By Sam Drabble, Head of Evaluation, Research & Learning
In a recent publication, WSUP explored what quality sanitation means from a public health and user experience perspective. But there is a further question which is core to achieving Citywide Inclusive Sanitation: how can quality sanitation be financed?
The scale of the financing challenge for urban sanitation is immense. The World Bank estimates that to meet SDG 6.1 and 6.2, capital financing would need to triple to US$ 114 billion per annum, in addition to operations and maintenance costs. Quantitative data from 20 countries, published in the 2019 GLAAS report, reveals a WASH funding gap of 61% between identified needs and available financing for WASH.
WSUP’s Urban Sanitation Research Initiative (USRI) aimed to drive sector change in our 3 focus countries of Bangladesh, Ghana and Kenya. Across our focus countries, institutional partners highlighted financing as a key area where targeted evidence generation could help unlock barriers to change.
This meant research to generate localised data on the costs of different sanitation options; and to assess the viability of financing options to help fund services.
Our new paper Mind the Gap: How can we address the shortfall in urban sanitation finance? synthesises findings from four research projects in this area.
Here are four key findings:
It is not realistic for low-income households to cover even a large proportion of the costs for sanitation services
Led by Aquaya Institute, the SanCost study involved 1) assessment of full life-cycle costs of sanitation options in low-income areas, across 5 cities in Bangladesh, Ghana and Kenya; and 2) detailed analysis of low-income people’s ability and willingness-to-pay (WTP) in that city. This enabled modelling of financing gaps that will need to be covered by some form of subsidy or cross-subsidy.
In conceiving this research, WSUP expected the gap between costs and WTP to be clear. But the SanCost results are striking, and incontrovertible. Across the five cities and across the range of sanitation services, median WTP values were far below current price levels — generally around 20 – 30% of the market price.
SanCost generated localised data of value to our institutional partners. But it also produced a wider takeaway message: households living in urban low-income areas are willing to pay only a fraction of what it would cost them to access high-quality sanitation services. Subsidy requirements for low-income households were estimated at over 50% for covering capex alone, and up to 90% to cover the total costs in some cities, up to 2030.
What households will actually pay is even lower than reported willingness to pay
SanCost findings were largely based on stated willingness to pay: what users say they would hypothetically be willing to pay for a service. As authors Ben Tidwell and Goufrane Mansour outline in Mind the Gap, revealed preference is generally more reliable, as it requires the respondent to make real-life choices.
So what will households actually pay when given the opportunity? SanCost findings were supplemented by a voucher redemption trials in Nakuru and Kisumu, Kenya, to test revealed WTP for high-quality toilets and pit emptying services respectively. In both cases, revealed WTP was markedly lower than stated WTP. In Nakuru for example, only 10% of those receiving vouchers were willing to pay even 11% of the actual required costs for toilet construction.
It should be noted that revealed WTP may be attributed to a wide range of factors, some of which can be influenced, for example through improved sales strategies. And low WTP does not imply sanitation is not valued by these households. Rather, these findings show that most quality sanitation systems remain unaffordable for low-income residents – with even long-term costs representing more than 5% of incomes in the majority of cases.
Our key takeaway: For low-income urban residents, the cost of sanitation is very high compared to income levels. This means a balance must be found between higher finance allocations and cost savings in the delivery of services.
Sanitation surcharges on water bills can help to bridge the financing gap…
So if the poor are to access safely managed sanitation, the required costs need to be partly funded via other sources. Modelling the financing gap is the easy part of the equation. Identifying additional sources of revenue is more challenging.
As one potential mechanism, WSUP’s Kenya team have been successful in influencing the regulator WASREB to introduce a pro-poor sanitation surcharge — a sanitation charge added to the water bill — over a period of years. USRI aimed to strengthen the evidence base for the surcharge by assessing WTP of middle- and high-income utility customers. The results of the study, again conducted by Aquaya Institute, were encouraging: 75% of customers were willing-to-pay some amount, and at the median WTP of 1 USD/month, the 88 water regulated utilities in Kenya could raise a combined 19 million USD annually for sanitation improvements in low-income areas. Messaging to strengthen trust in how funds would be allocated by the utility and calculating the surcharge as a proportion of the water bill (rather than a flat rate) were recommended to maximise buy-in from utility customers paying the tax.
In WSUP’s view this research provides a template for effective research-into-policy. The regulator WASREB were considering an intervention but needed robust evidence to strengthen the case. These findings have helped WASREB move forward with confidence to the next phase and the piloting of the surcharge with utilities in Kisumu, Nakuru and Malindi.
…but public finance instruments of this type require functional local tax systems
In Ghana, WSUP has supported the piloting of a similar intervention, this time involving a sanitation surcharge on the local property tax. WSUP supported the roll-out of a 10% surcharge on the property tax, in the municipality of Ga West; neighbouring Akuapem North has also imposed a US$ 1 annual flat levy. USRI research sought to strengthen the evidence base for the intervention by assessing policymakers’ commitment to the sanitation surcharge policy and taxpayers’ willingness-to-pay.
In this instance, the research highlighted a number of challenges. Although the surcharge has been signed into policy in the two districts, revenues generated from the surcharge have been impacted by poor communication and lack of measures to track collection and disbursement.
The research highlights how sanitation is interconnected with wider aspects of municipal administration. In Ga West only half of property owners surveyed paid their property tax: successful implementation of the policy will require stronger administrative systems for collecting revenues, which is likely to affect the whole tax regime.
Future research needs
In WSUP’s view the SanCost findings are of huge value in quantifying the financing gap for sanitation in low-income areas. Once this gap has been established — using data specific to the cities involved — a discussion can follow on mechanisms to bridge the gap.
Our research has shown a sanitation surcharge on water bills has potential in the Kenyan context, although this would only be one measure and is far from sufficient in itself.
The next step is to build on this foundation and strengthen the evidence base for wider financing mechanisms. It is clear that diverse forms of finance have a role to play, including household, public, private and IFI investment.
In Mind the Gap we highlight further research to inform this debate, including research to better understand the cost-effectiveness of different sanitation interventions; further testing of approaches such as results-based payment of the private sector to deliver pit emptying services, which research in Kisumu suggested can be effective; and analysis to inform more effective and more equitable targeting of subsidies.
Financing is a core challenge of providing urban sanitation services at scale and there is no easy solution. But acknowledging the gap that exists — and the impossibility of low-income households footing the bill — provides a basis to move forward.
Learn more about the Urban Sanitation Research Initiative
Top image: A resident outside a toilet block in Ghana