Financial Sustainability of WASH Services

Compiled by:
Elisabeth Zech (seecon international gmbh)

Executive Summary

Financing WASH Services sustainably – in the sense of securing service delivery after implementation – has proven to be a challenge. Providing sustainable WASH services requires sound strategic financial planning to ensure that existing and prospective resources are appropriate for investment needs and costs of operating and maintaining services. Accounting for the capital maintenance, direct and indirect support costs in the life-cycle of services is often “forgotten” and the mechanisms and institutional changes catering for them left unaddressed (AGUASAN 2012). Hence, a planning tool, such as an indicator framework for financial sustainability of WASH services is needed. Different organisations have recently produced such frameworks (e.g. the life-cycle cost approach from WASHCOST), which provide an overview of important aspects for achieving financial sustainability. Life-cycle cost analysis, cost-benefit analysis and strategic finance planning are software tools that support the evaluation and allocation of SSWM project costs (IRC 2012; GWP 2008).

About Financial Sustainability

 MORIARTY (2012)

Source: MORIARTY (2012)

Considerable effort has been done towards scaling-up coverage of WASH services in recent years. Sustaining these services in the long-term is crucial. Supplying water as well as providing sanitation and hygiene services incur financial cost not only with regards to initial capital investments, but also during operation and maintenance, rehabilitation, upgrading and expansion phases. Financial sustainability focuses on how the governments, donors, civil society and private sector that are responsible for WASH services can ensure revenue streams to cover all costs (AGUASAN 2012).

The most important aspect in financial sustainability is the planning process. With initial capital expenditure the service level raises. However if maintenance and service security is not planned in terms of costs and responsibilities, the service level drops in the long-run and leads to disappointment (IRC 2010). Therefore, cost and finance planning must be an integral part of ensuring sustainability, and the elements of the following Financial Sustainability Framework have to be considered for sustainable finance planning (AGUASAN 2012).


Financial Sustainability Framework

Adapted from AGUASAN (2012)

For sound finance planning the following aspects have to be considered and evaluated in advance:

  AGUASAN (2012)

The six key elements constituting the “Framework for Financial Sustainability of WASH Services”. Source: AGUASAN (2012) 

This framework has been elaborated by the 43 participants of the AGUASAN workshop 2012 (AGUASAN 2012) that are professionals in the field of planning for water supply and sanitation management as well as more generic development specialists. Throughout the continuous learning process, the workshop participants came up with six key elements for the financial sustainability of WASH services(see figure and table below).


Key elements

Guiding questions

Tasks to improve financial sustainability

1. Appropriate sector governance

How favourable is the legal framework?

-    Clarify roles & responsibilities of various stakeholders

-    Ensure an independent regulatory body

-    Keep in mind, national governments are responsible for ensuring WASH services

 

How predictable is sector financing and planning?

- Ensure national mechanisms for planning and monitoring

 

Are mechanisms in place to ensure transparency and accountability?

- Consider monitoring & evaluation

 

Are mechanisms in place to ensure reflection and sector learning?

-    Consider monitoring & evaluation

See also factsheet on: Policies and Legal Framework, Institutional Framework, Government Contributions, Water Pricing General, Public Private Partnerships in Water Purification, Donor Agencies and Using Indicators to Measure Progress.

2. Comprehensive cost analysis

Are all costs identified, quantified and monitored at national or regional level?

- Include initial investment costs, maintenance, replacement and extension/upgrading of services
- Match costs with revenues

 

What are the costs at local level?

-    Include often forgotten costs (water resource protection, risk mitigation, Operation & Maintenance (O&M))

TOOLS

Life-cycle cost approach

See also factsheet on: Budget Allocation and Resource Planning and Operation and Maintenance.

3. Financially viable and socially equitable services

Are the revenues of taxes, tariffs and transfers greater than all life-cycle costs, and access to the poor ensured?

 

 

Are diversified and adaptable financing mechanisms in place to ensure human rights to WASH?

 

TOOLS

Business plan, human rights tool kit

See also factsheet on: Business Development in SSWM and The Right to Water and Sanitation

4. A solution suitable to the context

Is the solution appropriate and affordable?

- Check if technology is socially acceptable, financially affordable and environmentally suitable

-   Minimise administrative burden

-    Match O&M tasks to the local capacities of the system managers

-    Fit the service level to the users’ preferences

 

Is it adapted to specific institutional and organisational contexts (e.g. fragile states)?

-    Carry out in-depth analysis of the situation

-    Provide capacity building

-    Carry out household-centred problem solving

See also factsheet on: Sanitation Frameworks and Approaches and Planning with the Community

5. Organisational capacity of relevant actors

Where are the capacity gaps?

Check if they are:

-    Administrative

-    Managerial

-    Technical

-    Financial

-    Analytical

 

Are financial skills enhanced (e.g. to secure financial reserves and manageaccumulated funds effectively)?

 

6. Ownership and commitment

Is leadership committed?

 

 

Are all relevant stakeholders identified, actively involved, highly committed and effectively participating?

 

 

Are the economic benefits identified, understood and valued?

-    Launch advocacy strategies at policy level

-    Carry out awareness raising at community level

TOOLS

Cost-benefit analysis

See also factsheet on: Creating an Enabling Environment in Wastewater Treatment and Awareness Raising for Demand Creation

How to Use the Framework?

Start by evaluating your existing system – drawing a table of current costs, responsibilities and financing gaps – and move on to a future version of an improved system. The steps of the framework serve a realistic assessment of your system and the identification of opportunities.

Who pays for what?

Who will pay for what in 10 years?

National/ regional governments

Municipal governments

National/ regional governments

Municipal governments

Community

Households

Community

Households

Externals

Other

Externals

Other

Gaps? Unplanned costs?

Gaps? Unplanned costs?

Allocating costs and financing gaps of WASH services. Source: AGUASAN (2012)

The life-cycle cost approach, cost-benefit analysis and strategic finance planning (SFP) described below will help you in evaluating all costs.

What Are the Costs and Who Should Pay for Them?

Life-Cycle Cost Approach

Adapted from WASHCOST (2011); IRC (2011); FONSECA et al. (2011)

  DUTI (2012)

Coverage rates compared to sector efforts. Source: MORIARTY (2011) in: DUTI (2012) 

Which costs have to be considered for making WASH services last? The life-cycle cost approach is a methodology for monitoring and costing sustainable water, sanitation and hygiene (WASH) services by assessing costs and comparing them against levels of service provided. WASH services are expected to last. However, analysis in Africa and India has shown that there is little cost planning done in the service chain. This results in service levels dropping a certain time after project implementation. The life-cycle cost approach is based on the service delivery approach and aims at profound finance planning, taking into account all future costs (WASHCOST 2011; FONSECA et al. 2011).


When priority is given to capital expenditure only and recurrent costs get little attention in the cost planning, coverage rates stagnate at some point.Therefore the financial system has to ensure replacement of infrastructure when it is broken as well as extension of delivery systems when demand increases. Life-cycle means that costs follow a certain cycle and each cost component has to be considered in the planning – the costs that are needed to sustain, repair and replace a water (or sanitation) system throughout its cycle of wear, repair and renewal so it provides a service forever (IRC 2011).

Overview of Costs

Below you see an exhaustive overview of the costs to be considered to make water and sanitation solutions last, according to the life-cycle cost approach (adapted from IRC 2011).

