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Bridging the financing gap with smart tax

Published on: 08/06/2015

We have to spend more and faster than we are doing now if we want everyone to have water and sanitation by 2030.

IRC Event: Domestic resource mobilization for water, sanitation and hygiene, 3 June 2015

We have just 5 years to get the financing mechanisms right if we want to achieve universal access to water and sanitation by 2030. IRC's Head Innovation and International Programme Catarina Fonseca issued this warning on 3 June 2015 at the IRC Event on Domestic resource mobilization for water, sanitation and hygiene.

So how much money are we actually talking about? Based on World Health Organization estimates we need about US$ 27 billion a year to extend services to everyone by 2030. Add to that an additional US$ 290 billion to maintain or replace existing infrastructure gives a grand total of US$ 317 billion a year. This means spending more and faster than we are doing now.

Taxes play a key role in bridging the finance gap. They are not only the largest source of funds for public infrastructure but they can leverage tariffs and transfers (grants and loans).

Public sector banks

One way to get more money faster is through a public sector bank like the Dutch NWB Bank, which was established in 1954 and is owned by local water authorities. The Bank's director Frenk van der Vliet explained how the governance structure of his "lean and mean" organisation enabled it to provide low interest loans with long payback periods. The NWB Bank has a € 88 billion (US$ 98 billion) balance sheet and its clients have never defaulted on their loans.

Public Finance Cycle. Credit: (Sophie Trémolet, Trémolet Consulting

Public finance needs to be spent wisely to complement rather than substitute for other financing sources, said the final presenter at the IRC Event, Sophie Trémolet, Director at Trémolet Consulting. Her presentation lists numerous good practices to improve the "Public Finance cycle" shown above. For more information on public finance don't forget to check out www.publicfinanceforwash.org

 Aqua for All Executive Director Sjef Ernes

Following the presentations there was a lively discussion with participants at the IRC Event. Is taxation really that important? Don't you to need to improve services first before you can levy taxes or increase tariffs? How about collaborating with the energy sector to raise revenue or increase income from the productive use from sanitation waste products? Nevertheless, the speakers stressed that some form of public finance is always needed either as pre-investment or in the form of guarantees for private finance.

Governance and "bankable projects"

Good governance is crucial, particularly in the public sector. There needs to be strong government commitment and support to water investments; sound democratic processes need to be in place to decide on the best investment projects; and there is a need for legislation and regulation, both in the water and in the finance sector. Municipalities should stop interfering by setting unrealistic tariffs. They can for instance use property taxes to fund water and sanitation services. The reform processes to bring this about are costly in themselves and are often funded, again, from public sources (taxes or grants).

Crucial as well is to develop "bankable projects". There are various examples of trust funds, or facilities to help utilities and authorities to develop such projects. But we again have to be clear, that these trust funds are often set-up with public finance.

Are you convinced that "smart tax" is essential to bridging the finance gap? Share your views below.

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