Financing wastewater services in developing countries

Rising urban demand for clean water, combined with health and environmental concerns, have spurred donor agencies to fund water projects, usually based on U.S. models. However, two important aspects of expanded water services have received less attention: treatment and disposal of the higher quantities of wastewater that result; and financing mechanisms for operations and maintenance, and capital investment in the wastewater sector. This report provides information about current wastewater financing practices in both industrialized and developing countries. Although more comprehensive data are available from models in the United States, the Korean and French cases provide a broader basis for comparing policy and regulatory climates, detecting trends in decentralization, and evaluating the feasibility of sectoral financial autonomy. These case studies provide three quite different approaches to the sector. The United States is a completely decentralized model in which the central government"s role has been confined to financing and broad regulation of the water sector. Furthermore, the last 20 years have seen wide swings in the level of central government subsidy to the water sector, as well as some recent innovations such as revolving funds at the state level to leverage grant funds through borrowing in the private capital markets. France provides a case example that combines the European River Basin Authority model with municipal ownership of water supply and sanitation systems and heavy reliance on private firms to manage the systems under long-term contracts. Korea provides an example of a country that is decentralizing authority for the wastewater sector and also greatly increasing overall capital investment, while shifting the burden of cost recovery to users. These case studies support several contentions. (1) It is unlikely that user tariffs can finance all wastewater costs, even in industrial countries. (2) Long-term subsidization of infrastructure financing for the wastewater sector leads to less efficient use of resources and displacement of private and local sources of capital. (3) Demonstrating the linkage between water usage and sewage disposal (and pollution control costs) tends to increase sector revenues, promote water conservation, and improve public management of resources. (4) Beneficiary charges, pollution control legislation, and environmental education are effective ways to influence consumer attitudes concerning the real costs of wastewater collection and treatment. Wastewater finance cannot be treated in isolation from water supply, nor can it be separated from the larger issue of municipal infrastructure finance, given that local governments will play an increasingly important role in both cost recovery and assumption of the growing debt burden. A trend toward decentralizing responsibility for financing at least a portion of sanitation capital investment is evident in both industrialized and developing countries. Some privatization of service delivery is also occurring as a way to increase efficiency through better management and use of resources. Ultimately, developing countries will need to evaluate past and current practices in the water and sanitation sectors in order to develop efficient and equitable strategies for serving expanding populations with fewer resources. (Author abstract)