Guidelines for User Fees

and Cost Recovery

For Rural

Water

and Sanitation

Guidelines for User Fees

and Cost Recovery

For Rural

Water

and Sanitation

This document was prepared by the Water Partnership Program (WPP) of the AfricanDevelopment Bank under the supervision of the Bank’s Operations Policy and Compliance

Department with inputs from an international consultative stakeholder workshop for Bank staffand external stakeholders.

While every effort has been made to present reliable information, the African Development Bankaccepts no responsibility whatsoever for any consequences arising out of its use nor is anyopinion expressed in this publication necessarily the opinion of the Bank. The material in thispublication is copyrighted. Copying and/or transmitting portions or all of this work withoutpermission of the African Development Bank may be a violation of the applicable law.

AcknowledgementsThanks to consultants from IRC, The Netherlands, and Cranfield University, UK, CatarinaFonseca, Richard Franceys and Chris Perry.

The African Development Bank Group undertook the study with the financial support of its WaterPartnership Program donors i.e. the Government of Denmark, the Netherlands and Canada(CIDA)

Publication dateOctober 2010

LogoAfrican Development Bank, External Relations and Communication Unit, Yattien-Amiguet L.

Graphical ConceptualizationAfrican Development Bank, External Relations and Communication Unit in cooperation withFinzi Usines graphiques; Justin Kabasele T. and Mouna Lazzem

PhotoAfrican Development Bank

PrintingFinzi Usines Graphiques

CoordinationConsultant Sören Bauer

Additional explanation and information Please refer to the long version of this publication, “Guidelines for User Fees and Cost Recoveryfor Rural, Non-Networked, Water and Sanitation Delivery”, on the AfDB website www.afdb.org

This card is used in rural Rwanda for the sale of water. A box is ticked for the sale of each jerrican.

Table of contents

iii

Table of contentsExecutive Summary iv

Introduction

Background to Cost Recovery Guidelines 8Objectives of the Guidelines 8The Main Steps of the Guidelines 9

1. Step one

1.1 The Economic, Policy & Institutional Environment 10

2. Step two

2.1 Setting Cost Recovery & Service Objectives 10

3. Step three

3.1 Determining Revenue Requirements 12

4. Step four

4.1 The Basis for Charging User Fees 14

5. Step five

5.1 Implementation 185.2 Non-Payment Challenges 19

Conclusion 19

Tables 22

Table 1: Summary of the Five Steps Comprising Guidelines for User Fees and Cost Recovery for Rural Water & Sanitation Services

iv

List of abbreviationsAFDB African Development Bank

CGP Country Governance Profile

CPIA Country Policy and Institutional Assessment

GDI Gross Domestic Income

GDP Gross Domestic Product

IWRM Integrated Water Resources Management

MDGs Millennium Development Goals

NGO Non Governmental Organization

O&M Operation & Maintenance

PPP Polluter Pays Principle

RMC Regional Member Country

RWSSI Rural Water Supply and Sanitation Initiative

WPP Water Partnership Program

WTP Willingness To Pay

v

collections and ensuring that enough resourcesare put aside for major periodic servicing.

The Guidelines were developed through thesupport of the Water Partnership Program andwere extensively reviewed by the Bank.

This publication will provide important and usefulguidance for task managers within the BankGroup as well as among stakeholders workingwith the critical issue of financial sustainabilityfor rural water sector investments.

Ali Kies, Director OWAS / AWF

Foreword

The Guidelines presented here touch upon a verycritical issue for all rural water sector investments:how to build rural water and sanitation infra-structure that is, first and foremost, financiallysustainable, in addition to being environmentallyand socially sustainable?

The Guidelines attempt to address the middlepath where user contributions are more thantoken, and less than full capital cost. The authorsof these Guidelines emphasize the importanceof establishing acceptable tariffs, regular

vi

wastewater disposal to preserve thenatural environment by signaling toconsumers the cost to the economy ofthe resources used by the services.

iii The Bank Group’s Integrated WaterResources Management (IWRM) policyconsiders water as an economic, socialand environmental good. In a context ofgrowing water scarcity exacerbated byrapid population growth and urbanization,climate change and environmentaldegradation, mismanagement of waterresources, and misallocation of budgetaryresources, the Bank Group and its RegionalMember Countries (RMCs) have to adopta new approach to water resourcesmanagement anchored on sustainability inall its dimensions.

iv The recovery of financial costs (operatingand maintenance (O&M) expenditure,investment capital including interest ondebt finance, indirect sector support costsincluding environmental and economicregulation and resource opportunity costs)is necessary in the context of integratedwater resources management (IWRM). Inparticular, economic and financial pricingof water serves to guide consumerscollectively towards an allocation patternof water resources among the various

Executive summary

i The Africa Water Vision and the MillenniumDevelopment Goal (MDGs) targets relatingto water and sanitation services are to halveby 2015 the proportion of people who donot have access to safe drinking water andbasic sanitation. Sector experience stronglysuggests that sustainability is critical to theachievement of the MDGs for water,sanitation and irrigation projects. There arethree key dimensions to sustainability:environmental, social and financial. Thisset of guidelines focuses on the financialdimension, while taking into account thesocial and environmental dimensions. Arobust cost recovery system is necessaryto achieve financial sustainability of watersector projects and programmes.

ii Cost recovery through the levying andcollection of user fees serves two principalfunctions:

• Strengthening internal generation ofsufficient revenue to support continuingdelivery of services to users over thelong-term, including extension ofservice coverage to all including low-income households, and improvedservice quality; and

• Promoting better use of scarce waterresources and management of

1

competing uses that maximizes publicwelfare. Sustainability also requiresadequate wastewater management andimplementation of the Polluter PaysPrinciple (PPP).

v However, the point of departure varies bycountry, sector, and sub-sector: in somecases, cost recovery is extensive, wellestablished and effectively implemented.In other cases, it is minimal – either throughlack of policy commitment to the objectiveor poor implementation of policy or, equallyrelevant, due to a policy commitment todeliver services to the poorest byminimizing charges.

