from crisis and enabling them to meet basic needs.2. and take advantage of investment opportunities. These investments are often beyond the self-financing capacity of the players in the WS&S sector and require access to term finance. Consumption loans can be an important source for HSSPs for investment or improvement into WS&S. small distribution systems. salaried workers or MSEs/SMEs primarily in urban and peri-urban areas with established track record. (iv) the collateral requirements may include more traditional securities such as land title.investment or improvement into WS&S. PSSPs: larger investments such as trucks. 5. Successful financial institutions have adopted the graduation principle. savings help PSSPs and HSSPs to manage emergencies and to better meet unexpected demands. guarantees. facilitate smooth consumption. Often short-term loans are the first means of financing for small-scale providers of WS&S. Key features of investment loans are: (i) the size is generally few times larger than average working capital loans. Especially for small-scale providers of WS&S that so far have little experience with financial services and that have minimized their investment. For CSSPs and PSSPs. First. HSSPs: acquisition of upgraded or more sophisticated WS&S facilities and equipment. Many investments in WS&S require larger amounts of capital that only amortize over several years. compulsory savings.

Therefore. secondly. Unfortunately. PSSPs and CSSPs. They can play an important role for smoothing income flows of HSSPs and PSSPs but also for investments in WS&S equipment and facilities. establish a savings track record with financial institutions for future access to credit. the providers of small-scale water utilities need a safe place to deposit the money they have collected. Encouragement of savings and establishing the financial reserves for different client segments in the WS&S sector will strengthen their self-financing capacity and the various clients themselves. collect user charges more efficiently.5 Other Financial Services relevant for POWS&S Other financial services that can become important for small-scale service providers in the WS&S sector are: Current accounts for advanced PSSPs to better manage financial income and expenditures. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 40 . the demand for secure deposit facilities remains largely unmet in SSA.2. cover investment and/or operating cost from own resources. For HSSPs. 5. protect themselves from robbery and/or loss of money. savings equally play a crucial role as they enable them to become less vulnerable to emergency situations. Non-credit financial services include domestic and international money transfers such as remittances. savings play a crucial role in financing WS&S whether direct or indirect.could pay their fee directly to the account.

addressing service and water quality issues) and the demand of different client segments (HSSP. Past experience indicates that financial services for POWS&S will not require the creation of specific institutions or ‘windows’ but have to follow the widely accepted financial system development approach. less than 10% of the population has access to financial services. and viability issues. term investments. Its microfinance industry has achieved considerable growth rates and a number of dynamic institutions are committed to ‘best practices’. The following chapter will outline the key constraints at the different levels of the financial system that are relevant for the provision of financial services to the POW&S sector. The financial system development approach therefore also is of relevance for the supply of financial services for POWS&S as only viable and healthy institutions will be able to serve the water and sanitation sector in a permanent manner. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 41 . institutional. CSSB). legal and regulatory framework conditions for the water sector would also contribute significantly to a better linkage with the financial sector.1 Existing Situation and Trends The provision of financial services for POWS&S depends on the ability of the financial sector to offer a range of financial services that are tailored to the specific characteristics of the water and sanitation sector (e. According to studies conducted by the World Bank. (41)The only notable exceptions are South Africa and Mauritius that have a well-developed financial infrastructure (50). The microfinance sector in SSA is still relatively young and in an early stage of development.g. the financial sector in Kenya exhibits greater financial depth and more institutional variety than in most other SSA countries. more competitive and more dynamic financial sector. the continent has to take up many challenges in order to develop a more professional.6 Supply of Financial Services for POWS&S in SSA 6. PSSP. the challenge to link the two sectors depends on a wellfunctioning financial sector in any given country and the ability of small-scale service providers to develop economically sound businesses. Despite these positive developments in some countries of SSA. Conducive political. The water and sanitation sector has – because of its specific characteristics pointed out earlier – not been given much attention by the financial sector in the past. The main problem in the countries of SSA is that the effective provision and outreach of financial services to the economy and the population generally is inadequate. The situation is even worse in rural areas. The vast majority of MFIs in the region still are in the start-up and/or consolidation phase and still are struggling with capacity. However. outreach. Also. This approach has the dual aim of creating an infrastructure for the provision of effective financial intermediation services and creating efficient and viable financial institutions.

in remote rural areas with little agricultural potential. where the microfinance industry specifically targets the lower-end of the poor. In other words. Furthermore. financial services are hardly available at all. Furthermore. especially in peri-urban settings. the performance and viability of financial institutions at the micro level to a high degree depends on the level of support services they are able to receive from meso level institutions. In general. MFIs in SSA perform poorly in terms of portfolio quality and operational and financial performance (41). Poor financial performance. The range of products offered to the low-income population in SSA is mainly limited to short-term loan products for income-generating activities and simple savings accounts. For financial system development on the micro level major efforts in institutional strengthening is required.2. Other than in Asia.2 The Meso Level The meso level refers to the overall infrastructure of the financial system. Furthermore.6. if available at all. An indicator can be the weighted average outstanding loan per borrower of African MFIs that stands at USD 307 and is in absolute terms larger than those offered in other regions (40). The number of professional financial service providers with clientoriented services and a potential for further development and sustainable operations remains limited in SSA. The key constraints that concern the WS&S sector are listed below: Limited outreach. MFIs in Africa report the lowest average return on assets. The Micro Banking Bulletin (40) reports that that the overall financial performance of MFIs in Africa lags behind other global regions. competition in the financial market is a key incentive for financial institutions to expand their product range and to search for new client segments. The financial infrastructure at the meso level is weak in nearly all SSA countries.2. Improvement in the core business of financial institutions will lead to an expansion into new market segments. especially regarding product development.2 Key Constraints and Need for Improvement at the Different Levels of the Financial System for Financial Service Provision in the POS&S Sector 6. 6. However. only 47% earned positive returns in 2003.1 The Micro Level Financial systems' development at the micro level is about building sound domestic financial intermediaries that can provide financial services to poor people on a permanent base. The provision of financial services to the WS&S sector is a niche market for financial intermediaries and requires healthy institutions that are able to go beyond their usual scope. the microfinance industry in SSA has not yet reached many of the lower segments of the low-income population. Out of 163 MFIs analysed. Little product diversity. It can facilitate or obstruct the emergence of financial intermediaries and includes a complex and varied set of actors (10). an effective meso level is critical for the functioning of the financial system as a whole DESK STUDY POWS&S FINAL REPORT (16-03-2007) 42 . and therefore also will be beneficial for the POWS&S sector.

