Changing the way we change the world

Why water systems fail part 7: lack of cost recovery mechanisms

By Susan Davis, Executive Director

What leads to success or failure of water systems?  Everything we read points to a complex mix of factors.  In this series, we share quotes on various topics related to failure of water systems from our literature search and interviews for the resolution action brief as a way to highlight pieces of the puzzle.

Today’s blog focuses on an area that has received much-needed attention in recent years, thanks especially to the WASHCost program. However, as you’ll see from the quotes below, it has been a problem for many years. Many rural water systems are community-managed, and communities are expected to collect fees that will pay for operations and maintenance, water treatment products, repairs, replacements, and anything else needed. Read on to see why that’s not working. Poor cost recovery can be due to policies, poor planning, poor community engagement during implementation, poor community management, or unwillingness to pay, which will be subjects of future blogs.

The general philosophy is that communities are responsible for covering post-construction costs out of the fees that they pay. Yet this is rarely the case. [Global Water Initiative (GWI)] found in Honduras, for example, community water funds covered an average of just 12 percent of the costs of capital maintenance projects. The rest was paid with external funds, mainly grants and loans by donors and development banks to the government of Honduras. (Davis, Pocosangre, & Hicks, 2014)

Water fees in Central America rarely cover the cost of services

Water fees in Central America rarely cover the cost of services. Figure source: (Davis, Pocosangre & Hicks, 2012).

[In the program], it’s our goal to have utilities understand how much it costs them to deliver service and then for them to reflect on how much they are charging for water. What you have right now in many places is utilities or politicians are artificially selecting what water will cost with no foundation about why they are charging that. So it’s not like we’re going around advocating that tariffs are raised, we’re advocating that utilities understand how much it costs them to produce water and that they change their tariffs to reflect pricing. (US-based interviewee, 2014)

Yet across all three subsamples, only 52.6% of handpumps were coupled with any form of revenue collection. (Foster, 2013)

One thing that we see is not really working in many of our projects is the financial sustainability. . . [T]here is a very small percentage of the people who are paying for water; if it comes to 30% that’s already very good. And then it makes it difficult for the community managing the water point to buy spare parts or to pay for it. If something is broken because they had really very little financial reserves. (Swiss-based interviewee, 2013)

Across all countries, rates of breakdown were considerably higher where there were no revenue collection arrangements in place. (Foster, 2013)

In Honduras, the issue there has been the really old projects, the ones that our partners funded… the committees there are still functioning really well, the water systems are functioning, but the water systems, all of them, they’re getting older and residents are seeing need for more extensive work than you do as part of routine operation and maintenance, or maybe they’re starting to reach the population limits. So what is the next step for them if they don’t have the money saved up to make those changes? (US-based interviewee, 2013)

A study in Ghana showed that water points without a tariff paid were less likely to be functional than those with tariff paid. (Samani & Apoya, 2013)

In all three countries [Dominican Republic, Ghana, Philippines] — and across almost all interventions — aspects of financing scored relatively poorly, which suggests that collaboration interventions will face challenges related to inadequate revenue streams or other financing sources, particularly in meeting long-term capital replacement costs. In most cases this difficulty is due to low or very low tariffs, which are unlikely to meet even ongoing operating costs. But equally important over the long-term is the apparent lack of mechanisms for addressing major capital maintenance or replacement through effective redistribution of taxes or transfers from aid funding in the form of cross-subsidies. The few interventions addressing financing systematically and with a form of institutionalized cross-subsidy in place were some urban projects in the Philippines. (Lockwood, 2013)

Whenever you go [to a community], they’ll ask you, you need to give them income-generating activity so that they can have money to collect for the water quality repair. (South Sudan-based interviewee, 2013)

Operation and maintenance costs tend to be fairly low if construction quality is good, but ensuring that [the community] has developed a longer term asset plan is a challenge, either because the communities aren’t really charging enough to begin with or they’re charging enough to cover their basic costs but they’re not saving enough for that rainy day when there is a major rehabilitation or replacement required and they don’t have the funding to support it. …[While there are cases where] communities are doing a really good job and they’re not only saving for their own costs but they’re saving for long-term repairs. But then the problem is that over time if that reserve builds up there is a tendency for either the competition in the community to change or for pressure to utilize those funds for other community needs. If there’s not a reserve fund that’s set up to protect than that’s at risk being depleted over time. (US-based interviewee, 2013)