vi In sum, these factors create a continuumof contexts and opportunities for costrecovery interventions, which in turninfluences what is feasible and desirable,and the timescale that may be required tomeet specified policy objectives. TheseGuidelines, through a step-by-stepapproach, are intended to facilitate thatprogress. The key point is that failure toattain financial sustainability of water andsanitation projects is highly likely to hinderscaling-up and therefore delayachievement of the MDGs for the watersector.

vii These Guidelines, one of three coveringthe water sector (urban, rural and irrigation),focus upon rural water supply and

sanitation. The guidelines apply to ruralareas (including urban and/or peri-urbanareas, rural townships, villages andhamlets) not served by networked waterand/or sanitation services. It is recognizedthat much of peri-urban water supply, aswell as urban on-site sanitation, is alsonon-networked and therefore often followsthe household and communitymanagement approach. In such situations,the term “user fees” is not the mostappropriate term because costs arerecovered mainly by a combination ofsubsidies to capital investments andcommunity and / or household irregularcontributions in cash, labour and / or inkind. The term “community / householdcontributions” is therefore more frequentlyused rather than “user fees”.

viii Five key steps are proposed to befollowed in developing, setting andimplementing user fees and costrecovery systems for rural (and non-network ed) water supply and sanitationprojects:

• Step One : Determine the economic,policy, and institutional context in thecountry, with respect to water and sanitationservices. An understanding of the country’seconomic conditions, including theinstitutional and social environment isnecessary to facilitate promotion of costrecovery through user fees.

2

• Step Two : Set cost recovery andservice objectives. Stakeholders(especially users) should be engagedin the selection of service levels (andtechnology), as these have significantimpact on costs of services and costrecovery. Cost recovery and serviceobjectives are best negotiated withstakeholders. Issues of affordability,willingness to pay and willingness tocharge should be considered, andthese should inform the setting of costrecovery and service objectives.

• Step Three : Undertake investmentplanning, costing and appraisal of theservices (selected in Step Two), todetermine the costs to be recoveredand the overall revenue requirements.An understanding of the total revenuerequirements is important to identifyhow much is necessary to coverexpenditure, and to determine thesource of those funds. The source offunds may include subsidies, but theseshould be well targeted, taking intoaccount the objectives set.

• Step Four : Determine the basis forlevying user fees. Total revenuerequirements are dependent on servicelevels, which need to be decided in aninter-active process with stakeholders.Different sources of funds are oftenrequired to cover different costs incurred.A demand-responsive approach should

be used, to balance service levels withaffordability and willingness to pay. Aservice and price differentiationapproach should be used to provideusers with service levels andtechnologies that they can afford andare willing to pay for, to ensuresustainability. After determining totalrevenue requirements, it may benecessary to reconsider service andcost recovery objectives (Step Two).

• Step Five: Implement the user fees andcost recovery system. Although thecommunity management model hasproved effective at implementing newrural water and sanitation systems,there have been significant failures inmaintaining those systems in the long-term using the community manage-ment model. As many ruralcommunities and some municipalitieslack financial management skills toorganize, implement and efficientlycontrol a revenue collection and costrecovery system, external support froma water supply entity should beconsidered to ensure that cost recoverystrategies are effectively implementedto enhance overall sustainability of ruralwater and sanitation services.

Details of each of these five steps areexplained in the Guidelines, and asummary is presented in Table 1.

3

ix It should be recognized that non-networked water and sanitation servicesare often a community or householdresponsibility where, because of thetechnology used (such as hand pumps,on-site sanitation), the need for “user fees”for operations and minor maintenance maynot be apparent due to the lack of regularcash requirements to “operate” thefacilities. Communities and/or householdsare responsible for ensuring that facilitiesare kept in good working order. Thecommunity should have some form ofrevenue collection to ensure that there arefunds to meet the occasional operationand maintenance costs and capitalmaintenance (replacement) costs.

x Servicing of any capital investmentfinance (over and above communityconstruction contributions in labour and

in kind), which often necessitates regularcash payments from consumers, is notalways required in rural areas (wherefinancing has been done through grantsor free donations).

The Bank’s Rural Water Supply & SanitationInitiative requires a 5% contribution frombeneficiaries. In order to avoid the commonfailure to invest in capital maintenance, andconsequent failure of the service, it isnecessary to achieve cost recovery throughdifferent types of ongoing levies and/ortaxes which can be held by some trustedentity or through occasional charges asthe direct costs arise. Regular interventionby a trusted entity (such as localgovernment or autonomous water andsanitation agency) is necessary to promoteand facilitate occasional cash collection tomeet the periodic maintenance needs, andthus ensure sustainability of services.

4

Introduction

Background to the cost recoveryguidelines

Cost recovery plays an important role in meetingsocial, economic and environmental policyobjectives. At a minimum cost, recoveryprovides the basis for financial sustainability:failure to provide for adequate funding leads tothe degradation of systems, deterioratingperformance and services, and unwillingness topay – a commonly observed vicious circle.

In 2000, the Bank produced an Integrated WaterResources Management (IWRM) Policy statment. The policy stated that getting the pricesright is at the very core of improving waterresources management. These Guidelines havebeen developed to assist in the implementationof the Bank Group’s water policy, particularlywith regard to financial sustainability.

The Guidelines for user fees and cost recoveryfor rural water and sanitation projects apply torural areas, including rural townships, villagesand hamlets not served by in-house piped waterand sewerage networks. Such areas rely largelyon communal or individual wells and/or waterpiped to collective water points. As forsanitation, each household or groups ofhouseholds would have access to stand-aloneonsite disposal facilities. The Guidelines alsoapply to urban and peri-urban areas where waterand/or sanitation services are not networked.

The main objective of these Guidelines is toprovide guidance to Bank Group Task Managersand other stakeholders as well as to enhance thedesign and implementation of financiallysustainable irrigation and drainage projects. Theultimate goal of the Guidelines is to improvewater and sanitation service provision, in order toaccelerate growth in economic development aswell as improving the health of all households,particularly the poor. The Guidelines recognizethe economic and institutional environment inwhich Regional Member Countries areoperating.

