funding & financing

What is WASH finance?

glaas
A 2017 GLAAS report graphic on the WASH finance mix in a set of countries

In a previous post, I proposed a working definition of WASH finance as “the study of how WASH services are paid for, including who pays, how and when”. There is also the huge question of what is paid for (i.e. level of service, technology, paying to cover capital or recurrent costs, how equitable it is, etc.). To simplify, let’s take that investment option as given. We could be thinking about a shared pit latrine, a gravity-fed network of rural standposts or a sewer network.

The “who, how and when” are important in the following ways:

  1. Who pays: It matters who is fronting the money, not least because it will give them a say in what is done. Service providers should be accountable to users paying tariffs. Banks offering loans will set conditions. Money might come from the public sector, private firms, individuals/households, donors/NGOs, etc. Some or all of that money might be borrowed (i.e. repayable), so there are effectively multiple payers sharing risk.
  2. How: There are many ways to provide money, whether through cash, debt, equity, etc. Money can be “cheap” or “expensive” if it is borrowed, or “free” if it is not. In-kind payment and unpaid labour can be important but would technically not cover a financial cost (see this post).
  3. When: Timing is everything. Spreading costs can make things more affordable to those without deep pockets, but sometimes interest payments can be crippling. Possible scenarios include immediate payment in full, instalments spaced over time periods (with or without interest), instalments on delivery of contracted outputs etc. Capital itself has an opportunity cost, i.e. it could make a return if invested in something else, like government bonds.

In summary, finance is about how financial costs are covered. The above three dimensions are just an intuitive way I like to think about it – comprehensive frameworks exist for conceptualising WASH finance, discussed below. This post aims to scratch the surface of those in fairly simple terms.

Categorising different types and sources

“Finance” is a useful catch-all term, but it should really be split into funding and financing, as I mentioned via a quote in this post. In short:

  • Funding means providing money which is not expected to be repaid.
  • Financing means providing money on expectation that it will be returned in full, plus interest or dividends, so perhaps better framed as repayable financing.

More on the sub-categories underlying these are as follows. In the WASH context, funding usually comes from three “sources”, together known as the “3Ts” framework popularised by the OECD (2009).

  1. Tariffs, meant in the usual sense as ‘fee for service’ but, conceptually, this bucket also includes self-supply expenditure (e.g. household-funded toilet construction) or user charges such as connection fees.
  2. Tax revenue, which might be collected by different levels of government (local, municipal, state, national)
  3. Transfers, e.g. from donors, NGOs, foundations or remittances

The best explanation I’ve seen of this is the table in the TrackFin guidance doc p.49, which shows how an accounting perspective (“types”) overlays with the 3Ts perspective (“sources”).

Repayable financing fits broadly within two categories:

  1. Debt, which could be a concessional or non-concessional loan, bonds or loan guarantees, etc. – on which the principal must be repaid and interest can be paid
  2. Equity, which could be a formal stake (or share) in a company, a PPP-based “contribution” to capital costs, etc. – on which dividends may be paid and the stake can be withdrawn.

The GLAAS 2017 report graphic at the top of this post shows how different countries use different mixes of funding and financing sources in their sectors. However, only the countries asterisked in the figure have done full TrackFin studies. I would take data for other countries with a pinch of salt (i.e. they are likely ‘best guesses’ by someone),  because detailed information on flows is rarely available at the sector level. That is the whole reason why TrackFin was originated by WHO and is so important (but I’m biased as I was involved in the Tunisia TrackFin study and am fully bought into the approach ).

When is WASH finance cheap or expensive?

Funding is “free” in the sense that it has no cost of capital (though capital may be allocated an opportunity cost in economic analysis). Repayable financing, meanwhile, comes at a price. That price can be “cheap” or “expensive” depending on the terms and implied interest rate. Concessional loans from development banks (such as the African Development Bank or World Bank) are generally the “cheapest” type of repayable financing for WASH services. They allow borrowing at below-market rates but come with various conditions. Non-concessional loans can be secured from commercial banks which probably comes with fewer strings, but at full capital market rates.

In practice in low-income countries, service providers are unlikely to be able to secure repayable financing beyond these options. Most will simply not have the track record of revenue generation and loan repayment (and subsequent credit rating) to be able to issue bonds, for example. A graphic from IRC shows how this can work. With equity meanwhile, allowing private stakes in service providers may not be legally straightforward in many low-income countries.

There is increasing interest in the idea of “blended finance”, whereby public funds (or concessional loans) and commercial repayable financing are combined in a synergistic way. The objective is usually to make an overall package cheaper than the commercial market could provide, but still crowding in private capital rather than crowding it out. Sophie Trémolet gives a clear explanation in this episode of WASH Talk or there’s this World Bank report.

Conclusion

All sources of funding and repayable financing have a role to play in expanding and sustaining WASH services. However, some are more appropriate than others for (i) different purposes, (ii) different providers, and (iii) at different stages of a WASH sector’s development.

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