Below the water line

On 8 September 1854, London health authorities removed the handle of a water pump located at the juncture of Cambridge and Broad Streets. The well was famous in the city for the sweetness of its water, apparently used as an ingredient in a “celebrated nectar”.

This fact was all the more astonishing because the well was also responsible for the deaths, in less than a fortnight, of nearly 700 people. The cause of death was cholera. Dr John Snow, a British physician credited as one of the founders of epidemiology, identified the source of the fatal outbreak as the Broad Street pump. Further investigation revealed that faulty brickwork around a cesspool, which lay within a metre of the pump, had allowed infected water to seep into the surrounding soil and thence into the well. The water level in the cesspool was two and a half metres higher than that of the well. On Dr Snow’s recommendations, authorities removed the pump handle.

The solution was simple, and in many cases, better drinking water and sanitation requires only the close scrutiny of authorities. But today, investment is rarely simple. Modern water use and sanitation systems are administratively and politically complex. Water is considered a human right, unlike electricity or telecommunications. Nor do people see water as an “infrastructure” like the mesh of power lines overhead. It is taken for granted, partly because the bulk of water infrastructure lies out of sight underground, which also makes it difficult and costly to maintain. Further complications arise from the fact that sanitation is often administered by a slew of ministries and departments rather than by a single agency, giving rise to potential conflicts of authority which can affect management and quality. Lastly, in the present economic climate, a dim view is taken of any proposal to make households or governments pay more.

Sufficient funding is necessary to maintain or improve existing infrastructures and to ensure access to healthy drinking water. This holds true not only for developing countries but OECD and emerging market (chiefly BRIC) countries as well. Together, OECD and BRIC countries will have to spend between 0.35% and 1.2% of their GDP to maintain existing infrastructures. This currently amounts to US$576 billion per year, an outlay projected to rise to nearly $780 billion by 2015 and $1,035 billion by 2025.

Developing countries face different problems, the main one being access to clean water. The World Health Organization estimates that clean water and hygiene would reduce the global burden of disease by 10%, and generate revenue of up to $84 billion per year. Diarrheal diseases such as cholera kill 1.8 million people a year, 88% of whom are infected as a direct result of impure water, poor sanitation and hygiene. Improving the water supply and sanitation reduces morbidity by 58.5% and the simple act of washing hands reduces it by another 35%. Yet there is a caveat. “Having a water tap does not necessarily mean having sustainable access to safe drinking water,” a recent OECD report warns. Cross-contamination, as the Broad Street pump example shows, can have grave consequences. Access must remain a priority, but without corresponding investments in sanitation, its provision may be a poisoned chalice.

Investors are already shy of the heavy initial outlay needed for water infrastructure. Economic uncertainty in developed countries and political instability in developing countries do nothing to embolden them. So where is the money to come from? A lot can be saved through efficiency. Leakage is a notorious problem, not only in developing countries, where up to 70% of water is lost through leaks, but in developed countries as well. Decrepit infrastructure built during the Victorian era was responsible for the 40% leakage rate in the London water network, prompting the economic regulator, Ofwat, to impose reduction targets. In other developed countries, leakage may be at similarly high levels.

Even with gains in efficiency, poorer countries will not reach the Millennium Development Goal of halving the proportion of people without access to clean drinking water by 2015. The United Nations estimates that hitting that target will require anything between $6.7 and $75 billion per year, increasing to between $33.5 and $375 billion by 2015. At current levels of financing, this target is out of range. Closing the financing gap means softening some long-held assumptions.