Governments need to maintain macroeconomic stability. avoid interest rate ceilings. The most important factors that are relevant for POWS&S are the following: Financial sector policy: The challenge is to promote a variety of viable financial institutions that are client-oriented. and refrain from distorting markets with subsidized. To reach the poor population with demand-driven financial services for POWS&S. Financial intermediaries that want to expand to new client segments such as WS&S need an infrastructure that provides the following: Training to build-up human resource capacities by technical service providers and educational institutions. Macroeconomic policies and legal framework: The macroeconomic policy conditions and legal framework that exist in a developing country can either enhance or hinder the development of the private and financial sector. high default loan programmes that cannot be sustained. for the POWS&S sector as well. Constraints that prevent financial service providers on their ability to provide appropriate loans and savings products should be removed.and especially for expanding access to financial services for the poor and. cost-effective. to invest in DESK STUDY POWS&S FINAL REPORT (16-03-2007) 43 .3 The Macro Level and Enabling Environment There is a growing consensus that the role of the government is to enable financial services but not to provide them directly. thus. The socalled ‘enabling environment’ is essential for any private sector development and therefore of high significance for PSSPs. It encompasses legal aspects of business operation as well as a sound business climate. an improved financial infrastructure and more service providers are required than are currently available in the countries of SSA. Market research and support for product development. Refinancing facilities to buffer liquidity shortages and term-mismatches of funds.2. the inability of many governments to assure an adequate policy environment is a major constraint for the development of financial services to the lowincome population in SSA and also affects the provision of financial services to the POWS&S sector. The donor community can significantly contribute to establish and strengthen the financial infrastructure and to ensure a permanent and competitive supply of these much-needed meso-level services (31). Furthermore. An aspect that is of special importance for POWS&S is that policies should facilitate the experimentation and adaptation of new financial technologies and development of demand-driven products. (10) However. to receive remittances from abroad or to move money around the county in a secure. policies must support the creation of a conductive environment with room for competition. that mobilize savings efficiently. 6. thus. for example. and efficient manner. and that provide access to loans for a wide range of the economically active poor population. Transfer and payment services. Housing and property issues: Land security determines the degree of willingness of poor people to improve the value of property and.

such as relatives and friends. Semi-formal lenders. The water sector still highly depends on subsidies and may not be aware of the potentials the local financial market can provide. An assessment of financial service providers derives to the following conclusions: (1) In the future. such as supplier credit of equipment for PSSPs / CSSPs or PSSPs that give advances to households. semi-formal lenders are the only providers of financial services in rural areas. cooperative banks.WS&S and to take a loan. through subsidized interest rates and/or directed credit) are avoided and that the government has clear guidelines on the support of the POWS&S sector. such as commercial banks. (14) 6. 6. microfinance banks.g. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 44 . Donor harmonization according to the ‘Paris Declaration' is another important aspect. New perspectives can develop if both sectors have a forum for exchange. a number of different approaches to POWS&S are being promoted parallel to each other. Major constraints include lack of financial management skills and limited resources. or other specialized financial institutions. On the contrary. village banks. A positive enabling environment for housing microfinance (under which home improvement loans for POWS&S may be classified) is one in which poor households have access to affordable land with a reasonable hope of obtaining secure tenure. such as credit unions.4 Other Constraints Lack of information: Financial institutions usually only have little knowledge of the WS&S sector and vice versa. land security also affects the supply of credit (15). Especially in the POW&S sector where subsidies are an integral part of financing mechanisms it is important that market distortions (e.2.3 Typology of Lenders relevant for POWS&S The provision of financial services for POWS&S is not limited to conventional MFIs. Interlinked credit arrangements. Lack of harmonization: In most countries of SSA. their outreach and range of products often is limited. NGOs. However. formal lenders may play the most important role for POWS&S development because of their ability to provide a whole range of financial services and improved outreach through branch networks. The following types of institutions could be relevant for the provision of financial services for the development of POWS&S: Formal lenders. From the perspective of financial institutions. Informal lenders. loans granted by (credit-only) NGOs may play only a minor role in the development of WS&S if other options are available. but is used in a financial systems perspective and considers different financial institutions or private actors providing financial services in different country contexts for various market segments (41). POWS&S is rarely perceived as an economic activity that can be profitable. (2) Often. credit cooperatives. moneylenders and rotating savings and credit associations. At the same time.

This requires demand promotion at the level of small-scale service providers on the one side and an improved outreach of formal and semi-formal financial institutions with demand-oriented financial products on the other hand. These institutions are a heterogeneous set of players and include commercial banks. However. costs are high on interest rates as well as on social obligations. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 45 . Not much information is available about scale and product features. The challenge is to replace the predominantly informal financing arrangements by more formalized financial services. (4) At present. the capacity is limited and it is desirable that the different actors receive more formal financial services as described in chapter 5. interlinked credit arrangements are – beside informal lenders – supposedly the second most important source of finance for the WS&S sector in SSA. nonbank financial intermediaries. Furthermore.3. (5) Right now. housing finance companies and NGOs. many of which originated as microfinance institutions. informal lenders are playing the most important role for the provision of financing to the POWS&S sector.(3) Innovations in providing house improvement loans on commercial terms to HSSPs are emerging largely from experienced financial institutions. credit unions.

1 HSSP Finance: Promising Approaches and Promotional Concepts Annex 2 provides a case study of SEWA Bank in India that finances home improvements at the household level. Importance of savings: In the absence of legal land tenure.1 Relevant Case Studies 7. Technical and supervisory support is critical not only for technical advise but also for interaction with the various parties involved. For SEWA Bank. It is a useful example to extract some leanings that could be translated into approaches and concepts for replication in SSA: Experience: Microfinance housing requires established institutions that have already substantial experience in dealing with the vulnerable poor population. However. There is no doubt.2 PSSP Finance: Promising Approaches and Promotional Concepts Annex 3 provides a case study of the “Aguateros” in Paraguay. Partnerships and linkages: The urban local authorities are important players in the provision of infrastructure services. Instruments/Tools and Promotional Concepts in the Financing of POWS&S 7. Technical support services: Support services for collective infrastructure projects are essential for the success of the activity. Best Practices. Communities need better bargaining power in order to develop reliable partnerships that fit their interest. that the case of the aguateros provides an interesting example to extract some leanings and to translate them into approaches and concepts that could be replicated elsewhere. Ownership issues: On-site slum upgrading projects had the assurance by the municipal authorities that the upgraded slum will not be relocated for a minimum of 10 years.7 International Experience: Promising Approaches.1. This ‘near legal’ tenure status has proved a powerful incentive for poor communities to develop ownership and to pay their own contributions. At the same time the financial institutions can manage their risks better. a regular savings habit is an indication for a creditworthy client. 7. A huge number of small entrepreneurs have demonstrated that it is possible to create small scale water supply systems to the unserved population. Housing microfinance is a consequence of careful market analysis and is based on client demand and established relationships with clients. Therefore.1. A clear separation of the tasks allows financial institutions to concentrate on their core business and to control costs. the vast majority of the urban poor settled in peri-urban areas are unable to provide any form of traditional collateral. an established savings track record demonstrates financial discipline and serves as a collateral substitute. The following are some interesting conclusions: DESK STUDY POWS&S FINAL REPORT (16-03-2007) 46 . there must be a clear separation in the division of tasks: SEWA Bank provides financial services while Mahila Housing SEWA Trust provides the technical support and community motivation.

