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If there is so much money around, what’s the problem?

Published on: 17/10/2014

In this blog, IRC's head of innovation and international programme Catarina Fonseca discusses the financing of the post-2015 development goals. "A substantial part of funding for development should be sought elsewhere," she argues. Through public finance. Or tax, as we call it.

Last time there was so much discussion around financing for development was 14 years ago after the Millennium Development Goals were adopted by the United Nations in 2000. Back then, a flurry of reports presented estimates for the billions needed to improve, among others, water and sanitation infrastructure. The focus was then mostly on development aid. With the Sustainable Development Goals about to be launched, the financing fever has started again, but with a twist.

The main source of funding for post-2015 development seems now to be sought elsewhere.  The focus has shifted from traditional donor funding – which represents a small fraction of sources of funds – to the (local) private sector and an expectation that with the right "enabling environment" they will provide safe toilets, pit emptying devices, household water connections, water filters and... lift millions out of poverty. The reader may actually argue that this is not a twist at all, rather a step back to the motto of the 1990’s water decade where tariffs were seen as the main source of funding for the water and sanitation sector.

Let’s be clear: neither in the 1990s or now, returns on investment from water supply or wastewater treatment are far from immediate. The Intergovernmental Committee of Experts on Sustainable Development Financing reports that “ [...] current financing and investment patterns will not deliver sustainable development. In particular, expected returns on investments associated with sustainable development are often not as attractive as other opportunities, especially in the near term.” (Pg. 6, see the link below)  

Some argue that the main problem of finding funds to achieve the development goals is that the older generations can only look in terms of either “not for profit” or “for profit” sources and that we will need to wait for another generation to develop robust hybrid models of finance for development. Maybe, but looking at the facts (draft GLAAS report), what we know is that aid, philanthropy and the local private sector represent only a small percentage of overall investments in water and sanitation services. This is not surprising. Countries like the Netherlands, the UK, France and most recently Singapore and South Korea, reached full coverage for water and sanitation through government leadership and… public finance.

In low income countries tax collection has been stagnant for decades. Donors are doing very little about it ... 

The conclusion is obvious: public finance is a crucial part of the solution. We need to shift the financing debate to also include public finance and domestic resource mobilisation (including stopping enormous illegal funds from leaving the countries). The debate should not be about IF public finance but HOW public finance is relevant for development and for the water and sanitation sector in particular. In low income countries tax collection as a share of GDP has been stagnant for several decades. Donors are doing very little about it – the amount of aid that goes to help poor countries sort out their tax systems is stuck at around 0.1%.

Gladly, others support these ideas. The latest OECD Development Co-operation report published last week (see the link below) highlights the need of measurements that take into account the broader financial flows for development. Chris Blattman, predicts that what we will hear a lot more in the next decades is that Africa needs more taxes and that taxation and the politics of public finance will be one of the largest areas of future research. (see link below)

“There is plenty of money in the world that could be used for development. Just stopping the enormous sums illegally flowing out of developing countries could provide billions of dollars for poverty reduction.” Erik Solheim, Chair of OECD Development Assistance Committee

The next big problem is of course how much of this money is being spent on water and sanitation and how effectively? The only reliable information on financial flows to water and sanitation is about aid and philanthropy because donors and the largest private donor in the sector report to the OECD-DAC. But the percentage of traditional aid in the overall picture is small. The TrackFin Initiative of WHO/GLAAS has been trying to track public funds to WASH with the governments of Brazil, Morocco and Ghana. The overall conclusion is that although extremely timely and valued, it has been an extremely difficult process to track public and private finance. With more countries joining the initiative it is expected that the methodology is simplified and widely adopted. 

We will also need more than the good intentions and hype around public-private partnerships: what do they achieve? Is it in line with the Sustainable Development Goals? What is the share of public and private investment in these partnerships? Greater transparency is essential to understand how to use public funds as catalysers for change and not only as a way to remove risk for private sector investments (at best) or subsidise further illegal extraction of national capital (at worst).

The last of the three possible sources of funding: transfers, tariffs and... taxes

As much as I dread sequels, I have to say it: after all the work developed by WASHCost and taken up by many organisations, we now know how much it costs to provide a basic WASH service in rural and peri-urban areas, but we need to move to the next level: how much is being invested from the last of the three possible sources of funding for the sector: transfers, tariffs and… taxes.

Are we saying that aid (transfers) is not needed? No, of course not, but it must be targeted to maximise its value: programmes targeted to reduce inequalities in access to water and sanitation services, to reduce poverty, to get to the real bottom of the pyramid where not even entrepreneurs find incentives, to create and enable the right environment for private sector to bloom and to close the gap in the supply chain where there is no private sector (i.e. human waste disposal and treatment).

IRC, together with WSUP and Trémolet Consulting have identified public finance as an area that deserves much more attention when discussing how to finance the Sustainable Development Goals. Within the next six months we will be promoting discussions around the theme of public finance for water, sanitation and hygiene.

This week, follow us at the Water and Health Conference at the University of North Carolina in the US and next month at the IRC event in The Hague.

Stay tuned!

Disclaimer

At IRC we have strong opinions and we value honest and frank discussion, so you won't be surprised to hear that not all the opinions on this site represent our official policy.