A key objective of these guidelines is to enableservice promoters and providers to deliver betterservices to all, within the context of a protectedenvironment, through accessing enhancedrevenue and finance flows whilst acknowledgingthat direct full cost recovery may not beachievable in all rural areas in the near term. Inthis context, it is recognized that part of theprocess of moving towards direct cost recoveryhas to be through ensuring that appropriateservice levels and technologies are chosen sothat users obtain the services they desire and forwhich they are willing to pay.

The Bank has committed through its Rural WaterSupply and Sanitation Initiative to coverapproximately 80 percent of the overallinvestment requirements through internationalfunding, with the remaining 15 percent financedfrom government resources and 5 percent frombeneficiaries. However, in order to ensure

5

sustainability of the water and sanitationservices, the beneficiaries should contribute(user fees) towards maintenance of the facilities.

User fees are normally derived from sharingamong consumers the total costs of operationsand minor maintenance, longer-term capitalmaintenance, and the cost of capital. In general,non-networked rural water and sanitationservices require minimal operations and minormaintenance financial expenditure (except forpoint-source fuel-powered pumps), significantbut occasional and time-delayed capitalmaintenance expenditure and, where the 5 percent beneficiary contribution has been throughlabor contributions for example, zero capitalrecovery cost.

There is therefore a very significant challenge incollecting acceptable (to the users/ consumers)regular user fees for capital maintenancecharges which will not need to be spent forsome years into an unknown future when theperception of users is that they themselves areundertaking all the present work, for examplehand-pumping water and cleaning/ maintainingsanitation facilities. The external capitalcontribution limits understanding of the value ofthe services being accessed and non-cashoperating costs further reduce that value. Theconsequent capital maintenance charges arevery significant (massive) relative to earliercommunity contributions and do not in any waymatch consumer perceptions of apparentcosts.

The danger, however, of failing to establish a capitalmaintenance fund based upon user charges is thatwhen the need for repair and replacement arises,usually made apparent by service failure, it can bemore convenient/acceptable for communities toescape from the challenge of raising significantfunds immediately by foregoing that servicealtogether. It is not the intention of the MDGs toplace communities in the situation of, by default,reverting to distant and polluted water sourceswhen the new improved source requires capitalmaintenance. This is one reason why some form ofuser fees should be paid by all beneficiaries.

The role of user fees outlined earlier has,therefore, to be adapted in the case of non-networked rural water and sanitation where thecapital costs have been provided from externalsources. It is not anticipated that user fees willbe required to ensure sufficient revenue tosupport improved service quality or servicecoverage expansion. Similarly, using user fees tosignal the value of water in the context of IWRMare not possible, if all capital costs are deemedto have been paid by others, whilst also beingirrelevant in the context of such small-scaleabstractions. There remains the critical task ofensuring sufficient funds to ensure adequatelong-term capital maintenance.

The guidelines stress the iterative nature ofreflecting anticipated user fees and/or localgovernment budgetary support againstproposed service levels and the need toreconsider service levels when subsequent

6

willingness and ability to pay indications are thatsuch services would not be able to recovercosts.

Agreements for financing water and sanitationprojects with RMCs must establish an agreedapproach to user fees as well as the basis onwhich financial sustainability is to be ensured.Any such agreement assumes the existence ofan appropriate entity to facilitate serviceprovision which has an efficient accountingsystem capable of ensuring the timely availabilityof reliable data, clear policy and appropriate legalsupport to proposed user fees and adequateenforcement procedures.

The Bank’s Guidelines for FinancialGovernance and Financial Analysis ofProjects provide detailed information onstandards and procedures for financialaccounting that are comprehensive in scopeand fully adequate to guide financialaccounting aspects of ensuring overallrevenue sufficiency, once the scope of a costrecovery approach has been identified.

The main steps of the guidelines

There are five key steps to be followed indeveloping, setting and implementing userfees and cost recovery systems for ruraland/or non-networked water and sanitationprojects/programmes:

1. Determining the economic, policy andinstitutional context in the country withrespect to water and sanitation services;

2. Setting cost recovery and serviceobjectives;

3. Undertaking investment planning, costingand appraisal, to determine costs to berecovered and overall revenue requi-rements;

4. Determining the basis for charging userfees; and

5. Implementation of user fees and costrecovery system.

The five steps are summarized in Table 1 in theannex, and each of the five steps is describedin the following sections.

1. Step one

1.1 The economic, policy &institutional environment

1.1.1 Promoting cost recovery through user feesrequires an understanding of the country’seconomic conditions, including the institutionaland social environment. Useful economicindicators include average household wealth and

7

Gross Domestic Income per capita. The level ofeconomic wealth is already recognized in AFDB’sclassification of RMCs and is an importantpredictor of possible levels of cost recovery.

1.1.2 Another useful indicator is the tax-to-GDI(or GDP) ratio that not only illustrates thepotential for supporting water and sanitationservices through direct taxation (throughbudgetary support to the water and sanitationprovider) but most importantly the likelihood ofthe sustainability of this source of finance. Somecountries have achieved good water andsanitation services through a tax-based systemwith only limited user fees. However, suchsuccesses are unusual, particularly in low-income countries and this approach does notassist in the IWRM goal of appropriate sharing ofscarce resources based upon the principle of“water as an economic good.”

1.1.3 Analysis of the institutional frameworkgives an indication of any institutionalweaknesses that need to be addressed toensure viable organizations and the necessarysupporting framework for service delivery andcost recovery. Useful indicators can be obtainedfrom the Country Governance Profile (CGP),which identifies the strengths and weaknessesof governance arrangements in a country. TheCountry Policy and Institutional Assessment(CPIA) should also be considered as it gives anindication of the governance potential to deliversufficient institutional autonomy to support acost-recovery sustainability policy (or

alternatively efficient delivery of a tax-basedsystem). There is a particular need forinstitutional support to deliver sanitation servicesand promote hygiene.