For example. the financial burden of their customers could be lowered. even though they get no subsidies. Thus. small network operators can compete successfully on price with the public utility. their responsibility should grow from its present unregulated and informal contract to one that is subject to certain controls and a closer collaboration with the state or the public water utility. in general. Efficiency: Under favourable conditions.Financing: The potential of PSSPs to mobilize financial resources is very large. the aguateros represent a viable alternative for expanding water supply service into peri-urban areas. even in remote rural areas.1. This implies a certain promotion of the local small-scale operators. it is reported that even parts of asset renewal is feasible) is possible. subject to suitable groundwater conditions. substantial technical assistance (training the CSSPs on technical and administrative functions of water supply) is necessary in order to bring the CSSPs to the desired level. The overall customer satisfaction with lower rates and a somewhat lower level of service leads to the conclusion that. the simple well-drilling techniques and plastic hosing used by the aguateros has reduced the installation cost of a small water network considerably. Formalizing and regulating their water business would certainly enhance their possibility to have better access to the formal banking sector and to get more favourable loan terms and conditions. Technology: The small-scale providers’ low cost and prices stem in large part from their development and use of innovative. These cases provide limited but useful examples to extract some leanings and to translate them into approaches and concepts that could be replicated elsewhere: Cost recovery tariffs: The application of water charges that at least cover the O&M cost (in Mali.3 CSSP Finance: Promising Approaches and Promotional Concepts Annex 4 provides an example of village banks in Benin and Mali that have been linked to rural water supply schemes. well-measured and adapted to the customers’ ability and willingness to pay. The aguateros' case demonstrates that the sum of many smallscale operators proves to be more economical than the large-scale “economies”. This type of privatization could assume the form of an operational contract between the aguatero and the public water company. 7. Regulation: Instead of imposing a regime of “overregulation” that would undermine the efforts and chances of the aguateros. Service quality and affordability: Service quality is often much better than assumed and water charges are.and medium-sized water supply systems (rural centres or secondary towns) – seems to offer more viable alternatives. low-cost technologies. Close cooperation of a “support body” (DNH in the case of Mali) is also seen as an important condition for sustainability of the approach. However. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 47 . Privatization: Rather than privatize a large-scale (countrywide operating) water company as one unit a step-by-step approach – beginning with the small.

The purpose of this innovative financial instrument is to fund. 7. Regular audits would help to increase operational efficiency of the water supply system and create awareness among the CSSP members. The pre-finance loans strictly follow market conditions and are dealt with separately. OBA is a mechanism for providing subsidies to support the delivery of basic services in the above sectors where policy concerns – such as limited affordability for some customers. For the water and sanitation sector. and create opportunities for engaging private sector know-how and (micro-)financing.Outreach: The outreach of financial Intermediaries in remote rural areas is often quite limited. the desire to capture positive externalities. At the heart of the OBA approach is outsourcing of service delivery to a third party – usually small-scale private providers and NGOs but also possibly public utilities – which would operate within a strong performance regime that links payments to results.2 Innovative Approaches in Financing POWS&S: The Global Partnership on Output-Based Aid In January 2003. see http://www. (v) health and (vi) education. (ii) electricity. improve efficiency and innovation. demonstrate and document output-based aid (OBA) approaches to support the sustainable delivery of basic services in developing countries. This approach can sharpen the focus on objectives. the initial loan amounts would be reduced accordingly. several interesting pilot projects are currently being developed in Africa. GPOBA co-finances OBA pilot projects and related activities in order to identify and disseminate lessons of experience on the design and implementation of schemes involving explicit performance-based subsidies. Domestic microfinance institutions and banks participate in prefinancing parts of the investment cost (usually 80%) and the performance-linked subsidies are paid subsequently over time to enhance chances of sustainability. Latin America and Asia. GPOBA’s focus sectors are: (i) water and sanitation. whereas the OBA component (approx. the Global Partnership on Output-Based Aid (GPOBA) 7 was established by the United Kingdom’s Department for International Development (DFID) and the World Bank. (iv) transportation.org/activities DESK STUDY POWS&S FINAL REPORT (16-03-2007) 48 . (iii) telecommunications. enhance accountability for the use of public resources. Water Services Trust Fund in Kenya). 40%) will be allocated after completion upon compliance with the agreed performance criteria. Local MFI and banks are used to leverage GPOBA resources that in the mediumand long-run could be reduced or replaced by locally available public grants or donor funds (e.gpoba.g. Operation and maintenance: Referring isolated remote village water supply schemes to a nearby rural growth centre for technical issues can solve operation and maintenance issues. Table 6 highlights the main features of these projects: 7 For details. Village banks can fill the gap but there is a risk of overburdening from a banking point of view when savings reach a certain quantity. Thus. or the infeasibility of imposing direct user fees – justify public funding to complement or replace user fees.

Table 6: OBA Pilot Projects in Water Supply and Sanitation Country SSA Uganda Senegal Type of Project Piped water supply On-site sanitation Water and sanitation Area Execution/Operation Target Group Small towns and rural growth centres Dakar Local private providers AGETIP/small-scale contractors Private small-scale providers in cooperation with public utility Community-based organisations Kenya Kenya Microfinance for small water schemes Kisumu Town (informal settlements of Nyalenda and Manyatta) 21 rural communities in the broader service area of Nairobi under jurisdiction of Athi Water Services Board Lima Metropolitan Area Urban and rural poor 400. only few pilot projects within the GPOBA arrangement have been implemented and one of them (the aguateros in Paraguay) is documented in Annex 3 and under chapter 7. Therefore.2. The others are still in the design/development or early implementation phase. 11. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 49 .to high-potential agricultural areas Latin America Peru Honduras Brazil Innovative low cost (condominial) technology Water and sanitation services in low-income areas Water services in low-income and peri-urban areas Local NGOs/SEDAPAL (public utility) Government Low-income communities Whole country (national OBA Fund) Poor in periurban and rural areas Manaus No information available Approx.000 poor families Asia Indonesia Water services in low-income areas India Rural community water supply Cambodia Water access with smallscale providers Source: Own compilation Jakarta No information available Poor in selected peri-urban areas of Jakarta Unserved rural poor Low-income households in secondary towns 25 villages in Andhra Pradesh Secondary towns across the country Naandi Foundation (Indian NGO) Private small-scale operators So far. lessons cannot be drawn yet.000 people living in periurban areas Poor people in peri-urban areas Rural population in medium.

Financial intermediaries that do not have to meet standards are rarely run professionally. independent of donor or government subsidies. Another important aspect is the clear separation of financial services and other support services (e. of a lending organisation. This allows financial institutions to concentrate on their core business and to control costs. This endangers deposits of poor people and creates a nonconductive environment with the result that financial services for the poor in general and the POWS&S sector in particular will rarely be available. sanitation or education can be appropriate for poor people who have no means of repayment. 8. in the debate of financing POWS&S a clear distinction needs to be made between POWS&S for the destitute that remains a function of government (grants) and financial services to the poor. Given the ambitious MDGs and the huge potential demand for finance in POWS&S. SME finance and rural finance. value. the donor community and/or governments will not be able to provide the necessary funding for expansion and satisfactory coverage of POWS&S. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 50 .1 Financial Services and Sustainability Sustainability in financial service provision means meeting the operating and financial cost of providing financial services on a permanent basis. technical assistance). they need to attract private investors and other sources for refinancing for their (term) portfolios that is only possible. but economically active population that is able to repay the loans. etc. 8 Most formal banks in developed countries rely on rating agencies to attract investors. Sustainability of financial institutions is an important factor for successfully linking the two sectors for the following reasons: Financial institutions need to be run in a sustainable manner in order to provide continuing services to a large number of poor people including those involved in POWS&S. if financial institutions shall contribute to fill the gap. transparency and sound operations 8. Financially viable and sound financial intermediaries are in the position to mobilize savings and to tap funds from other sources.8 General Best Practices and Experience Relevant for Financing POWS&S The following chapter will review general best practices and experience that are relevant preconditions for successfully linking the financial and POWS&S sectors. It has also to be recognized that credit is not an appropriate service for people living on the margins of survival.g. the above definition will be adopted and is equally relevant for all types of financial services such as microfinance. if institutions demonstrate financial performance. In other words. Rating agencies provide an “objective” credit benchmark that enables others to check and compare the performance. Other types of interventions such as support for social services or grants for health services. Non-financial services ideally should be carried out by an independent organization in close collaboration with the financial institution. Therefore. For this study. risk.