 Life-cycle cost components. Adapted from IRC (2012)

Life-cycle cost components. Adapted from IRC (2012) 

  • Capital expenditure: Initial costs of putting new services into place: “hardware” such as pipes, toilets and pumps and one-off “software” such as training and consultations.
  • Cost of capital:The cost of borrowing money or investing in the service instead of another investment opportunity. It also includes any profits made by the service providers not reinvested. It has a direct impact on the ability to maintain a service financially.
  • Operation and maintenance expenditure:Routine maintenance and operation costs that are crucial to keep services running, e.g. wages, fuel, or any other regular purchases. Neglect has long-term consequences for service delivery, e.g. expensive capital (maintenance) expenditure and/or service failure.
  • Capital maintenance expenditure:Occasional large maintenance costs for the renewal, replacement, and rehabilitation of a system. These essential expenditures are required before failure occurs to maintain a level of service and need to be planned in. This is one of the most frequently “forgotten” costs.
  • Expenditure on direct support:Pre and post-construction support costs not directly related to implementation, e.g. training for community or private sector operators or user groups. These costs are often forgotten in rural water and sanitation estimates but are necessary to achieve long-term functionality and scale.
  • Expenditure on indirect support:The costs of planning and policy making at governmental level and capacity building of professionals and technicians. These costs have a direct impact on long-term sustainability.

  FRANCEYS & PEZON (2010)

The blue line shows that regular capital maintenance maintains serviceability, while (red line) service levels fall away over time without capital maintenance, eventually requiring the service to be “rehabilitated” or replaced. Source: FRANCEYS & PEZON (2010) 

Planning and identifying life-cycle costs is an essential aspect of a ‘service delivery approach’ geared towards achieving sustainable services at scale (WASHCOST 2011). By understanding how the different cost components affect the overall costs, finance planning can counteract interruptions of service provision and avoid backslides to use of unsafe water sources and environmental risks through open defecation (IRC 2011).


Valuing Costs and Benefits

Adapted from HUTTON (2012)

The objective of valuing costs and benefits is to understand their relation and compare them in monetary units, in order to utilise these operationalised benefits for better advocacy and decision-making.

What are benefits of improved water and sanitation?

  • Health benefits:health care cost saving, health-related productivity, lower mortality-rates
  • Environmental benefits:less water pollution, land use changes, energy/carbon/nutrients recovery
  • Social and private benefits:more dignity, privacy, comfort, security, gender equality, better physical access
  • Broader economic benefits:tourism revenues, business benefits, income generating water and sanitation markets

There are several methods how the benefit-cost analysis can be used as an economic tool for advocacy and decision-making:

  • Benefit-cost ratio: evaluating the ratio by which benefits exceed costs comparing actual versus optimal conditions (on a time horizon of 20 years).

  WSP (2011)

Benefit-cost ratios of different sanitation service options. Source: WSP (2011) 


  • Internal rate of return: annual rate of return on an investment.

  HUTTON (2012)

Annual rate of return sanitation services. Source: HUTTON (2012) 


  • Payback period: after how many years do net benefits become positive?

  HUTTON (2012)

The payback period of wastewater treatment should not be longer than the lifetime of an installation. Source: HUTTON (2012) 


Strategic Financial Planning (SFP)

Adapted from GWP (2008) and OECD (2009)

SFPaims at making the financing of infrastructure and services more predictable. It combines planning and financing – which are typically done separately – to make spending ambitions more compatible with available financial resources. Equally, financing strategies can be tailored to what is actually needed, which improves the prospects of getting funding (GWP 2008).

The frameworks objectives are:

  • To provide a structure for policy dialogue, involving all stakeholders.
  • Illustrating long-term impacts of set targets.
  • To link sector policies with projects.
  • To enable external financing through transparent and clear finance planning (OECD 2009).

General elements of Strategic Finance Planning:

  • Building scenarios (≥10-20 years) of investment and service planning for the sub-sector (e.g. water supply and sanitation, irrigation, wastewater), including estimated costs for capital investment and recurrent operation and maintenance.
  • Projecting feasible sources of finance for both the initial capital investment and the recurrent costs of operating services.
    Tariffs and other user charges, subsidies from the government, contributions from NGOs, loans, private equity, loans on concessional terms from international financing institutions (IFIs), other sources (use only project finance that is likely available)
  • When finance gaps appear, a process of iteration takes place, involving revisions to both the spending and financing scenarios. Spending plans are adjusted to make them more realistic (like: less ambitious targets, more cost-effective options, demand management programmes, more attenuated implementation periods), while more rigorous assumptions are made about financing sources (higher tariffs, greater engagement with donors and IFIs, use of financial engineering and innovative financing sources and more.

This iteration goes on for several rounds until the spending scenarios are compatible with feasible sources of finance (GWP 2008).

Applicability

The presented frameworks and software tools are applicable at any planning level (for governmental planning as well as for local or community planning). They are to be applied in the planning phase of the project and are themselves a part of the planning process. The usage of these tools requires excellent knowledge of the existing SSWM systems and policies.

Advantages

  • Increases (financial) sustainability of WASH services
  • Helps to identify gaps in the system regarding financial aspects
  • Costs are clear, therefore planning and allocation of responsibilities becomes easier
  • A more objective and realistic debate on tariffs is possible
  • Better communication base with financing institutions (e.g. government, municipality)
  • Responsibilities are set, which assures continuity
  • Commitment is assured

Disadvantages

  • Time and cost intensive in the forefront
  • An effective process depends on many government levels (long process) – full support is needed

References Library

AGUASAN (Editor) (2012): Briefing Note: Financial Sustainability of WASH Services – About Mindset Change and an Eye for the Future. (= Results of the 28th AGUASAN workshop, 18-22 June in Gwatt, Switzerland). St. Gallen: SDC, Eawag/Sandec, HELVETAS, Skat. URL [Accessed: 10.01.2013]. PDF

FONSECA, C.; FRANCEYS, R.; BATCHELOR, C.; MCINTYRE, P.; KLUTSE, A.; KOMIVES, K.; MORIARTY, P.; NAAFS, A. (2011): Life-cycle costs approach. Briefing Note 1a. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 12.11.2012].

FRANCEYS, R. ; PEZON, C. (Editor) (2010): Services are forever: The importance of capital maintenance (CapManEx) in ensuring sustainable WASH services. Briefing Note 1b. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 09.01.2012].

GWP (Editor) (2008): Strategic financial planning. Stockholm: Global Water Partnership (GWP). URL [Accessed: 12.11.2012].

HUTTON, G. (2012): Valuing Costs and Benefits. (= Presentation at 28th AGUASAN workshop, 18th June in Gwatt, Switzerland). Geneva: World Health Organisation.

IRC (Editor) (2010): WASHCost’s theory of change: reforms in the water sector and what they mean for the use of unit costs. Working Paper 1. The Hague: International Water and Sanitation Centre (IRC). URL [Accessed: 12.11.2012].

IRC (Editor) (2011): Introduction: From systems to services. Module 1. The Hague: International Water and Sanitation Centre (IRC). URL [Accessed: 09.01.2013].

IRC (Editor) (2012): Costing sustainable services. Module 1. The Hague: International Water and Sanitation Centre (IRC). URL [Accessed: 08.11.2012].

MORIARTY, P. (2011): Life-cycle cost approach policy meeting. Unpublished presentation.

MORIARTY, P. (2012): We can no more expect unmaintained pumps to provide services than we can a car with no fuel to take us on our journey. The Hague: International Water and Sanitation Centre (IRC). URL [Accessed: 12.11.2012].

OECD (Editor) (2009): Strategic Financial Planning for Water Supply and Sanitation. Paris: Organisation for Economic Co-operation and Development (OECD). URL [Accessed: 12.11.2012].

WASHCOST (Editor) (2011): Life-cycle cost approach. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 19.12.2012]. PDF

WSP (Editor) (2011): The Economic Returns of Sanitation Interventions in Yunnan Province, People’s Republic of China. Washington DC: Water and Sanitation Programme, Worldbank. URL [Accessed: 21.12.2012]. PDF

Further Readings Library

Reference icon

AGUASAN (Editor) (2012): Briefing Note: Financial Sustainability of WASH Services – About Mindset Change and an Eye for the Future. (= Results of the 28th AGUASAN workshop, 18-22 June in Gwatt, Switzerland). St. Gallen: SDC, Eawag/Sandec, HELVETAS, Skat. URL [Accessed: 10.01.2013]. PDF


Reference icon

EUWI (Editor) (2007): Developing Financing Strategies in Water Supply and Sanitation. Kongens Lynby (Denmark): European Water Initiative (EUWI). URL [Accessed: 19.12.2012]. PDF

This paper provides information about financing strategies in WSS that are realistic and meet established development objectives - and in doing this explain what is required to prepare them. Three questions are addressed: What is actually meant by a financing strategy in WSS? What are the stages of preparing, developing and implementing a financing strategy in WSS? And what are the major challenges when doing so?


