NOTES AgriculTurE & rurAl DEvElOpmENT 46225 Financial Services to improve Access to Water and Sanitation in Sub-Saharan Africa iSSuE 42 SEpTEmBEr 2008 By BrigiTTE BiESiNgEr AND mArEN richTEr Achieving the Millennium Development Goals, par- viders of water and sanitation services. Currently, ticularly, reducing child mortality (the fourth), and less than 10 percent of the African population has halving the proportion of people without sustainable access to financial services, and products are rarely access to safe drinking water (the seventh) requires made available for investments in small-scale water significant improvements in access to safe water supply and sanitation. and basic sanitation.1 In Sub-Saharan Africa a water and sanitation crisis looms. Forty-four percent of Marrying the financial with the water and sanita- the population does not have reliable access to safe tion sectors to make financial services available to water, and 63 percent remain un-served by sanita- low-income households and small-scale providers tion facilities.2 Income poverty is also at a crisis stage. of water and sanitation services is a market-driven, Some 72 percent of the population in Africa lives on market-friendly approach to resolving the credit con- less than US$2 a day and 41 percent suffers from straint that is inhibiting the development of water extreme poverty on less than $1 a day.3 Despite the and sanitation infrastructure in Africa. Depending dire need and consensus on the goals, public funds on the situation, this approach (1) promotes the for water supply and sanitation are drying up. provision of financial services directly to low-income households in order to enable their investment, (2) Private sector financial services could contribute extends access to water and sanitation services to meaningfully to alleviating this crisis if they become poor households by making financial instruments available to low-income groups and small-scale pro- available to micro-, small-, and medium-size private operators, and/or (3) targets public funds more effec- tively to the extreme poor Key strategies are: · Closing the information gap that exists between the sectors at the policy and operational levels, and between service users and service suppliers. · Supporting competition and financial viability in service provision in addressing policy challenges. · Financial broadening by widening the range of financial products suitable for small-scale water supply and sanitation. · Financialdeepeningbyincreasingtheoutreachand coverage of financial institutions to small-scale ser- vice providers and users. · Tight targeting of grant funding to the extreme poor and low-potential areas, and separating it from loans. Photo:ArneHoel/TheWorldBank ThE WOrlD BANK Key potential benefits are: cal service providers and educational institutions that · Fulfillingthebasichumanneedfor,andhumanright provide needed training, (2) market research and to, clean water and sanitation. support for product development, and (3) refinanc- · Enablingpoorhouseholdstodedicatemoretimeto ing facilities to buffer liquidity shortages and term- economic activity. mismatches of funds. · Improvingthehealthstatusofpoorhouseholds. On the micro-level, financial institutions must establish · Closing the "small business finance gap," thus working, responsive relationships with clients outside allowing small and medium-size private operators to their traditional clientele, including low-income individu- expand water supply and sanitation services to those alsandless-formalsmallbusinesses.Toclosethesmall who are currently unserved. business finance gap in the small-scale water supply and sanitation market, microfinance institutions need to pOlicy AND `upscale` to include private operators, while commercial implEmENTATiON iSSuES banks should `downscale` to reach low-income clients. Implementing this market-driven approach is not a The water supply and sanitation sector is organized `quickfix'forpovertyreduction.Therelevantconstel- by various countries in different ways--centralised or lation of actors, policies, and circumstances is complex decentralised, with service provision by public utilities and many enabling conditions need to be introduced orrelyingonprivatesectorparticipation,etc.Themain or strengthened across the financial, water, and sani- challenges in implementing a market-driven approach to tationsectors.Wherecreditatmarketconditionscan closing the gap of financial services for small-scale water be extended, this approach will fill in existing gaps; supply and sanitation providers are good corporate gov- where market credit fails due to extreme poverty, the ernance, sufficient autonomy that allows service provid- need for grant arrangements will persist. Despite the ers to operate profitably, and the existence of regulatory lack of conditions that would enable a broad-based mechanisms that guarantee quality, transparency, and application of the approach to be successful in the accountability on the part of