If a government decides that it is important to subsidize water supply and/or sanitation services – e. Regulation in the sector will also balance between commercial and social objectives to address the needs of low-income groups. low-cost technologies can reduce the investment and operating cost considerably. These principles that are outlined below have to be taken into consideration for any financing strategy. thus. replacement and expansion to cater for increasing population and renewal of infrastructure. Usually. (iv) seek innovative ways (e. Bolivia) with regard to large utilities by introducing transparent benchmarking systems and participatory tariff setting processes. regulation of small-scale service providers in general is a still unsolved issue.g.2 Water Supply & Sanitation and Sustainability For the WS&S sector. the WS&S sector must follow clearly defined sector principles and should be regulated by an independent body (regulator). and that small-scale service providers have an important role to play. Revenues should be reinvested for improved services. a certain subsidization of wastewater systems is justified in many cases. infrastructure is dilapidated and there is little or no expansion and. However. The concerns of the poor should be addressed by actively promoting pro-poor approaches in the WS&S sector.8. As a result. That means. Past experience has shown that efficiency and quality of service provision can only be ensured by adequate regulatory mechanisms. households do not face the true cost of the service. for environmental 9 or social reasons – it must then decide whom. access to services is on decline. especially when sewage treatment is involved. what and how to subsidize.g.g. Whereas good regulatory practices have been developed (e. financial and environmental point of view. in Zambia. low-return customers. Sustainable services means that management of water schemes have to identify all costs relating to the supply of water. (v) recognize that efforts to provide subsidies to the poor through water tariffs have often been unsuccessful and (vi) aim to reduce the distance between the utility and poor customers (48). schemes are inefficiently run. water utilities still do not make adequate provision for both capital and operating costs. Peru. low-cost technologies) to address the physical constraints to infrastructure and service provision in low-income areas. In many countries. This means that policy makers and service providers should be prepared to (i) avoid the assumption that poor customers are high-risk. the overall objectives of water supply and sanitation will not be reached in a sustainable manner. There is a general understanding that tariffs for water supply – at least in urban areas – should allow for the recovery of operating cost and capital cost for repair. 9 DESK STUDY POWS&S FINAL REPORT (16-03-2007) 51 . (iii) to recognize that the main operator (utility) may not be the best service provider for the poor. Otherwise. budget for and recover them through a variety of user charges. regulation refers not only to the traditional (large) utilities but should also include small-scale providers. In order to be effective and sustainable from an economic. it is preferable to subsidize access to service rather than consumption. This undermines Due to the high externalities (environmental impacts) involved. When consumption is subsidized. (ii) to address the specific problems of informal settlements in water supply policy and the related legislation. the sustainability aspect is likewise important.

e.g. and ineffective in achieving their objectives. the financial systems approach which is based on the assumption that a commercial approach is much more likely to reach large numbers of clients on a sustained basis. (iii) at present. The POWS&S sector is susceptible to replicate resembling models because (i) the government plays a significant role in the provision of POWS&S services to the population. rivers. adequate regulation and targeting of subsidies. this approach failed to produce the desired results. drinking water quality must be safeguarded because it is essential for human health. (ii) water and sanitation are perceived as ‘human right’. supply-led and directed credit programmes 10 were an important tool to spur agricultural development in many countries. It also means that a “marriage” between the two sectors can only work if the respective framework conditions ensure that these principles are duly respected in each of the two sectors. This principle is necessary to retain some measure of demand responsiveness in order to ensure that systems are not built when people are not willing to use them. As a conclusion. Therefore. This fact could enhance the mutual understanding. 10 DESK STUDY POWS&S FINAL REPORT (16-03-2007) 52 . It has also become evident that 100 percent subsidies are inappropriate. many of the directed credit programmes undermined the development of a viable financial market with the result that as of today the rural population has even less access to financial services than before. the risk is high that a commercial orientation will be compromised in order to achieve other goals. The assumption behind these efforts was that (i) farmers face liquidity constraints (ii) farmers are too poor to save. This means that water governance arrangements should protect ecosystems and preserve or restore the ecological integrity of groundwater. because it is normally more costeffective than the restoration of polluted waters. The flaws of directed credit led to the formation of a new paradigm. including subsidized interest rates and/or high tolerance to loan defaults. wetlands and associated coastal zones. directed agricultural credit programmes proved to be subsidy-dependent. Instead of building a sustainable financial infrastructure.3 Failure of Directed Credit for Agriculture During the three decades prior to the 1990s. stimulate agricultural production and improve rural income. and that (iii) financial institutions are too conservative to lend to the agricultural sector. In fact. in the discussion of involving the local financial market in the financing of POWS&S. In the first place. Directed credit programmes focused on overcoming these constraints. However. The lessons from past experience of directed credit for the POWS&S sector are twofold: Government or donor programmes that have targeted the agricultural sector by supporting loan programmes for a number of ‘beneficiaries’ who have benefited from ‘soft’ loan conditions. lakes. Pollution prevention has to be prioritised. It was argued that enhanced access to credit would accelerate technical change. prone to disasters. the need for financially sound institutions. Water and sanitation investments must be designed in a way that enhances environmental sustainability. 8.economically efficient water-use and demand management. both sectors have many principles in common. Directed credit for POWS&S? The experience of the agricultural sector provides important lessons that should not be replicated. there is a large interest of the donor community to finance POWS&S (iv) concerns of ‘affordability’ dominate the debate.

It is essential that the POWS&S sector identifies sound business if it is to attract funds for viable investments. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 53 . which is a potential demand for financial services from the local financial market. for the three market segments the following implications derive: PSSPs are pursuing an entrepreneurial activity that has to follow a clear commercial orientation. services must be demand-driven and must correspond to the customer’s preferences.1) and elsewhere have demonstrated that house improvement loans can have a strong impact on household income. Furthermore. Business has to be profitable. investments have to be born by the entrepreneur. OBA approaches (see chapter 7. Second. such as better health conditions or timesavings render investments into water and sanitation to an attractive investment. Continued reliance of financial institutions on subsidies. lending for POWS&S will not find the interest of the local financial market. Nevertheless. A commercial orientation is desirable and necessary in the POWS&S sector – and is a condition for local financing to enter the scene.First. because they are unable to reach self-sufficiency given that their interest rate margin does not cover their administrative and financial costs over the long term. the indirect impact of ameliorated water and sanitation conditions at household level.2) bear a high potential to create strong incentives towards a better commercial orientation and sustainability of community schemes. Notably in peri-urban areas and informal settlements. Rationing of loans. CSSPs are as user-organisations not profit-oriented but must ensure that at least O&M costs of the system are covered by tariffs. An environment with lively competition provides the best incentives for client responsiveness and quality of services. Such conditions have most often resulted in: Low loan collection rates because clients consider cheap loans as grants that do not have to be repaid. Institutional corruption and fraud because staff may try to capture the difference in the interest rate by eliciting side payments from clients. experience from India (see chapter 7. Furthermore. Limited number of borrowers served because the loan capital shrinks due to high default rates. up-front investment costs have to be shouldered by the community to a certain percentage. HSSPs invest into water and sanitation facilities to create better living conditions and increase convenience for private households. Regulation of the water sector should therefore enhance competition but at the same time need to ensure that quality standards are met. Financial institutions have to recognise the entrepreneurial activities of PSSPs as a business venture. subsidized interest rates and ‘soft loan conditions’ have the opposite effect of that intended because local financial markets cannot develop under such distortions. For most financial institutions. a loan for water and sanitation facilities is a pure consumption loan. the critical issue in POWS&S financing is profitability and/or cost recovery by tariffs. Consequently. which typically favours wealthy and politically connected rent-seekers. the house is an important factor of production for poor people. As long as returns are low and legal framework conditions in the water sector are not clearly set. Water should be treated as an economic commodity paid for by users.

Small-scale providers are not regulated and often operate illegally (illegal connections) and under “cartel” conditions (push up prices artificially) that is against the objectives pursued by water sector reforms. PSSPs are no adequate solution because they do not pay their bills regularly (to the utility). The dominant financial sources still remain the public sector and external aid flows. (ii) Potential role of small-scale providers PSSPs offer services that are well adapted to the needs of the poor and highly accepted by them. (ii) could and should small-scale providers contribute to close the coverage gap in low-income areas and (iii) does the lack of access to finance constitute a major constraint for the activities of small-scale providers? The literature review undertaken in this study shows that there are no clear answers to these questions. For the water sector.g. Source: Own compilation DESK STUDY POWS&S FINAL REPORT (16-03-2007) 54 . in response to their clients’ demand. the most common “pros” and “cons” are summarized: Table 7: Controversial Statements about Role and Significance of Financial Services in POWS&S Pros (i) Financial Services and MDGs Financial services / Microfinance services are topical because it can make an important contribution to the achievement of the MDGs.9 Conclusions 9. The informal water sector is constrained in its rate of expansion due to the lack of access to adequate loans. (iii) Access to finance Some MFIs (e. microfinance is only of marginal importance (niche market).1 Controversial Working Hypothesis The topic of this study boils down to the following central questions: (i) could financial services in general play an important role in achieving the MDG targets for water supply and sanitation. charge high prices. offer bad water quality and operate under inefficient conditions. It is the scarcity situation in which the PSSPs operate and thrive. Large-scale monopoly companies are justified in the water and sanitation sector because of economies of scale. In table 7. Huge investments are necessary in order to bring the water and sanitation infrastructure to adequate levels. microfinance can help the poor to have access to water services. The core blockage to increased financial services in the water sector is (the lack of) awareness of the business case for water supply projects. Making profits from the poorest is ethically wrong. even if the interest rates provided by MFIs are lower than those offered by informal moneylenders. Cons Non-financial measures are many times more critical than merely increasing finance. CMFL an Ugandan MFI) consider the entrepreneurial activities of smallscale provides as a business venture. Small-scale providers often do not need loans but would rather need a fair institutional and legal environment that is favourable to more investment and expansion of activity on their part.

Although literature often optimistically refers to “microfinance for POWS&S”. CSSPs. the supply of financial services to the poor population in SSA lags far behind the development in the rest of the world.In this study it was tried to look behind these arguments and to find solutions that could bring both sectors closer together. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 55 . yet quite new. This process will take time and should be strongly supported by the development partners. a ‘marriage’ of the water and sanitation sector and the financial sector can provide great opportunities to leverage local resources to provide poor populations with water and sanitation facilities that are needed to contribute for reaching the MDGs. small PSSPs and SME-POs) with different needs from the perspective of two sectors that hitherto did not take much note one from the other. Preliminary conclusions will be presented in the following chapter. This information is not available.2. Examples of their investments to the sector are rare and most studies use localised case studies to extrapolate widely. 9. Nevertheless. the informal sector is servicing more than 50% of the overall WS&S market (54). the task of effectively bringing the two sectors together remains still a major challenge. The initial idea to limit the analysis on microfinance only has also proven not to be comprehensive enough regarding the financial needs of the WS&S sector. 9. innovative systemic solutions with regard to financing approaches are rarely found and the only highlight. several misconceptions exist regarding POWS&S: financial institutions have little information on the water and sanitation sector and investments in this sector are perceived as non-productive. financial services that are beyond the scope of traditional microfinance are to be considered as well. these opportunities can only be converted into reality if the different stakeholders overcome the huge information gap and develop ownership in order to actively move the topic forward. Therefore it is recommended that the above hypothesis be a starting point for the two case studies and be looked into more closely when analyzing the specific cases of Kenya and Uganda. However.2 Preliminary Conclusions From a bird’s-eye view the topic of the study is quite complex because the challenge is to analyse four target groups (HSSPs. In practice. In general. little product diversification and low financial performance of the financial sector. In most developing countries.1 Supply – Demand Gap in POWS&S Financing and Key Constraints In order to derive exact figures regarding the financing gap for POWS&S. Particularly the supply of financial services for POWS&S is constrained through low outreach of financial institutions (especially to rural areas and the lower end of the poor). Therefore. The WS&S sector in itself has different features in different country contexts and the same applies to the financial sector. However. is the OBA approach that tries to in-build smart subsidies in a financial concept suiting the conditions and needs of the POWS&S in SSA. desk studies tend to suffering from limited insight into the problems. it would be necessary to give an estimate on the potential of small-scale service providers in the development of POWS&S in SSA. Furthermore.

Further constraints are lack of tenure security for home improvements of HSSPs and the illegal status of many PSSPs. The most important findings are summarized below: At the level of HSSPs.2. The development of financial products for water and sanitation requires institutions that have already substantial experience in serving vulnerable poor populations. institutional. Established relationships with clients and a positive savings and loan track record can replace traditional collateral requirements.2 Potential for the Development of Financial Services for POWS&S in SSA The case studies in chapter 7 have outlined promising approaches from worldwide experience that has the potential for replication in SSA. moneylenders and equipment suppliers. the demand for formal financial services is underdeveloped. Past experiences indicate that financial services for POWS&S will not require the creation of specific institutions or ‘windows’ but have to follow the widely accepted financial system development approach. PSSPs will require not only financing but also other financial services. Regulation in the water and sanitation sector can either enhance or impede the development of PSSPs. Besides some rare exceptions. the most important source of finance for HSSPs and PSSPs are still informal sources from family. Therefore.The potential demand for formal financial services for POWS&S has not yet been translated into effective demand among low income people in countries of SSA and small service providers. They pursue profitable business and should be treated by financial institutions as any other micro or small entrepreneur. friends. PSSPs mainly operating in urban and peri-urban areas can be a very interesting clientele for financial institutions. Conducive political. legal and regulatory framework conditions for the water sector would furthermore contribute significantly to a better linkage with the financial sector. a conducive regulatory framework is a precondition for the development of a healthy environment with competing PSSPs. Therefore. Individual or group lending methodologies as well as the graduation principle are useful methods that have been developed by the microfinance industry over decades and can be adapted to the local circumstances for the development of suitable financial products for POWS&S including much-needed deposit facilities. financial institutions have to recognize the close relationship between water and sanitation facilities and increased capacity of households for income generation. Especially in rural areas and informal settlements in SSA the presence of financial institutions is negligible. The water and sanitation sector – because of its specific characteristics pointed out earlier – has not found much attention from the financial sector in the past. 9. the challenge to link the two sectors depends on a well-functioning financial sector in any given country and the ability of small-scale service providers to develop economically sound businesses. However. rotating savings clubs. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 56 . Tenure status or tenure security must be addressed simultaneously if the potential demand for financial services shall develop. It is assumed that a multitude of investments could be pursued if financial institutions and adopted financial products were available. Once they enter into the formal financial market. Technical and supervisory support of related house improvements is a critical factor of success but should be clearly separated from financial services.

high default loan programs that cannot be sustained. The creation of an exchange forum 11 Noteworthy that inefficient operations may push prices (interest rates for financial services and tariffs for water services) up higher than required. The tendency is to demand a larger share of community contribution for the investment and the full responsibility for operation and maintenance. Second. Innovative concepts in financing POWS&S such as the OBA approach bear a high potential for wider replication in SSA. many microfinance institutions face difficulties resulting from poor health conditions of their clientele. there is a strong consensus in the financial sector that governments should only enable the provision of financial services but not provide them directly 12. First. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 57 . The risk of loan default could be significantly reduced if health conditions of clients improved because they have access to safe water supply and adequate sanitation facilities.3 Outlook The ‘marriage’ of the two sectors is a great challenge. Public funds should not crowd out or compete with private funds but rather being deployed in areas where private funding is not applicable. training in financial management and governance. At the same time. e.CSSPs mainly operating in rural areas must learn to better manage their systems and not to repeat the shortfalls of the past. fees. in areas where social or ecological objectives have priority. financial institutions have developed sophisticated systems for loan recovery. The direct link to performance criteria is a promising approach in the provision of ‘smart subsidies’ that support the sustainable delivery of WS&S services. ‘Intelligent’ leverage of funds and the creation of sound policies without compromising sector principles may be the biggest challenge. The water sector likewise is insisting in cost recovering tariffs in order to maintain the systems and to provide sustainable access to water 11. financial services and funds for maintenance and major repairs have resulted in dysfunction of many schemes. both sectors have not yet found together because they lack of information about each other and opportunities for exchange. The financial services industry has come a long way in defending ‘high’ interest rates to the poor that allow operational and financial sustainability and therefore lasting operations. Furthermore. and refrain from distorting markets with subsidized. Mainly the concerns about sustainability have led to sector principles that deny the access to services free of charge. many of past failures can be avoided. avoid interest rate ceilings. 12 Governments need to maintain macroeconomic stability. Financial services can play an important role but need a careful design and compliance with the financial sector development approach. sensibilisation. many of which are waterborne. village banks have good prospects to act as financial intermediaries where more formal financial institutions are not present. OBA approaches have a great potential to create the right incentives for amelioration. 9. The creation of a win-win situation could have an interesting impact: the water sector could take advantage of financial services and bank clients that are already familiar with various aspects of these services: on-time repayment. Third. In addressing these issues by community organization. Poor maintenance of systems.g. interest rates. poor governance and lack of user charges.2. Furthermore. both sectors show astonishing similarities. The water sector faces similar challenges with regard to collecting tariffs. savings and other related issues.

and enhancing linkages and networking between the financial sector and the POWS&S sector will allow to create a cooperation that can address the sectorrelated problems from a multi-sectoral and more holistic perspective. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 58 .

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79. 10.Bringing Water Supply and Sanitation to Brazils Urban Poor’. Washington D. Jobs. In: Water Supply and Sanitation Feature Stories No. Housing and Services in Nairobi’s Slums’. 80. 2006a. 2005: ‘Alternative Technologies for Water and Sanitation Supply in Small Towns’. DESK STUDY POWS&S FINAL REPORT (16-03-2007) 63 . World Bank.C. 2006b. March 2006.78.C. WSP. ‘Community Participation and Low Cost Technology . ‘Inside Informality: Poverty. Washington D. Nairobi. World Bank.

ANNEX DESK STUDY POWS&S FINAL REPORT (16-03-2007) .

The unit cost refer to the technical options to be financed (e.400 High Urban 5 Private borehole and standpipe with electric pump Bank loan CSSP PSSP • Availability of water at reachable level • Qualified operator in place Depends on scale of investment and amount required Suburban + Rural 13 14 In some cases.000 • Availability of drinking water • Availability of trucks • Availability of water supply system • Contamination of water • Lack of quality control High Urban Preconditions • Availability drinking nearby Risks • Contamination of water • Lack of quality control • Contamination of water • Lack of quality control Potential for Microfinance Low (small investment only) Urban Rural Urban / water of water 2 Water truck Formal or informal loan and earning from other activities Own and family savings PSSP • Availability of drinking water • Qualified operator in place Depends on scale of investment and amount required Urban 3 Overhead water tank to fill trucks PSSP 4 Standpipe Own and family savings CSSP 50 700 700 37.g. handcarts etc. Where these costs are difficult to estimate (in case of systems). cost per inhabitant etc. HSSP Examples (best practices) • Burkina Faso (Ouaga) • Mali (Bamako) • Mauritania (Nouakchott) • Mauritania (Nouakchott) • Kenya (Nairobi) • Uganda (Kampala) • Uganda (Kampala) • Burkina Faso (Ouaga) • Senegal (Dakar) • Mauritania (Nouakchott) • Kenya (Nairobi) Unit Cost (USD) 14 50 120 135 15.500 2. these operations are also financed by donors. unit costs refer to cost per km.Annex 1: Typology of Small-Scale Water Supply and Sanitation Operations and their Respective Investment Needs (Source: (41) and own compilation) Water Operations 1 Handcart transport for Sector Usual Source of Finance 13 Own and family savings Operator/Potential Client PSSP.000 13. water trucks.000 7. DESK STUDY POWS&S FINAL REPORT(16-03-2007) I .).

000 (per km) Depends on scale of investment and amount required Urban + Rural 8 Shallow water systems • NGO loan/grant • Own sources and family savings • NGO loan/grant • Own sources and family savings Own sources and family savings HSSP CSSP • Brazil • Peru n/a Proper operation & maintenance Depends on scale of investment and amount required Urban (high density) 9 Rainwater harvesting HSSP n/a n/a Rainfall in sufficient quantity and frequency Contamination of drinking water due to unsafe storage conditions In water-scarce regions: Increase of water demand High Rural 10 Household connections HSSP n/a n/a Availability of water supply system High Urban 15 In some cases.500 1. DESK STUDY POWS&S FINAL REPORT(16-03-2007) II . these operations are also financed by donors.500 100 per inhabitant connected Preconditions Risks Potential for Microfinance Depends on scale of investment and amount required Urban Rural Urban + Rural / with Urban: Availability of water supply system Rural: • Water supply by gravity is possible • Qualified operator in place Urban: Availability of water supply system Rural: • Water supply by gravity is possible • Qualified operator in place Availability of water supply system Proper operation & maintenance 7 Small network with metered household connections User subscription fees CSSP PSSP Mauritania (Guerou) 3.Water Operations 6 Small network standpipes Sector Usual Source of Finance 15 NGO loan Own sources and family savings Operator/Potential Client CSSP PSSP Examples (best practices) • Guinea (Conakry) • Benin (Cotonou) • Ecuador (Loja/Zamora) Unit Cost (USD) 12.