In 2009, the OECD recommended a combination of tariffs, taxes and transfers of development aid and philanthropic donations as the surest way to close the funding gap. The steady stream of revenue from these sources would open the way for repayable finance in the form of loans, bonds and equity. This approach, known as “sustainable cost recovery”, departs from the earlier concept of “full cost recovery”, which held that tariffs alone were sufficient to recover costs. While largely true in OECD countries such as France, where tariffs account for 90% of financing, it is clearly not the case in developing countries. In Mozambique, for example, tariffs cover only 30% of financing; in Egypt, a mere 10%. This is not surprising. Proponents of full cost recovery overlook the fact that water infrastructure in developed countries evolved over a period of 50 to 100 years and until recently was largely financed from public budgets. Until sound infrastructure is in place, and household affordability has improved, developing countries will have to rely on their public budget resources, on assistance and donations in addition to tariffs.

Setting tariffs offers a good example of the complexity of water issues, especially in countries where the provision of water is heavily subsidised. Subsidies are rightly meant to protect poor consumers. However, there is little incentive to save water if those subsidies are overly generous and reduce the water price. Politicians may be loath to raise tariffs on a “public good” and “human right”, but sustainable cost recovery cannot be realised unless a balance is struck between affordability and financial sustainability. The question is whether the criterion of affordability should apply to the population as a whole or only to the most vulnerable?

An example of a flawed approach to ensuring affordability is when water tariffs are subsidised across the board, as is the case in Egypt for example, where 90% of water utility revenue comes from tax payers’ money. As a result, the rich, who are the largest per capita water consumers, receive a larger subsidy than the poor and pay a relatively small percentage of their income, while the poorest sections pay a larger share of theirs.

Governments could cushion this by compensating poorer households directly and by making it easier for those consumers, whose incomes are often irregular, to pay their bills: week by week, for instance, rather than quarterly.

While tariffs may cover cost for provision and maintenance, the hefty capital required to develop and to repair infrastructure generally comes from taxes in the form of government subsidised loans, grants and guarantees. With governments today scrambling for cash, these sources of revenue are being siphoned off, although some countries, such as China, Korea and the United States, specifically targeted the water sector in their economic stimulus packages. The crisis also makes it hard for both developed and developing countries to borrow at acceptable rates. The result may be “temporary” cuts in funding.

For developing countries, the situation is brightening. In 2001, aid for water and sanitation began to rise sharply. Between 2002 and 2009, bilateral aid increased on average by 18% per year, with multilateral aid increasing by 10%. Official development assistance (ODA) is most effective when used to support public goods, such as wastewater treatment, improved access for the poor, and as leverage to attract private investment. Allocation for water and sanitation is a problem, however, with some countries receiving more ODA than they need, and spending it disproportionately on urban areas rather than water-stressed rural ones. Unfortunately, as donor countries shore up their finances, ODA is unlikely to see further increases any time soon.

The OECD has a range of tools to help policymakers achieve more sustainable financing of water and sanitation. The strategic financial planning approach helps decision-makers to find the right mix of funding. This is supported by FEASIBLE, a computer-modelling programme that evaluates the discrepancy between the cost and the financial reality of proposed water and sanitation projects. Another tool is the OECD Checklist for Public Action, a set of 24 principles that guides policymakers in assessing their policy framework against the objective of attracting private sector investment and expertise in the water sector, which has now been used by Egypt, Russia, Lebanon and Mexico.

Water and sanitation have often suffered from the poor judgement of policymakers, who fail to look closely at the financial realities of the sector, whether because of idealism, political temerity or economic necessity. Beckoning investors requires the presentation of a realistic and balanced approach to financing. Like the water from the Broad Street pump, certain policies may sweeten the reality but only hands-on action will change it. Lyndon Thompson

For more on water management, contact Peter.Borkey@oecd.org or Celine.Kaufmann@oecd.org

Global Forum on Environment: Making Water Reform Happen Paris, 25-26 October 2011

References

Borkey, Peter, and Brendan Gillespie (2006), “Safe water: A quality conundrum”, in OECD Observer No 254, March.

OECD (2011), Meeting the Challenge of Financing Water and Sanitation: Tools and Approaches, Paris.

WHO Water Sanitation: Hygiene Facts and Figures.

See also www.oecd.org/water and www.oecdobserver.org/water

©OECD Observer No 286 Q3 2011




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