the private operators. short run, solid gains are possible by implementing targeted pilot measures. The concerns of the poor need to purposefully be The financial sector. Most countries in Africa suffer addressed. Policy-makers and service providers should from shallow financial systems that provide only limited not assume that all poor customers represent high-risks accesstoservices.Theobjectivesherearefinancialbroad- andlow-returns.Theymustalsorecognizethatthemain ening by widening the range of products, and financial utility on its own might not provide end-services to the deepening by increasing the outreach of institutions. poor nearly as well as small-scale private operators, and Customer-friendly procedures, marketing to stimulate should encourage the adoption of innovative and low- demand, and the collection of useful data are founda- costtechnologies.Tothisend,thecreationofpro-poor tions that must be developed. units within agencies and utilities can be very useful. Restricting water tariffs in order to reach the poor can At the macro-level, policies must be put in place that undermine the approach. supports market-based competition between institutions. Constraints that prevent financial service providers from Potential client groups. Todeterminewhetherfinan- offering products in a sustainable way must be removed. cial services are appropriate instruments for helping poor On the other hand, prudential rules and regulations, as groups increase access to water supply and sanitation, well as supervisory structures, need to be elaborated, it is essential to distinguish between the potential client taking into account the particular characteristics of the groups. Some are households that provide thier own ser- micro-finance business. vices. Some are small private service providers, including micro and small enterprises. Others are more formal small Effective meso-level infrastructure must be in place ormediumenterprises.Therearealsosmallcommunity- for the financial system to work well in relevant areas. based service providers. Two important differences are Key components of such infrastructure are (1) techni- the economic status of the client and whether any of 2 thesegroupshavecommercialinterests.Thefigurebelow vices.Theyoperatemostlyinurbanandperi-urbanareas classifies economic status along a continuum between un-served by the utility and typically inhabited by the destitute and wealthy, and suggests the type of service poor.Therearetwomaincategories,wherebydegreeof provider that tends to be most suited to each. formality is much more important than size in distinguish- ing between them: Extreme poverty line Poverty line Micro or small enterprises US$1 a day US$1 a day usually have low-skill sets, simple organizational struc- Destitute Extreme Moderate Vulnerable Non-poor Wealthy tures, and minimal access to organized markets, for- Households as small mal credit, education, or service providers technical training. This Private small service providers, small and group mostly includes the Community-based small medium enterprises extreme poor, poor, and service providers vulnerable non-poor. Their main constraint is comply- Private small service providers, micro and small enterprises ing with the requirements of the financial sector because of their informality. Whilethisdivisionofserviceprovidersbyclassificationof High potential nevertheless exists for drawing on finan- client is a useful conceptual device, it is also very impor- cial services (especially micro-loans) in low-income, peri- tant to account for location because different financial urban areas for small-scale water supply investments. instruments are better suited to urban and peri-urban areas, and to high- and low-potential rural areas. Small- and medium-size enterprises resemble firms in a more formal sense. However, their incomplete formalisa- Common needs. Low income groups are generally tion and relatively large typical investments imply a higher financially-illiterate, lack access to relevant financial riskexposureforfinancialinstitutions.Theseoperators products, and have limited technical capability. Financial clearly do not belong to the poor, but can play an impor- institutions that build working relationships with these tantroleinservingthepoor.Thisgrouphashighpotential groups could overcome the lack of trust and negative as customers of financial institutions, but currently falls reputation of their industry that prevails among those in the small-business gap that is served neither by micro- groups,andinsodoingexpandtheirclientbase.The credit institutions nor by commercial banks. clients, for their part, could establish a positive history and savings track record. All groups would benefit Community-based, small-service providers are found from interventions that support the local production mainly in water supply schemes in rural or peri-urban and distribution of appropriate technology. areas.Thepovertylevelsofcommunitygroupmembers range from the destitute to the more vulnerable