2. Step two

2.1 Setting cost recovery & serviceobjectives

2.1.1 Rural and/or non-networked areas in Sub-Saharan Africa face a significant challenge inachieving cost recovery from community/householdcontributions. Since communities in many poorcountries, and poor regions within countries, areunable to finance the operation and minormaintenance expenditure of sophisticated waterand sanitation systems, the selection of technology,and hence service levels, is crucial.

2.1.2 Within a district or programme area, the firststep of the iterative process to decide on levels ofuser contributions is to consider and determinethe service objectives. The process to set serviceobjectives starts from investigating existing levelsof service and resulting costs and revenue, andthe required levels and impact on coverage andinfant morbidity (as a key health indicator) to beachieved within the program time-frame. Settingservice objectives should, therefore, ensure thathealth and convenience benefits are achieved byall, particularly women and the poorest, in afinancially sustainable manner.

8

2.1.3 Basic indicators such as infantmorbidity, existing service coverage and theaverage distance to a water source of low-income households, provide some indication ofthe urgency of planning for increased coverage,indicating the required costs and explaining theneed for additional funding sources. Thepercentage of population with access toalternative (non-safe) sources and the indicatorson average water-user fees, provides a firstindication of the ability and willingness to pay, andthe possibility for cross-subsidies.

2.1.4 Concerning sanitation coverage, open-defecation affects more than the people in onehousehold. It can affect the whole neighborhoodor community. Therefore, for a health impact, ahigh proportion of the people living in an areamust consistently use latrines. This implies thatintensive interventions are needed with thecommunity or neighborhood as the primary unitof change, not only the individual or household. Inslum areas, where most housing is rented, a highpercentage of pit latrines being unsafely emptiedmanually will endanger previous efforts todecrease the health risk. The need for public orprivate incentives/subsidies will have to becomputed when considering the costs of theservice.

2.1.5 The iterative process of setting serviceobjectives necessarily deals with technologychoices, service levels and other demands fromcommunities matched against availableresources and willingness/ability to pay beforeconsidering what levels of subsidies and whichalternative sources of funds will be required.

2.1.6 Poverty is both an economic and humancondition. This broader definition of povertycannot be easily measured in monetary terms.Consequently, in addition to income-basedmeasures of poverty, other quality-of-lifeindicators should also be used.

Communities in rural areas are not homogeneousand differences within communities need to belooked at closely. Within communities, severalsocial groups are particularly vulnerable socially,economically and culturally. These groups maybe composed of women (such as single-parentfamily heads), the elderly, handicapped, childrenand indigenous groups. In many ruralcommunities where income levels are notavailable, wealth indicators can also be used asyardsticks.

2.1.7 Willingness to pay (WTP) is anexpression of demand for a service and is aprerequisite for cost recovery because it is ameasure of user satisfaction of a service, and ofthe desire of users to contribute to thefunctioning of the service. Willingness and abilityto pay are regularly confused. It is often statedthat people are not able to pay the requiredcontributions because they are too poor.

Evidence shows that, while this may perhaps betrue in a few individual cases, in many casespeople are able to pay but not willing to prioritizespending on improved water supplies orsanitation facilities. It is, therefore, not an issue ofability to pay, but a case of prioritizing water andsanitation services in the allocation of householdresources.

9

2.1.8 There are several methodologiesavailable for measuring willingness to pay (forinstance: actual behaviour studies,hypothetical behaviour studies, contingentvaluation, etc.).

While many of these studies will send a clearmessage that there is willingness to pay forimproved services, it is only on very rareoccasions that policy changes as a result. Inmany countries, there is considerablewillingness to pay for water and sanitationservices, but unwillingness to charge by policymakers.

For rural areas, these guidelines suggestlimiting willingness to pay studies to surveyand focus group discussions at communitylevel and ensuring that the views of women asmain water users are investigated andrecorded separately. This approach will alsoincorporate the possible provision bycommunity members of voluntary labor fortasks such as trench excavation, transport,pipe laying, or the supply of local materialssuch as gravel and sand.

2.1.9 On-site sanitation is mostly a householdresponsibility and similar to many non-networked water services, there are no regular“user fees”. However, provision should be madefor recovery of costs of pit digging, constructionof the latrine slab, pit latrine/septic tanksemptying fee, and rebuilding latrines where thisis not done by households.

2.1.10 Overall, in order to limit the possibility ofa mismatch between services and affordabilitywhere capital investment is significantlysubsidized, a demand-responsive approach isrecommended. This allows users to signal theirwillingness to pay for long-term sustainability,though it may lengthen the implementationperiod. In the sanitation sector, this approach hasled to a reduction in the level of capital subsidieswhich, in turn, has led to a more efficient andeffective choice of technologies, thereforedelivering enhanced sustainability.

2.1.11 In an attempt to match cost recoveryobjectives/possibilities with social and economicgoals in low-income economies, self-provisioning is suggested for the pooresthouseholds and communities with externalsupport in the form of cement for a hand-dugwell, pre-cast latrine slabs etc.

2.1.12 For the slightly better-off low-incomehouseholds and communities, the recommendedapproach is to encourage self-provisioning byfacilitating external component provision. Thisrequires support to the supply chain of boreholedrillers or hand-pump spare part providers ortraining of masons who can build locallyacceptable latrines.

2.1.13 In the lower middle-income areas,conventional user fees are generally morefeasible for more conventional, utility-typesupported services. However, it should beemphasized that whatever objectives are set

10

for whichever income group, these cannot beachieved and sustained without a clear costrecovery system.

3. Step three

3.1 Determining revenue requirements

3.1.1 Understanding total revenue requirementsis important to identify how much is necessary tocover expenditure and to determine the sourceof those funds. Initial capital investment is themost obvious cost perceived and understood byrural households but experience hasdemonstrated to households that governmentsand/or donors are prepared to pay for capitalcosts apart from some notional laborcontribution to construction. The nature of anoften highly dispersed population with lowaccess to cash, high collection costs and limitedbanking and accounting capacity has meant thatit has not been possible to replicate the urbanutility model, of recovering capital costs throughuser fees in most rural areas.

