Exploring broader efficiency aspects in the water and sanitation sector
Published on: 28/11/2024
In the water and sanitation sector, discussions around efficiency as a source of additional funding, often focus on reducing non-revenue water (NRW). NRW refers to water that is produced but not billed due to various reasons, including leakages, theft, or metering inaccuracies, and energy efficiency. While these are significant aspects of efficiency, a recent Connect Finance discussion highlighted that strategies towards operational efficiency need to be implemented alongside financial efficiency at sector level.
The focus on NRW is understandable since it impacts investments and the ability to take on loans or change tariffs. It is one of the indicators that shows if a service provider is financially viable and/or bankable, and with NRW above 50%, as is common, all additional finance gets blocked (understandably). For example, see the recent ESAWAS benchmarking report for NRW levels of the best performing utilities in East and Southern Africa. On the other side of the coin, the report from the International High-Level Panel for Africa estimates that in African countries, efficiency gains of 10% of existing assets and 20% on new assets would release an estimated USD 11.5 billion per year.
Another important part of operational efficiency discussions is energy efficiency . More than 50% of operational costs tend to be spent on pumping water for extraction, treatment and distribution. There is therefore a big potential to achieve efficiency in energy use by undertaking energy audits, to develop strategies around shifting to renewable energies, but also by changing to more efficient pumps, and designing schemes and pumping schedules that are more energy efficient. See this GWOPA factsheet.
Still, these discussions on efficiency often refer to operational efficiency at service provider level. There are several other important factors beyond just the infrastructure level that could unlock significant resources. These include: subsidy targeting; the ability to maximise outcomes with existing resources; and promoting better sector planning and management. This broader perspective on efficiency moves the focus from solely operational metrics towards a wider view on sector processes, including measures to improve public financial management and timely allocation of funds to district level authorities, which provides the potential to increase the use of available budgets (absorption). The latest global estimates on budget execution are 72% (World Bank, 2024).
Without adequate planning, compounded by late disbursements of funds and low budget execution, local government and service providers often struggle to maintain operational capacity, resulting in delays and escalated costs due to delays in procurement and deferred maintenance. See the recent World Bank report and dashboard with global public spending in the water sector and how financial resources are being allocated and what to do to increase them. Expenditure in the sector as GDP ratio remains at 0.5%, which is not much of a change from the past 20 years.
Below are a number of examples of sector-level financial efficiency measures and strategies that can be adopted to effectively increase the amount of money flowing through the sector.
Finance strategies that IRC supported in countries like Ethiopia, Rwanda, Honduras and Cambodia, quantified how much money can be raised by adopting specific efficiency improvements. In Ethiopia, adjusting water tariffs to match costs more accurately, particularly for industries with high water use, emerged as a significant measure, raising an estimated ETB 225-300 million per year (approximately USD 1.9-2.5 million). Meanwhile, in Rwanda, the existing VAT on water tariffs opens the door to ring-fencing funds for maintenance, raising between RWF 10-14 billion per year (approximately USD 7.3-10.2 million).
Having accurate data is essential for making informed decisions about where efficiency gains can be achieved. Mini studies (e.g. that can be completed within a month by a consultant) can be used to provide quantitative insights that help refine the efficiency strategies adopted by countries. By gathering granular data on efficiency options, decision-makers can then focus their discussions on the most impactful measures, tailoring solutions to their unique country contexts.
Beyond piped water and sanitation, a large part of the sector also consists of point sources. The efficiency improvements in point sources, and specifically sanitation is often overlooked.
Sanitation financing and efficiency measures frequently receive less attention compared to water. Insights into finance strategies for sanitation showed that measures like developing asset management plans for wastewater treatment plants and creating a sanitation budget code can lead to substantial efficiency gains. In some contexts, public financial management reforms specific to sanitation could ensure that funds earmarked for sanitation reach local authorities. For instance, in Phnom Pehn, Cambodia, utilising the ring-fenced 10% of water tariffs as intended for sanitation in the city, would raise an estimated USD 4 million per year.
Wastewater treatment facilty in Suva, Fiji. Credit: Eric Sales.
Many efficiency improvements, particularly those involving NRW or energy savings, require significant upfront investments. While the promise of improved efficiency is attractive, it often involves substantial capital expenditure, which is not feasible for all utilities. Utilities need investment strategies that balance immediate needs with long-term sustainability.
In some countries, for example, it was found that the estimated return on investment for reducing NRW was only achievable over long periods of time due to the high upfront investment needed for infrastructure upgrades (including solar replacements and introducing technologies for billing). Such information helps prioritise investments that offer the most value and feasibility – and discards those that are too costly to implement and provide a lower return rate.
When discussing financial efficiency, the concept of economies of scale also emerged as a viable way to reduce costs. In Honduras, besides reducing technical losses, the top efficiency measures in the finance strategy included economies of scale in infrastructure programmes and intermunicipal models for service delivery.
By consolidating investments and minimising administrative overhead, water programmes could reduce expenses. For example, instead of spreading investments thinly across multiple small projects, from a financial perspective, pooling resources for more extensive, regional-scale initiatives, may lead to a reduction in unit costs and improve project viability.
Efficiency in the water sector often intersects with political challenges, especially when it involves tariffs and public subsidies. Political factors can influence decisions about subsidy allocations and billing efficiency.
When tariff increases are framed as a technical adjustment to address inequalities, the conversation becomes more approachable. This means referring to tariff increases for some parts of the population, or industries, as a necessary measure to cross-subsidise the provision of affordable services for people who are less able to pay. Additionally, targeting subsidies more accurately—by avoiding subsidisation of customers who can afford to pay—can free up resources for underserved areas.
When discussing efficiency measures, early discussions and brainstorm sessions with Ministry of Finance colleagues can lead to interesting options worth quantifying, such as specific ring-fenced taxes (e.g. in Cambodia and Rwanda), but also exploring import tax reductions for specific equipment.
This blog has shown that efficiency in the water sector requires a combination of strategies. These include measures aimed at operational efficiency at the level of service providers (reducing NRW, energy efficiency), and measures focused on financial efficiency at sector level - for example through efficient use of public finance flows, efficiency in subsidies, economies of scale, reducing unit costs, ring-fencing taxes, amongst others. The two groups of strategies need to be linked, as finance mechanisms are increasingly tied to the performance improvements of service providers. This allows countries to enhance efficiency in the sector and save/mobilise significant amounts of money, and demonstrate to financiers that it is a competent sector worth investing in.
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