non- Households as small self-service providers are those poor.Theirmanagementandoperationalcapabilitiesare not served by reliable and safe water supply or sani- low;theydonotseekprofits.Theyoftenlacksufficient tation services. They tend to belong to low-income legal recognition for consideration for loans, yet their groups. The bottom of the economic range of this investment needs can be large. If at all, they usually are group mostly does not generate cash income, and so served by the microfinance industry. cannot access loans. For those with sufficient income, in urban or rural areas, appropriate financial vehicles lESSONS and technologies can be made available with good potential for success. The marriage of the financial with the water supply and sanitation sectors for small-scale infrastructure is a Private small-service providers generate income by selling new and complex undertaking that requires innovative or transporting water or by providing latrine-cleaning ser- approaches.Todate,thebodyofrelevantexperiencein 3 Africa is quite limited. One valuable pilot project underway of financial institutions to broaden their product range is the Kenya Women Finance Trust Ltd. This program and deepen outreach should be supported. Agencies provides a one-year loan for a rainwater harvesting tank can assist with the piloting of innovative facilities in low- package that includes a reduced purchase price, delivery, potential areas, and strengthen financial institutions and and installation. This program is a collaboration with non-financial institutions (i.e., equipment suppliers) in private-sector water tank producers. providing term-lending or leasing arrangements to end- clients. Second-tier institutions that offer refinancing to Recommendations foR institutions on the micro-level should be fostered. pRactitioneRs Inaddition,donorsmustcarefullyrethinktheirfinancing Fostering an enabling environment for collaboration policy in the water supply and sanitation sectors. This between the financial and the water supply and sanita- new co-operation should aim to refrain from co-financing tion sectors is the first step towards putting this approach investments and instead support governments in pursu- into practice. Recommendations include: ingtheintelligentleveragingofloansbygrants.Itshould also make funding available for small-scale water and · Closingtheinformationgapbyfacilitatingexchange sanitationserviceproviders,ratherthanfocusingexclu- and dialogue among the key stakeholders and across sively on large utilities. the sectors involved. · Thedevelopmentofappropriatemarket-friendlypolicy conclusion in the financial, water, and sanitation sectors. · The development of supervision mechanisms that Opportunities for local financing mechanisms for water ensure financial soundness of business practices and supply and sanitation run dry where the population has the security of savings. nomeanstorepayaloan.Intheinitialstagesofincreas- · Thedevelopmentofmeso-levelnetworksandprofession- ing access to financial services, the moderate poor and al institutions that serve rural financial intermediaries. the vulnerable non-poor will benefit significantly. At the upperendoftheextremepoor,householdswithcash · Theestablishmentoflocalequipmentmanufacturing earnings can be reached with appropriate financial vehi- facilities that produce small-scale water supply and cles.Toreachthedestituteandextremepoor,carefully- sanitation technology. targeted grant funding might be required. · Innovationandpilottesting.Inthefinancialsector,this meansdesigningflexible,demand-drivenproducts. Thus for each country the following thorny issues will need further discussion: possible donoR involvement · Theroleofprivateversuspublicsectorinproviding Donor agencies can help support the market-driven water and sanitation, particularly for the poorest. approach in Africa through the provision of technical · Theroleoflargeutilitiesversussmallandmedium- and financial co-operation. To be effective, agencies sized firms in water and sanitation. should work with national decision-makers to prioritize · Waystoeffectivelyreachtheextremepoorwithout and support the recommendations listed above. Efforts undermining financial systems development. 1 This paper draws on studies authored by Brigitte Biesinger and Maren Richter, and on a Position Paper prepared by Alison Lobb, an independent consultant. 2 2006:WHOandUNICEFJointMonitoringProgrammeforWaterSupplyandSanitation. 32007:WorldBankGroup(calculatedonlineathttp://iresearch.worldbank.org/PovcalNet/jsp/index.jsp) ThisnotewaspreparedbyJuliaRota,ConsultantwiththeAgricultureandRuralDevelopmentDepartment,basedonapositionpaper writtenbyAlisonLobbandpublishedbytheGermanSocietyforTechnicalCooperation(GTZ).Thepositionpaperreportsontheresults ofaseriesofstudiesundertakenbyBrigitteBiesingerandMarenRichter,commissionedbyGTZonbehalfoftheGermanFederalMinistry forEconomicCooperationandDevelopment(BMZ). tHe WoRld banK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural