PPP Development Stage – Financing (Cost Recovery)
13.5 What are the key issues?
A. Payment mechanisms
The forming of an appropriate and feasible payment scheme is
an essential part in cost recovery policy because it ensures
the collection of the necessary financial amounts.
As a part of the initial, detailed poverty assessments and
willingness-to-pay studies, municipalities should explore
factors affecting payment and, where possible, design mechanisms
to address constraints. The analysis should identify the reasons
for low-cost recovery and the constraints affecting service
provision and access.
The main objectives of a payment mechanism can be:
- frequency of payment (including seasonal variations in
service use and payments);
- flexibility of payment conditions (including penalties and
enforcement mechanisms); and
- options available in a time of crisis (buying drinking water,
using natural sources for washing and so on)
Service access of poor households is frequently affected by the
capacity each has to make payments in the form, at the time
and at the place required by the service provider. Continued access
can be threatened if there is no flexibility for poor households
to take on an appropriate and feasible payment scheme.
This flexibility may be necessary to pay tariffs and consideration
might be given to methods of:
- delaying/spreading payments during difficult times;
- adjusting monthly/quarterly payments to shorter timeframes,
which are more applicable to the way the poor manage
- reducing the constraints and costs of making the payments themselves.
Where connection costs are passed on to users, it may be
necessary to improve the capacity of the poor to pay by arranging
financing options. This might include mechanisms for:
- delaying/spreading payments by paying in instalments
at affordable rates and agreed intervals;
- establishing the possibility for householders to offset some
costs by providing their own labour at the
household or street level; and
- establishing or linking into existing micro-credit initiatives.
What are the key issues?
◊ Payment mechanisms
◊ Willingness to pay
◊ Financial sustainability
B. Willingness to pay
With regard to willingness to pay, experience shows that willingness
to pay only extends to what users see as a benefit or priority
and that this is not usually sufficient to pay the full
cost of the systems, including trunk sewers and treatment. Complementary
financing will always be necessary to ensure the sustainability
of services. This may be done through a variety of taxes.
However, tax collection in many developing countries is not
efficient or effective and, moreover, a large part of the population
does not pay taxes that can be used for sewage management
(those living in low-income urban areas, for example).
The key features to success in this willingness to pay are:
- Community members make informed choices on:
- whether to participate in the project;
- technology and service level options based on willingness
to pay – these
based on the principle that more expensive systems cost more;
- when and how their services are delivered;
- how funds are managed and accounted for; and
- how their services are operated and maintained.
adequate flow of information is provided to the community and procedures
are adopted to facilitate collective action decisions within the
community and between the community and other actors.
play a facilitative role, set clear national policies and
strategies, encourage broad stakeholder consultation and
facilitate capacity building and learning.
enabling environment is created for the participation of
a wide range of providers of goods, services and technical assistance
to communities, including the private sector and NGOs.
There is a range of problem areas around financing that remain
to be resolved and need to be addressed during project
implementation. These include:
- Since willingness to pay does not often extend to downstream
costs, what weight should be given to downstream effects
in service selection and user consultations?
- How are downstream costs to be covered if beneficiaries are unwilling to
- In general, how are the economic benefits of externalities to be sustained
- How can these approaches be applied when considering more than a single
sector, as is necessary when planning urban environmental
sanitation for a city?
- How can users’ priorities be reconciled with broader city needs and
priorities, and service interactions and dependencies?
- Should the demand-based approach be the preferred method of arriving at
the service levels, service mix, user contributions and
- What other alternatives exist that might be more cost-effective, sufficiently
precise for the intended purpose or more appropriate
to developing country institutional capacity?
C. Financial sustainability
Financial sustainability of the infrastructure remains a major
concern. Too many investments and efforts fail to lead to
truly functional programs because they are not viable financially.
This is the main “limiting factor” in the achievement
of substantial improvement.
Finance raised from water use charges or pollution fees should
not be considered as taxes and entered into the national
budget. Rather they should be earmarked for water quality
management initiatives in the river basin or region that generated
the funds, such as co-financing wastewater treatment facilities.