these operations are also financed by donors.Water Operations 11 Sector Usual Source of Finance 16 • • NGO loan/grant Own sources and family savings NGO loan/grant Own sources and family savings NGO loan/grant Own sources and family savings Operator/Potential Client HSSP CSSP Examples (best practices) The Gambia Unit Cost (USD) n/a Preconditions Risks Potential for Microfinance High Urban Rural Rural / Hand-dug wells (open) Availability of water at reachable level Contamination of well 12 Hand-dug wells hand pump with • • CSSP The Gambia n/a Availability of water at reachable level Proper operation and maintenance Depends on scale of investment and amount required Rural 13 Borehole pump with hand • • CSSP The Gambia Burkina Faso North Mali 12.000 19.000 15. DESK STUDY POWS&S FINAL REPORT(16-03-2007) III .000 • • Availability of water at reachable level Borehole to be financed by others (grant) Proper operation and maintenance Depends on scale of investment and amount required Rural 16 In some cases.

these operations are also financed by donors.000 Availability of proper discharge site Depends on scale of investment and amount required Urban 3 Public latrines shower facilities and Formal or informal loan PSSP 200 3.Sanitation Operations 1 Sector Usual Source of Finance 17 Own sources and family savings Operator/Potential Client PSSP HSSP Examples (best practices) • • • • • • • • • Senegal (Dakar) Mali (Bamako) Kenya (Nairobi) Mali (Bamako) Burkina Faso (Ouaga) Senegal (Dakar) Uganda (Kampala) Mali (Bamako) Uganda (Kampala) Kenya Brazil 18 Unit Cost (USD) 25 19 50 Preconditions Risks Potential for Microfinance Low (small investment only) Urban Rural Urban + Rural / Manual latrine-cleaning equipment and latrine cleaning Availability of proper discharge site 2 Second hand suction truck (for septic tanks) Formal or informal loan PSSP 15. connected 200.500 Latrine cleaning service available Depends on scale of investment and amount required Urban 4 Shallow sewer systems (SSS) • • NGO Own sources and family savings NGO Municipality Formal or informal loan HSSP CSSP • • n/a 100 per inhabitant connected Availability of central sewer system to connect SSS Proper operation and maintenance Depends on scale of investment and amount required Urban 5 Communal sludge treatment plants using ponds (stabilization ponds) • • • Municipality CSSP • Ecuador 19 80-100 per inhab. CAERN: Rio Grande do Norte KfW. Loja / Zamora DESK STUDY POWS&S FINAL REPORT(16-03-2007) IV .700 25.000 8.300 16.000 Qualified operator in place Proper operation and maintenance Depends on scale of investment and amount required Urban • Benin (Cotonou) 17 18 19 In some cases.

DESK STUDY POWS&S FINAL REPORT(16-03-2007) V .000 Ground water contamination High Urban 20 In some cases. these operations are also financed by donors.Sanitation Operations 6 Sector Usual Source of Finance 20 • • • NGO Municipality Formal or informal loan Operator/Potential Client Municipality CSSP Examples (best practices) • Ecuador Unit Cost (USD) 80-100 per inhabitant connected Preconditions Risks Potential for Microfinance Depends on scale of investment and amount required Urban Rural Urban / Communal septic tanks with infiltration trenches Qualified operator in place Proper operation and maintenance 7 Unlined pit or latrine Own sources and family savings with Own sources and family savings Own sources and family savings Own sources and family savings HSSP 30-100 Ground water contamination Low (can constructed user himself) High be by Urban + Rural 8 Lined latrine platform HSSP 150-300 Ground water contamination Urban + Rural 9 Latrine or toilet + lined pit linked to soak pit HSSP 300-800 Availability of water supply system (flush toilet) Availability of water supply system (flush toilet) Ground water contamination High Urban + Rural 10 Septic tank and grease trap and soak pit/filtering trench HSSP 800-3.

Its main housing microfinance products are not significantly different from its micro-enterprise loans that can be used for housing as well. Mahila SEWA Co-operative Bank (SEWA Bank) was created by 4. The objective of the programme is to provide basic infrastructure (road. SEWA Bank has been a pioneer in the field of housing microfinance and started its housing and infrastructure finance activities in 1976. located in Ahmedabad City 22 is part of the Indian SEWA movement. More than 30% of the people live below the poverty line. access to water facilities saves time for women who can do business instead of lining up for water. SEWA Bank has recognized that for a wide range of activities by women in the informal sector. Evaluation studies in the three slums of Ahmedabad City have documented an average increase of >USD 1 per day in the net earnings level of the housing loan debtors. SEWA Bank has been refinanced by the Housing and Urban Development Corporation (HUDCO) and the Housing Development Finance Corporation (HDFC) for its housing portfolio. SEWA Bank has been providing banking services to poor. storm water drains. warehouse.g. Property ownership (a land title) is not required for a housing loan. Population is about 5 million. The maximum loan amount for an unsecured housing loan is USD 532. India 21 SEWA Bank.5% as compared to 19%) than working capital loans. Furthermore. In 1974. underground sewerage. etc.000 members.g. e.7 million. the applicant is required to have legal rights (a so called ‘near legal’ tenure status) to the property. their home is a productive asset. sorting place and/or shop. As of March 2004. workplace. (60). illiterate self-employed women. The Ahmedabad Municipal Corporation provides the connection of services (individual water supply. upgrading or expansion including water and sanitation facilities 23. DESK STUDY POWS&S FINAL REPORT(16-03-2007) VI . solid waste disposal service. The Slum Networking Project or Parivartan scheme deserves special attention. Ahmedabad.) up to the city mains and pays with its own resources (general municipal revenues and financing from the World Bank) 80% of the funds needed for 21 22 Information from (14). 23 Separate figures on WS&S are not available. Ahmedabad has India’s third highest per capita income. Considered as the second largest industrial centre of India.Annex 2: Case Study One HSSP Finance: House Improvement Loans – SEWA Bank.000 SEWA members in order to address the problem of non-availability of appropriate banking services and to free themselves from the ‘vicious cycle of poverty’. (61) and own communications. SEWA Bank estimates that half of all loans the bank disburses are used for housing whereas a large majority of SEWA Bank’s housing loans are home improvement loans for general repairs. electricity and water) to people living in the informal settlements. Assets such as jewellery are used as collateral for secured loans. (15). instead. SEWA Bank has 127 employees and more than 70. tobacco industry). street lightening. Since then. Clients are required to save regularly for at least one year before being eligible for a housing or infrastructure loan. The housing loans are longer-term (60 months as compared to 36 months) and cheaper (14. The Self Employed Women’s association (SEWA) is a trade union of female workers in the informal sector (e. The bank holds more than USD 14 million deposits and has an active loan portfolio of USD 3. unsecured loans are backed by a lien on the client's demand deposits and guarantors.

most clients were able to save the required amount instead of taking a loan given the time it takes from planning to implementation. In addition. SEWA Bank acts as a financial intermediary and provides savings and credit facilities in order to meet the cash contribution.the upgrading work (USD 170 per participating household). DESK STUDY POWS&S FINAL REPORT(16-03-2007) VII . Interesting to note that in the Parivartan scheme. the Corporation has also provided written land tenure security for a period of 10 years to all the slum participants of Parivartan. Mahila Housing SEWA Trust is involved as a technical agency and provides technical advise and supervision and ensures that the women residents of the slums are involved in the decisions made. Beneficiary households are expected to contribute the remaining 20% (USD 42).