3.1.2 However, there remain three types ofrecurrent expenditure in the provision of watersupply and sanitation services in rural areas:

• Operating and minor maintenanceexpenditure (including management andadministration);

• Capital maintenance expenditure (formaintaining the infrastructure in goodcondition); and

• The costs of servicing capital (in someprojects, a loan has to be paid ininstallments).

3.1.3 There is a difference in approach betweenrural and urban cost recovery for capitalinvestments. Urban customers are presumed topay for capital investment through user fees thatcontribute to the cost of capital and alsomaintaining the level of that service throughcapital maintenance payments (depreciation).This results in relatively small additions to themonthly bill and is a major aid to affordability.Generally, poorer rural communities andhouseholds are required to pay some capitalcontribution in advance, which can be a barrierto access for cash-limited communities. Apartfrom cash contributions, communities are,therefore, often encouraged to contribute in kind(such as labor). The requirement forcontributions is imposed in order to increaseownership of the installed system among thecommunity, recognizing that any additionalregular payments may not be made. However,this again reduces the understanding of the cashrequirements for maintenance.

3.1.4 In rural &/or non-networked systems, thecapital investment costs and some directsupport costs are therefore usually paid by

11

government or donors since, withoutconventional recovery of capital charges over along period, investment costs are oftenunaffordable. Normal lending procedures are noteffective where there is no regular income. Moreattention should be focused on how operating andcapital maintenance costs can be recovered fromcommunities and households when discussingservice levels and technology options with thecommunities. Often, these costs are considered“small” and the communities are left to determineon their own how to collect the required amounts.This is particularly difficult in local economies withrelatively few cash transactions. The result is the alltoo often lack of capital maintenance leads todisrepair and users cannot access the desiredbenefits until the cycle begins again with theprovision of a new or rehabilitated facility.

3.1.5 Societal contributions towards the waterand sanitation sector need to be based on theanswers to three fundamental questions :

• What is the objective of providing thesubsidy ?

• What source of funds will be used tofinance such measures ?

• How will these funds reach the targetpopulation ?

3.1.6 Within a sustainable developmentframework, the need for subsidies to be gearedtowards the provision of subsidized services to

the poor is understood and widely accepted. It isgenerally agreed that, in some poor areas ofmiddle and low-income countries, subsidies maybe necessary to cover basic amounts of water forthe poorest. Environmental and public healthexternalities make it socially beneficial to increaseaccess to improved water and sanitation services.

3.1.7 There are essentially two sources of fundsfor subsidies.

• From general taxation (national orinternational), or

• Other service users (cross-subsidization).

In rural and/or non-networked areas. the scopefor cross-subsidization is reduced as a result ofthe imbalance between the fast growing low-income population and the stagnating or declininglarger consumers’ group (often as a result of poorcost recovery strategies). Some countries haveadopted the transfer of a surplus fund on waterfrom urban to rural areas.

3.1.8 Most public utilities do not have the surplusrequired and many public/private utilities areincreasingly financially autonomous, reducingthe possibility for such transfers. Furthermore, ina non-networked system, the poorest are oftennot a part of the network in the first place andmost benefits from existing subsidies (mainlythrough tariff design) accrue to those who arealready connected to the network, and who areoften the wealthier consumers.

12

3.1.9 As far as possible, subsidies should betargeted to promote access to basic water andsanitation services rather than providing supportfor consumption. As a rule, subsidies, if any,should be directed at extending access to servicesand consumption should never be subsidizedbecause it cannot be sustainable in the long term.

3.1.10 The most common practice is to utilizesocietal contributions through tax revenues andreallocation through government budgets andinternational taxation (donor funds). However,many countries have already either a large fiscaldeficit or inefficient taxation and transfermechanisms, which prevent them fromimproving access to those that cannot afford it.

3.1.11 When the objective of providing thesubsidy has been fully costed and the source offunding agreed, it remains to select theinstrument by which the funds are to reach thetarget population. For rural populations thesemay, for example, include subsidies forinvestment costs, setting up support teams toensure capital maintenance and promotehygiene practices, setting up revolving funds atdistrict level, setting up guarantees which allowlocal entrepreneurs (drillers, latrine diggers,latrine slab builders, suction truck companies forpit latrine emptying, etc.) to access specific bankloans at lower interest rates and extendedpayment periods, output-based aid, etc.

3.1.12 If available subsidies cannot cover thedifference between the costs of service and the

expenditure recovered from user contributions,service levels and coverage targets may need tobe lowered in order to reduce costs. Reachingthe appropriate mix of service levels, coveragetargets, user contributions and subsidies is aniterative process.

4. Step four

4.1 The basis for charging user fees

4.1.1 Total revenue requirements will be dependenton service levels which need to be decided in aninteractive process with the communities involved.Different sources of funds will be required to coverthe different costs incurred. More attention shouldbe focused on how long-term operations andcapital maintenance costs can be recovered whendiscussing service levels and technology optionswith the communities. Decisions need to be madeon the sources of funds to pay for the direct andindirect costs which are key to sustaining theservices.

4.1.2 Discussions on service levels (using amenu of service options) and price differentiationshould take place using participatoryapproaches. The participation of communities,both men and women, in the design andimplementation of improved services constitutesa great commitment by communities to takeresponsibility for the service since they will haveto manage, operate and maintain it, as well aspay for its functioning.

13

4.1.3 Gender considerations are especiallyrelevant for cost recovery in rural areas becausemen and women have unequal access to, andcontrol over water and other resources includingland, time and credit. It is also importantbecause women do more domestic work thanmen, including handling and paying for water.Finally, it is important because men and womenhave different productive uses of water.

4.1.4 The demand-responsive approach aims toensure that the service level chosen is affordablebecause communities and households shouldonly choose the level of service that they knowthey can afford. There is tremendous opportunityfor service and price differentiation in the ruralareas. For water supply and non-networkedsanitation in the rural areas, there is a ‘ladder’ ofpotential technologies and service levels (suchas wells with or without pumping mechanisms,boreholes with hand-powered or poweredpumps, springs with or without pipe distribution,gravity flow systems with varying degrees ofsophistication, rainwater catchment tanks, etc)which can be accessed according to willingnessto pay and local conditions.