[T]here is chronic underfunding of rural water services, to meet the costs required to provide and sustain a basic level of service that meets national norms and standards. Even where communities appear in national or international databases as having access to an improved water source and therefore as ‘covered’, most people who live there do not receive a minimum basic level of service. There are large data gaps that need to be filled so that plans and budgets prepared by governments and donors can be based on the realities of water service provision. (Burr, Fonseca, Moriarty, & McIntyre, The recurrent expenditure gap: Failing to meet and sustain basic water services, 2012)

In practice, communities are heterogeneous with varying socio-economic, cultural, and water resource environments. The handpump may be the only water source available, though more likely, it is one of many used by different people at different times of the year. Forming a water users association, or the like, to coordinate access, payment and maintenance functions thus presents challenges for users with low and often variable income, who may use the handpump in different ways at different times. Predictably, communities’ ability to collect and save money to pay for future repairs is often weak (Harvey and Reed 2007) in (Hope, Foster, & Thomson, 2012)

[Water point management] may be characterized as a common pool resource management challenge where boundaries for user groups may only be effectively set with a limited access arrangement such as through a pump attendant who levies a pay-as-you-go fee (Ostrom 1990). Even minor repairs requiring relatively low-cost spare parts can take weeks to months as communities attempt to collect sufficient money for the repair and then source the parts, which may not be available locally, often incurring disproportionate travel and time costs. (Hope, Foster, & Thomson, 2012)

In a small study of 27 handpumps and 25 motorized pumps in rural Kenya, …[a]t the community managed motorized pumps, the committees were well organized but they did not manage to make all users pay. . . .At the handpumps it happens more often that the regular money collection is neglected. The responsible entities at the motorized pumps have more need to be organized because of the daily need for staff and money for e.g. fuel refilling. . . .The community managed locations have difficulties with making people pay.(Adams, 2012)

Low levels of funding and maintenance contributions characterize the sector with financing and availability of spare parts for water points an ongoing problem. (Cotton, Adams, & Shaw, 2012)

Across communities visited it was evident that the issue of finance was compromising rural water supply sustainability. The majority of communities did not have any savings, nor carried out monthly contributions for operation and maintenance. Almost all engaged in reactive financing (Harvey and Reed, 2004), where they only contributed when the water point was broken. All communities that had experienced breakdown in service had managed to raise necessary funds to repair the water point. However, respondents questioned whether this method of financing would sustain a water point over time. The lack of monthly savings was often related to mistrust between communities and the water committees and also a lack of prioritisation in having an improved water supply versus other household needs. A very small number of communities had collected contributions on a regular basis, yet this was annually, not monthly, and because they were notably more motivated to ensure the service was constantly functioning. (Jansz, 2011)

One of the main causes of the financial problems of [community water management] boards is inefficiency in the collection. The high delinquency and lack of discipline payment of invoices by users, added to the permanent “forgiveness” are part of a disadvantageous economic and financial situation for the Boards. In the root of this behavior lies the historical culture that “water is free.” Among the causes of this situation may include: cronyism, political privilege, illegal connections, acceptance of delinquency as natural by the Health Board administration, installment payments from delinquent accounts, the lack of gauges and other problems that generate negative effects management service and threaten the sustainability of the system (AVINA, 2011)

Among the households included in our sample in Peru and Bolivia, … another troublesome finding is that rural households in the sample villages are paying very little for the improved water services, and, as a result, the finances of many village water committees are in poor shape. (Whittington, et al., 2009)

A [village water committee (VWC)], usually comprising ten members, is expected to manage the handpump O&M. The VWC should collect money, but this is rarely done. Communities raise money when the pump has broken down. (Baumann & Danert, 2008)

Communities are also expected to meet all on-going maintenance and repair costs. Some communities raise maintenance funds by charging a levy at the point of delivery. . .but in most cases communities charge a monthly household contribution or raise money only when repair is necessary. The use of bank accounts to store maintenance funds has been promoted by some agencies but the bank charges imposed on many accounts often deter communities from doing this. (Harvey, Ikumi, & Mutethia, 2003)

While policies state that rates for the poor are to be subsidized, considerable pressure exists to raise these minimal rates as commercial providers, such as the Water Boards, are under pressure to repay loans and make profits. (Ferguson & Mulwafu, 2001)

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