the concept of private provision of water supply under public-private partnership arrangements has not always proven to be successful. Argentina) have been replaced by private monopolies in the pursuit of efficiency gains. The aguatero selects an area where he calculates that his business can take root in a growing settlement. builds a well and pump house and provides water to the settlers.g. The existence of unclaimed areas on the edge of and between the aguateros’ business zones – where the “competition by comparison” on a reduced scale takes place – assures that the aguateros do not take unfair advantage of their customers. but because of the importance small-scale service providers can play in serving the poor. They operate mainly in the outskirts of Asunción and Ciudad del Este and often had started out as water truckers. Paraguay has been the reason for another type of experiment: the free entry mode of service provision. water is pumped for a limited number of hours each day and the customers plan their usage around this schedule. Besides the connection fee to be paid upfront by the customers. This case study was not selected in the first place because of its relevance for financial services. Instead. generally. The water charges are. private investment and better service under a regulated environment. the aguateros have long been cited as an important and convincing example for “informal” service provision and their DESK STUDY POWS&S FINAL REPORT(16-03-2007) VIII . they rely for the most part on personal loans (often secured by mortgaging the entrepreneur’s home) or high-interest short-term commercial credits. the governments have tried to turn over the business to private operators. A typical system consist of a well and pump house which supplies a series of houses close by through a low cost network simple to install. Actually. Where water supply has always been seen as a basic service to be guaranteed by the state. public monopolies in some countries (e. In an almost unique case. The sometimes-precarious nature of the installations and. almost always. Usually. However. after decades of water supply provision by public utilities. In addition. above all. a huge number of small entrepreneurs have been operating under quite competitive conditions in a service long believed to be a natural monopoly. well-measured and. The development of these water supply systems is completely private. the private water providers of Paraguay – or aguateros as they are called – have demonstrated that competition within a given area is possible. The aguatero makes the full investment and assumes all risks by himself and capital financing sometimes comes hard. The Aguateros Association also limits the possibilities for open flare ups between them and helps to standardize service quality and prices. Bolivia.Annex 3: Case Study Two PSSP Finance: The “Aguateros” in Paraguay In Latin America. below what the public water company charges its clients. the highly personalized nature of the aguatero business permits a great degree of flexibility in their relations with clients. their legal insecurity in the medium-term. Most of the aguateros invest in infrastructure without recourse to public funding or soft loans that normally sustain public utilities. It is reported (56) that the aguateros’ developments are based on a total recovery of investment costs before three years. as the residents in the unclaimed areas do have some choice. For almost two decades. but then have moved on to create small-scale water supply systems based on underground sources. buys a lot. Assessment. filling their on-site tanks with enough water for the family’s daily usage. means that the investment must be amortized rapidly.

The public utility’s USD 137 million investment accounted for 62. It is estimated (55) that they have installed some 50. In the pilot phase. Outlook. enjoys a privileged position with abundant and high quality ground water. or left unmentioned where they do not. This initiative was the first attempt to apply the OBA approach to rural and small-town water sector investment. state funds and OBA subsidies and to (iii) reduce the financial burden for poor households.000 households served by the aguateros found that 90 percent were satisfied with the service and 75 percent were unwilling to pay more for better service. Under the recently launched OBA initiative (see chapter 7. DESK STUDY POWS&S FINAL REPORT(16-03-2007) IX . leaving behind and unattended the poor population in peri-urban areas and the smaller communities. four systems were planned and implemented. then private sector participation will necessarily tend toward the places where business opportunities are greatest. A 2002 survey (25) of 1. if the smallscale operators are ignored where they exist. However. What works in Paraguay could work as well in any country in the hemisphere. However. Asunción. All four systems are in service now.4). like many of Paraguay’s and Argentina’s delta cities. Granted. aguateros and local construction companies were sought to extend their expertise to rural areas and small towns whereby output-based aid subsidies would be awarded through competitive bidding. it clearly demonstrates one case in which the sum of many small-scale operations proves to be more economical than the large-scale “economies”.000 new connections in the same timeframe. to (ii) leverage locally available funds by combining contributions from the small-scale private operators. The advantage of this approach is to (i) replicate the professional experience of the aguateros.000 connections in Asunción over the past 15 years for an investment of around USD 20 million in over 400 small-scale systems. and a second phase for additional systems in other small towns and rural areas is currently under way.potential for financial services is huge. Additional subsidies were guaranteed by the State (USD 150 per household).

Like in Benin. i. Both villages have accounts with the largest rural MFI (CRCAM). The water is sold and revenues go into two bank accounts. like in many other countries of SSA. Together with DNH (Direction Nationale de l’Hydraulique) is in charge of water supply in rural areas (and small towns). Currently. 24 Information from (41). KfW has developed a new O&M concept for rural water supply schemes where the operation is being transferred to local user groups (CSSPs).e. when spare parts need to be procured or technical problems need to be solved. Twice a year. the water is sold and revenues go into a bank account. which are organized like privatesector enterprises. (38) DESK STUDY POWS&S FINAL REPORT(16-03-2007) X .Annex 4: Case Study Three CSSP Finance: Village Banks in Benin and Mali 24 GTZ/KfW are experimenting with microfinance and water programmes in two villages in Benin: Allonkphon and Zian in the Oueme and Mono regions. Savings are used for maintenance and for assets renewal and altogether a considerable amount of savings (approx. and earn 3 percent interest on savings: 80 percent goes into a savings account which is used for maintenance in case of breakdown and the remaining 20 percent is used for onlending to the village population for new connections. the possibility of combining these savings with the well-established villages' banks structure is being investigated. EUR one million) has been accumulated so far. will the CSSPs receive advice and support from the next bigger water supply system (small town) or a central unit at the DNH. this unit conducts a technical and financial audit of the operator and creates the necessary transparency by presenting the audit results before the general assembly of the users. Only when required. In Mali. Inhabitants of these two villages have created committees to manage and sell water sourced from a pump installed by a donor.000 inhabitants and provide their water mainly from dug or bore wells. the central problem of rural water supply regard the operation and maintenance of hand pumps: almost 70 percent of Mali’s population still live in villages with less than 2.

de/water ReSPOnSiBle Dr. commissioned by GTZ. The publication has been financed by GTZ (Sector Programmes international Water Policy and infrastructure. Millennium Development Goals and Poverty Reduction. Dr. Jane Sautter COVeR PhOTOS GTZ PlACe AnD DATe OF PUBliCATiOn eschborn. .gtz. Financial Systems Development). Germany T +49 (0) 6196-79-0 F +49 (0) 6196-79-7291 e wasserpolitik@gtz. Berlin The opinions expressed in this study are those of the authors. and do not necessarily reflect the opinion of Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) Gmbh. GTZ works on behalf of the German Federal Ministry for economic Cooperation and Development. BMZ. Franz-Josef Batz.PUBliSheD By Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) Gmbh international Water Policy and infrastructure Programme Dag-hammarskjöld-Weg 1–5 65760 eschborn. 2007 ACKnOWleDGeMenTS The publication draws on excellent research studies carried out by Brigitte Biesinger and Maren Richter. Brigitte Klein.de i www. DiSClAiMeR AUThORS Brigitte Biesinger and Maren Richter DeSiGn WeBeR/SUPiRAn Kommunikationsgestaltung.

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