4.1.5 Discussions should identify the mostsustainable technology and consider alltechnical (operational) and financial implicationsand commitment to long-term management.There should be clarification on any necessaryadjustments to the existing operation andmaintenance system, defining theresponsibilities of the various actors in the

development of the project/programme. Thechoice of technology for service provision has adefinite impact on the level of future operating &minor maintenance expenditure. If a communityactively chooses a technology at a known priceand agrees to manage the system, it also tendsto invest in both maintaining and improvingperformance.

4.1.6 Although it is desirable for ruralcommunities to pay all operation & minormaintenance-related costs, in some commu-nities user contributions alone may not suffice tocover all of them (refer to step 2). Likewise,beneficiary communities are required to makeup-front contributions of at least 5% (fivepercent) to capital investments (either in cash orlabor). These contributions are made to enhanceownership and hence encourage sustainability ofwater and sanitation services. Manycommunities find it easier to contribute in laborfor investment costs, and it can be difficult whenpayments are required in cash, as spare partsdealers and mechanics will require cashpayments in exchange for spares. Depending onthe level of service, and from a cost recoveryperspective, a proportion of the total costs inrural and/or non-networked services may needto be covered by other sources (donors,government budget) and investment costssourced externally.

4.1.7 In non–networked and/or rural water andsanitation services, there are many ways tocollect user contributions. Attempts should be

14

made to recover some form of fixed chargebased upon access to a facility (a hand-pump forexample) or based upon a fixed level ofconsumption, such as a container of water takenfrom a powered ground water source. However,the reality of dispersed point sources or servicesmeans that user charges in rural and/or non-networked services more often becomehousehold payments or communitycontributions when the need for funds becomesmost urgent.

4.1.8 Cost recovery for sustainability wherefunds are available for timely capitalmaintenance, is dependent upon regular usercontributions through some form of levies oruser fees. Programmes and projects need toconsider the best approach in any specificlocation that will be accepted by the communityas a means of raising, and most importantlysafely banking, user contributions for ongoingcommitments.

4.1.9 Considerable attention is focused on usercontributions for capital investment costs whena bigger problem lies with payments and othercontributions to both minor operations andmaintenance costs and capital maintenancecosts. Attention should be paid to communities’access to sources of funds and it is proposedthat support agencies facilitate/organize accessby assessing their availability, reliability,sustainability and, where they are non-existent,the possibility of developing them. Possiblefinancial sources include:

• Existing community sources (voluntary funds,general community revenues, payment inkind);

• Private financing (private capital, cooperativefunds, user associations);

• Grants;

• Credit–loan mechanisms (micro-financethrough banks, associations, individuals); and

• Specific funds (social and development funds,village or other local funds).

4.1.10 Voluntary funds are built up by voluntarycontributions from local leaders or communitygroups through public meetings, bazaars,lotteries, festivals and similar social activities.These are common methods to financeconstruction and major repairs in communitiesthat have a tradition of fund raising and seasonalincome. People contribute to finance a particularproject or activity. The success of this optiondepends on a certain social cohesion thatensures that users contribute according to theirability and commitment to the project.

4.1.11 Communities can develop communalproductive activities, such as cash crops or avillage shop, and pay water bills with their profits.Disputes may arise over the priorities to give tothe use of these resources, especially whenusers do not have equal access to water supplyand sanitation services.

15

4.1.12 Households should be given theopportunity to pay part of their contribution to theconstruction of their water supply or sanitationfacilities in kind by providing voluntary labour fornecessary project activities such as trenchexcavation, transport, sand pipe laying, or byproviding local materials, such as gravel and sand.Payment of part of the construction costs in labourinstead of money makes the system moreaffordable to a larger number of households thanwhen all the payments have to be made in cash.

4.1.13 Private capital can be channeled into theconstruction of a water supply or sanitationproject, or to meet replacement, extension orrecurrent costs. However, those who provide thecapital may look for high rates of return to justifytheir investment, often through future contractsor ownership. Depending on the level of serviceand /or technology used, it can be difficult toapply this option in some rural and low-incomeurban areas where users are not able to pay afull-cost recovery tariff that would includerepaying investment costs and providing therequired rate of return.

4.1.14 Cooperative funds result from an initiativeby a group of users or individuals who gettogether to finance productive activities, notnecessarily related to water supply andsanitation. Cooperatives can be for agriculturalproduce, for livestock, fishing, etc depending onthe type of economic activities in the area. Theinitial capital comes from contributions in cash orin kind from the members of the cooperative,

which may be from payments for produce. Oncethe group has sufficient revenue, members maydecide to use part of their funds to finance waterand sanitation services. Where financially andorganizationally sound cooperative societiesexist, this is a good way to finance andadminister water and sanitation services.

4.1.15 Non-governmental organizations (NGOs)and donors often use grants as a type of financingmechanism for the construction of water supplyand sanitation systems. Donations can also comethrough former inhabitants of a village who live in acity locally or abroad. However, grants rarely payfor recurrent costs, so arrangements should bemade to finance recurrent costs to achievesustainability of services.

4.1.16 Microfinance is a method of financingthrough lending mechanisms, similar to loansgiven by banks, except for their nature and size.Micro-finance is generally small in volume andresponds directly to the specific needs of rural orlow-income urban communities. It is possible todistinguish three types of microfinance:

• Micro-credit through a bank• An association• Through individuals.

A microfinance system can be used to

• Contribute to investments;• Purchase materials and equipment for

replacement, extension and rehabilitation;

16

• Finance major unforeseen repairs;• Cover short-term cash flow problems; • Develop a stock of spares, parts and tools.

4.1.17 The development of a microfinancesystem through an association or individuals tofinance important capital investments isdifficult, due to the small amount of money andthe short-term nature of the credit. They have,however, been instrumental in financing smallindividual devices, such as rooftop waterharvesting or a hammer and pulley system forwells. For major investments, communitieshave had to rely on banks or rural developmentfunds. However, of late there has beenconsiderable interest within micro-financeinstitutions in Africa to finance water andsanitation services. This remains a potentiallyeffective source of funding.

4.1.18 Funds to purchase materials andequipment for replacement, extension andrehabilitation differ from initial capital investmentin that their need can be foreseen. Someprojects cover future replacement costs in theiruser fees. In these cases, this part of thepayments can be used as savings or asguarantee for possible credit. Financingunforeseen repairs and damage, together withcash flow problems, are perhaps the mostfrequent financial needs because of fluctuationsin income or because user fees fail to covercosts. It is of utmost importance to ensurealternative financing to meet thesecontingencies.

4.1.19 Microfinance through associations wouldbe particularly appropriate where the amountsneeded are not too large. The development of astock of spare parts and tools can be critical tosustain a rural water supply system, especiallywhen communities are isolated andgeographically remote from major tradingcenters.

4.1.20 Different types of funds have beenestablished to help the water sector, most ofthem with a social and development aim. Themain points of attraction for these funds are therelatively low interest rates and long repaymentperiods. Governments can provide credit atlower interest rates than the financial markets,and these funds can be used to promote socialdevelopment. Credit is allocated to institutions orlocal governments and it is not always easy forusers or community groups to access, unlessthey are well organized. There is, however, atrend to create funds which more closely matchthe needs of rural dwellers.

4.1.21 A strong feature of these funds is theirability to tailor themselves to changingcircumstances without sacrificing their efficiencyand effectiveness. Through their closer contactwith communities, the funds have opened newavenues for social action and have increasedpublic awareness of poverty issues.

4.1.22 However, the funds respond mainly toinvestment needs for new construction or formajor overhauls, and are not necessarily

17

available to finance short-term needs andunforeseen breakdowns. Moreover, pastexperience has shown that communities stillhave great difficulty in accessing resources fromthese funds, while project reports often mentionmismanagement as a major obstacle toefficiency. Since access is easier for localauthorities and municipalities than forcommunities, it is important that communitiesand municipalities work in partnership.

4.1.23 Communities can be encouraged tocreate a fund at local or village level for themaintenance of their water supply. An initialdeposit is put into a bank account, which isreplenished through monthly or yearlycontributions. The bank account attracts intereston savings, and opens access to credits,deficits, and overdrafts. Account holders canuse their savings as a financial guarantee. Thefund operates as a savings bank accountmanaged by the bank. The fund can also bemanaged within a village or area setting, withoutpassing through a bank. Deposits and savingsoperate as a revolving fund, which works as amicro-credit system through an association, asdescribed above.

4.1.24 Perhaps due to the uncertainty of manyof the above techniques to deliver funds foroccasional capital maintenance, cost recovery insome rural areas has ended up being dependentupon taxation and goodwill by donors such asNGOs. At present, international taxation issupporting implementation but it is highly unlikely

that international taxation can support capitalmaintenance in a sustainable manner. Providingcapital works to provide high levels of servicewhich communities cannot themselves afford, bydefinition, means that they also cannot afford thecapital maintenance of the high levels of service.This is where the principles of service and pricedifferentiation should be strictly applied.

4.1.25 Over time, it is understood thatinvestments in improved water and sanitation willnot only improve health but also facilitateeconomic growth and hence enhanced ability topay for services. However, in some rural areas, itis likely that such growth may be insufficient toenable communities to pay capital maintenancecharges in the near term. The subsequent stagewill be for capital maintenance to be supportedthrough national taxation which, whereappropriately managed and supported by localsales and/or household income taxes, will delivera level of user contributions in an efficientmanner.

5. Step five

5.1 Implementation

5.1.1 Although the community management modelhas proved effective at implementing new ruralwater supply systems, there have been significantfailures in maintaining those systems in the long-term using the community management model.A great number of communities and some

18

municipalities lack the financial management skillsto organize, implement and efficiently control arevenue collection and cost recovery system.

External support in this area is crucial if costrecovery strategies are to be effectivelyimplemented. It is likely that some form of watersupply entity, a part of local government, anautonomous agency or an extension of an urbanutility, will be required to facilitate and deliver bothtechnical and financial support to ruralcommunities.

5.1.2 A financial management system can besaid to be effective when managers can :

• Estimate the expenditure that a service willneed over defined periods of time;

• Recognize and access the various types ofrevenue, both budgetary support and user fees;

• Collect an appropriate level of fees from users;• Keep all necessary financial information and

records• Use indicators to control and monitor the

financial performance.

Billing and Collection Possible Options

When to collect money? • Each time a service is provided: monthly,post-harvest, beginning of financial year orevery sixth months

Who collects the money? • Caretaker, operator, user group, villagewater committee, community leaders,staff from an institution or treasurer

Where to keep the money? • In a safe, in the village account, in a bankaccount, in a development fund, in thetreasurer’s house, or in an official account

19

5.1.3 The aim of organizing financial flows is toensure that resources arrive in time to guaranteethe sustainable functioning of the water and/orsanitation service. For this reason it is useful tothink about how and when to present bills towater users, stipulating one or more placeswhere water bills can be paid.

5.1.4 Once funds have been collected andregular expenses met, any surplus shouldnormally be kept in a safe place, such as a bankaccount. Many communities wonder how to usethis surplus, which may lie idle in an accountwhile the community has great financial needs.

There are two possible solutions. Either thesurplus is used for water projects only or is usedto develop other activities provided this money isreimbursed over time. As a general principle,funds collected for water and sanitation shouldbe used for that purpose alone.

5.1.5 Making the management organizationaccountable to users is an important factor insustaining services. This includes transparentfinancial management and regular reports andaccounts to community meetings (moreinformation on transparency is provided in arelated annex). Effective control and monitoringis an ongoing necessity as part of financialmanagement. This relies on accurateinformation, which will mainly be found in therecords and books kept by the community.

