There is an ongoing conversation in the WASH sector about how we can enable urban water and sanitation service provision at scale. In Water and Sanitation for the Urban Poor’s (WSUP) view, this can only be realised with the involvement of locally mandated service providers, such as water utilities and municipalities. These institutions need the capacity and know-how to deliver services that are financially viable. In fact, we would argue that in any conversation about providing basic services at scale, financial viability deserves top billing.Why? Because it is simply not possible to provide services at the level required to meet SDG targets without cost recovery to underpin sustainability.
By Sam Drabble
In a new publication we explore the financial viability of six urban WASH service delivery models. Each case study had three common features: 1) service delivery is overseen by a locally mandated institution, directly or through public-private partnership; 2) a significant portion of the target customer base (in most cases the entire customer base) live in low-income areas of the city; and 3) the model has demonstrated financial viability over a sustained period, with the result that the service provider can be confident of recovering costs and in some cases generating profit.
Ensuring that WASH services recover costs while remaining affordable for low-income households, and reaching the city’s most vulnerable residents, is a constant balancing act. Our publication, Balancing financial viability and user affordability, shows it can be done. In this blog we share some key insights.
We need institutions with the capacity to deliver services at scale
Combined with the right incentives, targeted institutional support can bring a huge return on investment in terms of benefits to low-income consumers. A case in point is the institutional reform implemented by JIRAMA, the water utility in Madagascar. Since 2010 WSUP and JIRAMA have worked in partnership to implement a Non-Revenue Water (NRW) reduction programme, aimed at improving the utility’s financial efficiency and overall performance.
By prioritising leakage detection among other measures, the utility has made huge efficiency savings which have been used to strengthen water supply across the city. WSUP estimates that more than 700,000 low-income consumers have benefitted from the programme, with a projected net financial gain to JIRAMA of US$ 2.4 million for the period 2011-2020 for reinvestment into services in low-income communities.
We need public, private and household expenditure to bridge the financing gap
When developing WASH services, capital investment by governments and development partners is generally necessary to cover lifecycle costs. For safely managed sanitation, this is practically essential: each of the three sanitation models featured in our publication involved some form of public subsidy or donor investment, ranging from the procurement of vacuum tankers to a cross-subsidy for FSM services from water revenues. However, this investment alone is unlikely to be enough: household contributions are required to generate ongoing revenues. To get this balance right, negotiation between key stakeholders, and a flexible pricing strategy are essential.
People living in low-income communities are customers too
When it comes to water supply, half the battle is convincing water utilities that it makes commercial sense to serve low-income areas of the city. Our assessment of an ongoing household water connection programme in Maputo brought home the win-win potential of water supply to low-income urban areas.
Affordability for low-income customers was enhanced through a 50% reduction in the connection fee, and through the option to pay-by-instalment over a 12 month-period. Together these measures contributed to a surge in demand and a 100% increase in water coverage in target areas. In turn, our assessment found the utility AdeM is projected to generate US$ 630,000 from billings revenue (from just 3 of the 13 low-income areas included in the programme) over a 10-year period to 2023, with a net gain of approximately US$369,000.
Even sanitation can be profitable!
It is no secret that sanitation is uniquely challenging. Nonetheless, our experience has shown that FSM services can strike the balance between financial viability and affordability. With the right strategy, they can even return profits for the provider. A leading example is SWEEP, an FSM service provided in Bangladesh through a lease-based agreement between the public sector and the private sector. In Dhaka, SWEEP has been operated by DWASA (Dhaka’s water and sewerage authority) and a local SME. This partnership became profitable within five months of operation, and is forecast to reach over 200,000 people annually in Dhaka by 2025.
Key to SWEEP’s success has been a deliberate strategy to incorporate a high proportion of middle and high-income customers through the start-up phase, providing a solid foundation and enabling the business to charge lower, flexible rates to low-income households. SWEEP’s proven business model is now set for replication in three more Bangladeshi cities, which combined with Dhaka give an annual market size of US$ 18 million.
Safeguarding affordability for low-income households will be priority, beginning with in Bangladesh’s second city, Chittagong, where the requirement for the business to maintain a 30% share of the customer base as low-income households has been built into the contract.
So, what does this assessment mean for funders? In WSUP’s view, we need to keep these parallel principles of viability and affordability at the forefront when assessing where to allocate funding for urban WASH. We need to understand that striking the balance is possible, but it can take time, patience and iteration to locate. And if we are prioritising scale – which is essential if we are to meet the SDGs – then we need to back locally mandated institutions, and ensure they have the capacity, and the revenue streams, to deliver sustainable services.
By Sam Drabble is Research and Evaluation Manager, Water & Sanitation for the Urban Poor (WSUP). Follow @WSUPUK for more on financial viability in WASH service delivery.