Alternatives for capital financing of water supply and sanitation

It discusses the main sources of investment capital, both foreign and domestic, as well as private and public. The study also focuses on fiscal relations between the central government and WS&S delivery agencies, noting the issues that have arisen as debt financing has grown more important. The study also describes the main types of cost-recovery mechanisms, including direct and indirect recovery mechanisms, from simple connection fees to betterment levies and impact fees. The trade-off in recovering capital costs through either access charges or consumption-based charges is also discussed. The final part of the paper addresses strategies that can be used to expand resources available for sector financing and for improving cost recovery. Sector financing strategies focus on the role of local governments in mobilizing capital, on increasing access to domestic capital markets, and in expanding the role of the private sector. With respect to the latter, the "build, operate, and transfer" mechanism is examined in some detail. Improving capital cost recovery requires a management strategy that goes far beyond just selecting the most appropriate recovery mechanisms at the outset. This management strategy requires that WS&S service managers closely monitor the performance of the cost recovery itself, as well as the impact of that recovery on overall consumer demand. WS&S managers are fortunate in that they have a number of different cost-recovery mechanisms to choose from. However, it is also clear that few of these managers have had the information or training to use these mechanisms effectively. The purpose of this report is to help fill that gap. (Author abstract)