5.2 Non-payment challenges

5.2.1 Payment default for water and sanitationservices is a common challenge in many ruraland peri-urban areas. Small utilities andcommunity committees have implementedvarious measures to control and reduce it.Introducing educational programmes to informusers and make them aware of the need to payon time is always a good strategy.

5.2.2 However, when educational programmesdo not work, other measures have to beimplemented. Some of the strategies that maybe used against default include:

• External audit agents are hired to audit thebooks with treasurers, collect loan repay-ments and accompany the treasurer on homevisits to households whose payment is inarrears. Sometimes there are good reasonswhy a household is not able to pay the duecontributions and a realistic payment plancan be prepared;

• Include in the user fee/contribution a safetymargin to cover defaulters or encourageadvance payments through a small reductionin the fee/contribution. In practice this typeof advance payment would be introduced inline with the above-mentioned strategy;

• Use social pressure by announcing debtors’names at general meetings and other placeswhere the community gathers.

Conclusion

Enhancing rural water and sanitation services forconvenience, public health and economicreasons should be advanced on the basis of theprinciple of service and price differentiation. Thisprinciple has the effect of balancing households’ability and willingness to pay with service levels,and therefore maximizes the potential for costrecovery and financial sustainability.

2020

For rural (and/or non-networked) water andsanitation services, a demand-responsiveapproach is recommended, supported byhousehold and community contributions to thegreatest extent possible, and backed up byappropriate institutions with budgetary support.

STEP 1

The Economic,

Policy and

Institutional

Context

Economic condition, growth and average income levels (GDP pc and Gini index)

Trends in rural growth rates, peri-urban and slum growth with non-networked services

Policy and institutional environment, laws and formal statements of cost recovery policy by relevant

authorities

Country Policy and Institutional Assessment – likelihood of political support for accelerated move

towards cost recovery for sustainability;

Stakeholder analysis – likelihood of support/opposition to enhanced cost recovery. Possibilities for

cooperation and coordination.

Is there any system of comparative competition for drillers, small-scale private sector providers &/or

supply chain (both water and sanitation) in the country to promote efficiency?

STEP 2

Setting Cost

Recovery and

Service

Objectives

Existing RMC & AFDB policy on setting cost recovery targets from user fees

What are the primary objectives of service delivery in this context – social, economic, financial,

environmental?

To what extent should attainment of the desired cost recovery target be time-extended?

What are the existing levels of service provision – water and on-site sanitation? Is there a need

for social mapping?

What is the existing financial situation & efficiency of any direct service providers (community

committees, small-scale private sector)?

What is the existing level of subsidies to average customers of water? And on-site sanitation?

What levels of service are being accessed by the poorest?

What quality and quantity of services are desired by users and consumers, both present and

potential?

Can services be delivered through alternative, differentiated, modes of provision?

What is the affordability and willingness to pay for services at various levels of provision?

Co

un

try P

rog

ram

me

Assessm

en

tS

ecto

r re

vie

w,

Pro

ject

Iden

tificati

on

&

Feasib

ilit

y

Table 1: Summary of the five steps comprising guidelines for user fees

and cost recovery for rural water and sanitation services

22

23

STEP 3

Investment

Planning,

Costing &

Appraisal:

Determining

Revenue

Requirements

Understanding total revenue requirements

What are present operating expenditures, capital maintenance expenditure, costs of capital, if any?

What should they be at present service levels? What should they be at proposed service levels?

Have these costs incorporated direct support costs?

Is the country investing sufficiently in indirect support costs?

Is there a justifiable need for extra-sectoral subsidies, particularly related to the time-spread of

achieving cost recovery?

STEP 4

The Basis

for Charging

User Fees

What is the basis for charging user fees/contributions/levies (payment in kind etc,)?

To what extent does the cost recovery mechanism reflect the principle of revenue adequacy, social

fairness, water conservation and polluter pays, simplicity and enforceability?

Are cost sharing agreements clear and implemented between different stakeholders?

Is it an appropriate time to re-consider the basis for charging?

Is there an appropriate balance in sharing the total revenue burden between different consumer

segments?

To what extent are faecal sludge management costs being recovered?

Are any additional sources of finance required to ensure coverage to the poor?

Is there sufficient willingness and ability to pay these contributions?

Have women, the poorest and the most disadvantaged been consulted separately?

If not, reconsider service objectives and modes of provision Step 2.

Pro

ject

pre

para

tio

n a

nd

Ap

pra

isal

STEP 5

Implementation

Are any additional sources of finance required to ensure coverage for all, especially to the poor?

Is there an adequate strategy to communicate to customers the reasons for moving towards full

cost recovery?

What customer involvement mechanisms are planned?

Are there appropriate user payment collection procedures (flexible payment systems) in place? Can

lower-income customers pay little and often?

Are there appropriate but enabling processes in place/planned for non-payment?

Are public institutions paying their water fees?

Is there any need for adaptation of local bye-laws to enforce compliance?

Is there a system of financial control, monitoring and evaluation of the development of user fees?

Pro

ject

Desig

n a

nd

Im

ple

men

tati

on

24

www.afdb.org

The Water Partnership Program and its mission

The Water Partnership Program (WPP) promotes effective water management policies and practices at regional and countrylevels. It operationalizes the African Development Bank’s Integrated Water Resources Management policy in the Bank’s regionalmember countries.

WPP pursues its goal through the generation and dissemination of a range of knowledge products, fostering dialogue on keysector issues and promoting partnerships that enhance knowledge sharing.

The Guidelines presented here touch upon a very critical issue for all rural water sector investments: how to build rural water and

sanitation infrastructure that is, first and foremost, financially sustainable, in addition to being environmentally and socially sustainable?

Water Partnership Program WPP

The African Development Bank,

Temporary Relocation Agency (TRA),

13 Avenue du Ghana, BP 323,

1002 Tunis Belvédère, Tunisia

Tel. (216) 71 333 511 / 7110 3450

www.afdb.org

Agencecanadienne dedéveloppementinternational

CanadianInternationalDevelopment Agency