Past trends and on-going challenges

Past trends

Historically, service costs have been widely shielded from consumers, paid for instead by donor agencies and government budgets. Because water supply and sanitation are largely considered social goods, projects and programmes have been created and implemented without serious concern for their economic sustainability.

Supplying water and providing sanitation services has an inherent financial cost not only with regards to capital investments but also during the operation and maintenance, rehabilitation and expansion phases. These financial costs are reasonably straightforward to identify and potentially match in order to recover costs. The economic costs of water - such as the impact of over-extraction and pollution - have become more widely recognized within the water community over the last decade. This acceptance of water's function as an economic as well as a social good became mainstreamed when it emerged as the fourth guiding principle of the Dublin Statement on Water and Sustainable Development in 1992.

Many projects and programmes have tried to recover operation and maintenance costs from users, while others also include a percentage of capital costs. However, experience has shown that when funds from government and donors are cancelled or reduced, most existing community water and sanitation systems are threatened with collapse.

Against the general trend in aid flows, aid for water interventions increased during the 1990s (see Trans-boundary Water Management as an International Public Good pp12-13). Large proportions came from the World Bank, the Asian Development Bank, the Inter-American Development Bank, the European Union, UNDP and UNICEF. Most of the funds were directed towards infrastructure construction while there have been some investments towards capacity building activities.

Water policy frameworks agreed at global and local-level meetings have identified the need to integrate cost recovery principles into mainstream water sector reform, and are working to address the barriers and constraints to successful implementation at the programme and system levels (see DFID and ADB examples in the box below). But the truth remains that adequate cost recovery is still one of the major obstacles towards sustainable drinking water supply in developing countries.

Government commitments to the UN Development Goals bring an obligation to ensure that basic social services such as drinking water and basic sanitation are provided.

On-going challenges

There are many challenges to financing and cost recovery in the water sector, including: meeting the Millennium Development Goals; designing tariffs and subsidies to target the poorest; and implementing cost recovery in a changing policy framework that is heading towards greater decentralization despite weak public sector capacity.

Challenges to the water sector may be categorized at a general and at a water system level, although there are some overlaps. Some of the main challenges are described below. These lists are not exhaustive, but they do provide insight into the types of challenges that need to be addressed both at the broader policy level, and on a system-by-system basis.

General challenges - creating an enabling environment

To get the best results in terms of the equity and sustainability of water services, there are some important 'musts' and some other 'desirables':

1. Decision makers have to be made aware of the need for and benefits of cost recovery approaches that consider not only the construction, but the lifetime, rehabilitation and extension of water supply systems and all the elements that are necessary to providing longer-term support. That support has to be provided not just for the systems themselves, but also to make the systems affordable for the poorest consumers (Review the IRC approach).
2. In a decentralization framework, the transfer of operational and financial responsibilities from central government to regional and local authorities must be accompanied by sufficient training or funding to support the new activities and skills needed.
3. Typical time horizons and priority setting for programmes (and associated funding) need to be adjusted to meet the broader, sectoral development goals - this challenge is very much directed to development agencies and development banks.
4. Responsible agencies need to develop comprehensive national and regional budgets for the water sector that include human and technical resources as part of long-term programme design, and clarify the nature and sources of original and on-going financing.
5. Lack of information about water consumers is often a handicap to sector planning. Gathering detailed information about a customer base can be both technically difficult and expensive in relation to the potential size and scope of water services.
6. Specific water supply and sanitation programmes need to be part of an agreed long-term plan for water resources management within any community or set of communities sharing a watershed.
7. Partnerships for service provision need to be developed among local NGOs, donors, governments, and the private sector, which means that there has to be a framework for fostering and coordinating such partnerships.
8. Maintaining a focus on the poorest is vital in the context of sustainable financing and cost recovery policies.
9. Engaging women in the decision-making process for system design and service management has been acknowledged as a challenge for some time, and continues to pose challenges in many rural and peri-urban areas.
10. Monitoring the performance of service provision over time, to help guide strategy at the sectoral level is often a challenge, due to insufficient funding and capacity.

System-related challenges

1. High levels of unaccounted-for, or unbilled, water make cost recovery much more difficult. They can have a variety of causes, such as illegal taps, leakage, or fee waivers for larger government, industrial, or military consumers.
2. Often existing tariff structures are ineffective in capturing a system's recurring costs and promoting water conservation. They may also exclude the poorest of the poor from service provision.
3. Meters or other gauges of consumption are a critical component of cost recovery, although it should be noted that in areas with abundant supply, the cost of installing and maintaining promptly when they break down. This poses technical, institutional, and financial challenges.
4. Effectively designed subsidies are targeted at the poor, to improve access to networked services in peri-urban areas, and provide access to safe quantities in rural areas.
5. Output-based tariffs and subsidies can be a challenge in a political environment that is resistant to reform and accountability of service-provider finances and accounting processes.
6. Designing a flexible billing cycle that accommodates the needs of the poor (with regards to seasonal income, non-regular income, etc.) while allowing for the service provider to maintain steady income to meet expenses can be a challenge.
7. High administrative costs can arise in billing for water, and providing information to consumers about the system.
8. Problems can also arise where there is limited training and follow up with partners to expand expertise and encourage autonomy.meters may be less cost-effective. Meters must be read on a regular basis and fixed

Monitoring and evaluation for effectiveness at the system level is often inadequate, which means that problems are not corrected in a timely way.