Water Policy 9 (2007) 373–391

Cost determination and sustainable financing for rural water

services in sub-Saharan Africa
Peter A. Harvey
Water, Engineering and Development Centre (WEDC), Institute of Development Engineering, Loughborough University,
Loughborough, LE11 3TU, UK. Tel: 01509-228743, Fax: 01509-211079. E-mail: [email protected]
Received 19 December 2005; accepted in revised form 29 March 2006

Abstract

Access to safe, sufficient and affordable water in rural Africa will not increase unless sustainable financing
strategies are developed which ensure the sustainability of existing water services. There is a strong need for
international donors and national governments to confront the true costs associated with sustained service
provision in order to develop practicable long-term financing mechanisms. This paper presents a systematic
approach that can be applied to determine the overall cost of service delivery based on respective cost estimates for
operation and maintenance, institutional support, and rehabilitation and expansion. This can then be used to
develop a tariff hierarchy which clearly indicates the cost to water users of different levels of cost recovery, and
which can be used as a planning tool for implementing agencies. Community financing mechanisms to ensure
sustained payment of tariffs must be matched to specific communities and their economic characteristics; a blanket
approach is unlikely to function effectively. Innovative strategies are also needed to ensure that the rural poor are
adequately served, for which a realistic, targeted and transparent approach to subsidy is required.

Keywords: Africa; Developing countries; Financing; Rural water supply; Sustainability

Introduction

In the year 2000, the United Nations, through the Millennium Development Goal (MDG) for
environmental sustainability, set the international target to halve the proportion of people without
sustainable access to safe drinking water by the year 2015 (Annan, 2000). Estimates of the annual
investment required to finance this target vary enormously, but the majority are almost certainly
underestimates since they do not account for maintenance and rehabilitation of existing infrastructure,
nor consider the costs of maintaining the institutions and support services required for service
sustainability (Fonseca & Cardone, 2004).
doi: 10.2166/wp.2007.012

q IWA Publishing 2007

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Rural sub-Saharan Africa has the lowest water service coverage of any region in the world at 45% in the
year 2002; if current trends continue the MDG target will not be met, primarily because of conflict and
political instability, high population growth rates and low priority given to water and sanitation
(WHO/UNICEF, 2004). This major challenge is exacerbated by limited sustainability of existing rural water
systems, with an estimated 35% of systems in sub-Saharan Africa being out of operation at any given time
(Baumann, 2005). Before ambitious coverage targets can be considered, it is essential that both existing and
new rural water services are sustained. One of the main reasons for poor levels of sustainability is the
prevalence of unacceptable, unaffordable or impracticable financing strategies (Carter et al., 1999). The
development of sustainable financing mechanisms is therefore imperative to ensure sustainable service
provision. This cannot be achieved unless realistic long-term costs are determined. There has been far too
little attention given to this issue by donors, governments and implementing agencies in the past, and
consequently few countries have realistic policies, operational strategies or plans for sustainable financing
for increased service coverage, particularly for the poor (Fonseca, 2003).
The current situation has arisen primarily owing to the policies and practices of international donors
and western development agencies. The development project approach adopted has provided a
convenient concept to abrogate responsibility for long-term service provision from implementing
agencies, be they non-governmental organizations (NGOs), bilateral agencies or governmental
authorities, to poor rural communities. The presumption that once a new water supply is constructed and
“handed over” to the user community it can be sustained by community financing of operation and
maintenance (O&M) is over-simplistic, especially since the long-term O&M costs are neither calculated
nor communicated to water users. This simplistic approach is reflected in the western-influenced policies
and strategies of many African countries. A brief analysis of the 20 sub-Saharan African countries with
completed poverty reduction strategy papers (PRSPs) reveals that 85% of those countries have an
emphasis on community management and financing of rural water supplies in key national strategy
documents, yet these do not adequately address the determination, nor affordability, of associated costs.
If this does not change then sustainability levels will remain unacceptably low and the proportion of
people without access to safe drinking water in rural Africa will remain unacceptably high.
This paper, based on research on sustainability of rural water services in sub-Saharan Africa, with a
particular focus on Ghana, presents a systematic approach that can be used to estimate the true cost of
sustainable service delivery to the consumer. It also identifies potential financing mechanisms which
ensure service sustainability for the rural poor.

