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Quick guide to public finance

Published on: 20/12/2015

Public finance is essential to achieve universal access to sustainable water and sanitation services

What is public finance?

Domestic public finance refers to funds derived from domestic taxes, raised at the national or local level. For example, taxation revenues raised by the national government of Kenya or the municipal government of Nairobi. Public finance, properly used, can serve many essential functions: it can part-subsidise services for the very poor; it can support the development of profitable markets; it can provide the administrative and technical systems necessary to ensure that services are being developed sustainably.

Public finance originates from taxes, but it does not necessarily mean public service delivery. IRC believes in the mix of public and private finance, entrepreneurs who serve 'the bottom of the pyramid' and technological innovations. However, service delivery in poor communities will invariably involve a mix of a) domestic public finance (derived from taxes and other sources of government revenue), b) user finance (derived from household payments for services received, i.e. from tariffs), and c) donor finance (i.e. development aid).

Why focus on public finance?

Universal water and sanitation is fundamentally dependent on public finance and well-functioning domestic taxation systems. Development aid and purely market-based solutions are not able to deliver universal access to sustainable services. Governments are the only ones that have both the mandate and the potential to provide universal access to social goods such as water and sanitation.

Investing in water and sanitation services pays off

Investing in water and sanitation services pays off. The economic return on sanitation spending is estimated at US$ 5.5 for every US$ 1 spent on average[1]. With access to water and sanitation, people are both healthier and wealthier: people get sick less and are more productive.  

Raising finance through taxes is cheaper than raising finance is through capital markets. More domestic resources can be mobilised by increasing the tax base and professionalising revenue collection capacity. Limited taxation capacity, a large informal sector and illicit financial flows are some of the obstacles that need to be addressed. People’s willingness to pay taxes is hampered by lack of transparency and accountability, unreliable and substandard services. The call for strengthening domestic resource mobilisation must therefore go hand in hand with better services and local governance.

Together with Water & Sanitation for the Urban Poor (WSUP), IRC has launched the Public Finance for WASH (PF4WASH) Initiative to raise awareness and understanding of domestic public finance solutions for WASH.  

For an introduction on domestic public finance for WASH have a look PF4WASH' first briefing note: Domestic public finance for WASH.

Read more about public finance for WASH

Public finance around the world:

Other interesting publications and initiatives:

[1] WHO, 2012. Global costs and benefits of drinking-water supply and sanitation interventions to reach the MDG target and universal coverage