Reference icon

EUWI-FWG (Editor) (2010): Strategic Financial Planning for water supply and sanitation in Africa. Stockholm: European Water Initiative Finance Working Group (EUWI-FWG). URL [Accessed: 19.12.2012]. PDF

This paper explains the idea of Strategic Finance Planning, which is concerned with finding national consensus on future water and sanitation planning, including financial feasibility. The study focuses on water and sanitation services in Africa.


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PARKINSON, J.; HUTTON, G.; PFEIFFER, V.; BLUME, S.; FEIEREISEN, P. (2012): Financial and economic analysis - Factsheet of Working Group 2. Eschborn: Sustainable Sanitation Alliance. URL [Accessed: 19.12.2012]. PDF

This factsheet introduces financial and economic costs and benefits in relation to sanitation systems. It provides an overview of analytical approaches for comparing sanitation interventions using financial and economic analyses and illustrates these using results from various studies.


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WASHCOST (Editor) (2011): Life-cycle cost approach. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 19.12.2012]. PDF

This brochure gives a brief and clear overview of the theory and usage of the life-cycle cost approach for financial planning, concerning water and sanitation services.


Reference icon

WSUP (Editor) (2012): Financing Water and Sanitation for the Poor: six key solutions. London: Water and Sanitation for the Urban Poor (WSUP). URL [Accessed: 19.12.2012]. PDF

Water and sanitation services for the very poor remain grossly deficient over large areas of the globe, and financing water and sanitation improvements for these people remains a major challenge. This paper proposes six key solutions to overcome this challenge.


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WSUP (2013): 100 percent Access by Design . A Financial Tool for Urban Sanitation. (= Practice Note, PN#009, MAY 2013). London: Water and Sanitation for the Urban Poor (WSUP). URL [Accessed: 06.06.2013]. PDF

This Practice Note from WSUP (Water and Sanitation for the Urban Poor) describes an Excel-based financial analysis tool which generates reliable costings of different options for achieving 100% sanitation access across low-income and non-low-income areas.


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IRC (2011): Applying the Life-Cycle Costs Approach to Sanitation. (= Briefing Note, 3). The Hague: International Water and Sanitation Center (IRC). URL [Accessed: 07.08.2013]. PDF

This briefing note presents an application of the life-cycle costs approach (LCCA) to sanitation in rural and peri-urban areas in four different countries— Andhra Pradesh (India), Burkina Faso, Ghana, and Mozambique. The document compares the differences between the financial costs of traditional and improved latrines, and the quality of service delivered to users.


Reference icon

BOULENOUAR, J.; SCHWEITZER, R.; LOCKWOOD, H. (2013): Mapping Sustainability Assessment Tools to Support Sustainable Water and Sanitation Service Delivery. (= Working Paper, 6). The Hague: International Water and Sanitation Centre (IRC), Water Services that Last. URL [Accessed: 01.11.2013]. PDF

This paper reviews five different sustainability assessment tools that are currently in use for programme monitoring of WASH interventions. The selected tools all have a developed framework that has each been pilot tested and produces an objective and quantifiable output (e.g., final score or percentage) that can be used to trigger improvements to programme design or take remedial actions.


Reference icon

COWLING, R.; NORMAN, G. (2013): Achieving Sustainability: Changing the Ways in Which we Define Success. (= Perspective, 1). London: Water and Sanitation for the Urban Poor (WSUP). URL [Accessed: 25.11.2013]. PDF

Implementing agencies like WSUP, Water For People and IRC are of course accountable to their funders, including major bilaterals and foundations. And naturally, these funders must track the effectiveness of their spending. But short budget cycles and the need to demonstrate “value for money” can often encourage over-simplistic measurement of success in terms of short-term outputs, rather than genuinely sustainable services. This note proposes some ways forward.


Case Studies Library

Reference icon

WSP (2009): Study for Financial and Economic Analysis of Ecological Sanitation in Sub-Saharan Africa. Washington: Water and Sanitation Program (WSP). URL [Accessed: 10.01.2011]. PDF

This study focuses on the comparison of ecosan with conventional sanitation systems suitable for urban settlements in Sub-Saharan Africa. The aim of the study was to compare ecosan with conventional sanitation systems in terms of financial and economic costs and benefits, in order to assist decision-makers and sponsors of development programs to make informed decisions about relative merits of different types of sanitation. Based on two case study analysis, none of the currently implemented systems are seen to provide an obvious model for scaling up without considerable external support.


Reference icon

WSP (Editor) (2011): The Economic Returns of Sanitation Interventions in Yunnan Province, People’s Republic of China. Washington DC: Water and Sanitation Programme, Worldbank. URL [Accessed: 21.12.2012]. PDF

This is the Briefnote on a multi-country study launched in 2007 as a response by the World Bank’s Water and Sanitation Program to address major gaps in evidence among developing countries on the economic aspects of sanitation. Its objective is to provide economic evidence to increase the volumes and efficiency of public and private spending on sanitation. The Briefnote summarizes key findings of Study Phase II—cost-benefit analysis of alternative sanitation options—from Yunnan Province.


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WSUP (2013): Get to Scale in Urban Sanitation!. (= Practice Note, 10). London: Water and Sanitation for the Urban Poor (WSUP). URL [Accessed: 07.08.2013]. PDF

Taking urban sanitation to scale requires ‘scaling out’ models that work for poorer communities, and at the same time ‘scaling up’ sustainable management processes. This short note reports scale-out and scale-up experience from Maputo and Antananarivo.


Reference icon

JONES, S. (2013): How Can INGOs Help Promote Sustainable Rural Water Services?. An Analysis of WaterAid’s Approach to Supporting Local Governments in Mali. In: Water Alternatives 6, 350-366. France: Water Alternatives Association. URL [Accessed: 11.10.2013]. PDF

This paper examines how the international NGO WaterAid supports decentralised local governments in Mali to fulfil their role of service authorities within a service delivery approach for rural water services.


Training Material Library

Reference icon

WASHCOST (Editor) (2012): The life-cycle cost approach to water, sanitation and hygiene. Module 1. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 19.12.2012]. PDF

The first module is an introduction to the life-cycle cost approach and the service delivery approach.


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WASHCOST (Editor) (2012): Implementing the life-cycle cost approach. Module 2. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 19.12.2012]. PDF

The second module is concerned with implications on how to implement the life-cycle cost approach in service planning, including data collection, check lists and methodological advice.


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WASHCOST (Editor) (2012): Analysing life-cycle costs and service levels. Module 3. The Hague: IRC International Water and Sanitation Centre. URL [Accessed: 19.12.2012]. PDF

The third and last module explains how to analyse the evaluated life-cycle costs and how to apply them to service levels.


Important Weblinks

http://www.irc.nl/page/79727 [Accessed: 07.08.2013]

This video by IRC’s WASHCost project examines the full costs of building traditional latrines in Mozambique. There, cost data for planning are collected by local authorities. They gather the information around households in the area. Households are visited and their sanitation situation is assessed. This gives a clear picture of what is actually achieved.

http://www.washplus.org/ [Accessed: 19.12.2013]

The WASH Sustainability Index Tool, developed for the USAID-Rotary International H2O Collaboration, is a tool to assess sustainability of WASH programs. The tool considers the sustainability of institutional, management, financial, technical and environmental factors.