Cost recovery

The term “cost recovery” is routinely referred to in rural water projects and programmes but can be
applied in many different ways. In general, cost recovery refers to the practice of charging users the full (or
nearly full) cost of providing services (MacDonald & Pape, 2002). Full cost recovery means
reimbursement to service providers of both recurring and non-recurring costs associated with
construction, management, O&M, rehabilitation and expansion of water systems. Costs include, but are
not limited to, the costs of community mobilization, planning, design, administration, construction and
O&M. Full cost recovery for rural water services in Africa is rarely, and probably never, achieved because:

. the cost of systems is significantly beyond the means of most rural communities; and

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. the political and humanitarian desire for improved access to water, and definition of water as a “right”,
mean implementers are reluctant to seek full reimbursement.
Whereas during the Second World Water Forum in 2000 full cost recovery was advocated, during the
Third Word Water Forum in 2003 the concept of sustainable cost recovery emerged, in which the general
necessity for subsidies, especially for the poor, was acknowledged (World Water Council, 2004). Whilst it is
generally agreed and widely accepted within the donor community that users should pay for operation and
maintenance costs, there is no consensus on whether users should pay for capital costs and if so, what
percentage is reasonable and how might it be paid (Fonseca & Njiru, 2003). Cost recovery for construction
and installation of new rural water systems and facilities is, in practice, negligible. Communities are often
requested to contribute 5 to 15% of initial capital costs, which usually means the cost of the water facility
itself (e.g. a hand pump installed on a borehole). The costs of mobilization, administration, management and
transportation generally remain hidden. Even where communities are expected to make a financial
contribution, this is commonly intended to demonstrate demand, instil a sense of ownership and act as an
indicator of the community’s ability to organize and collect payments, rather than a real attempt to recover
actual implementation costs (Deverill et al., 2002). It is generally accepted that user financing of full
implementation costs for improved rural water systems is an unrealistic goal. In a rural African context,
therefore, the infrastructure development required to ensure increased access to water is likely to remain
dependent on external donor support or continuous national government investment (Lane, 2004).
Cost recovery for ongoing service delivery and recurrent O&M costs may be a more achievable target, but
evidence suggests that the majority of community organisations and small service providers are failing to
generate sufficient revenues even to meet the direct O&M costs of existing systems (Fonseca, 2003). Direct
O&M costs comprise those for maintenance, repair and asset replacement. Even where cost recovery for O&M
is relatively high this rarely reaches 100%, owing to hidden costs such as subsidy of spare parts provision,
supply chains and institutional support from local government or aid agencies (Harvey & Reed, 2004).
Ideally, the water tariffs that users pay should cater for future system upgrade, rehabilitation and
expansion costs, as well as ongoing O&M costs. Currently, this occurs very rarely, if ever. One of the
main constraints is the need for a transparent, secure and sustainable method of storing and investing
money for future use. Community-managed financing mechanisms are rarely able to fulfil these
requirements. Private sector service providers could potentially do this but require sufficient incentive
and regulation. The second key constraint is insufficient ability and willingness to pay for these costs
among users. In many cases it may be unrealistic to expect poor rural communities to finance these costs
and this highlights the need for an external institution (ideally local government) to provide appropriate
support. This also applies to emergency needs, such as the results of sabotage or natural disasters.
The term cost recovery as applied to rural water services remains generally misleading, since capital costs
are simply not recovered, and even where direct O&M costs are met by users, revenues are generally
insufficient to recover indirect costs such as the cost of developing adequate institutional capacity to provide
support. The term “sustainable financing” is therefore used in this paper since this better articulates the need
to “pay for water”, i.e. finance the cost of ongoing provision of a water service on an indefinite basis.

Cost determination

Determination of the real costs of service provision is one of the key problems in developing
sustainable financing strategies (Fonseca & Njiru, 2003). Most implementing agencies simply do not

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address this issue adequately, in part because there is a lack of systematic guidelines to estimate costs.
Without comprehensive cost determination, however, it is impossible to inform water users of the true
cost of service sustainability to them, or to determine the level of external financial support that may be
required. If sustainable financing mechanisms are to be developed, so that rural water services are to be
sustainable, the following three categories of cost must first be calculated:

. direct O&M costs;

. indirect O&M costs (institutional support costs) and
. rehabilitation and expansion costs.

Costing operation and maintenance

The main consideration when determining direct O&M costs for rural water systems is to
incorporate recurrent repair costs and future asset replacement costs. Without considering the need
for saving specific sums of money to replace major component parts, the sustainability of most
water systems is undermined. One method that can be used to do this is amortization whereby
equal amounts are set aside every year, taking into account interest rates. These amounts can form
part of the O&M tariffs charged. A four-stage process that can be used to determine appropriate
tariffs is outlined below. The India Mark II hand pump is used as an example to illustrate the
process. This was selected since hand pumps remain the principal technology for improved rural
water supplies in sub-Saharan Africa (RWSN, 2005) and the India Mark II is one of the most
common public domain hand pumps, which has been adopted as a “standardized” pump in several
African countries, including Ghana. It is accepted that there are many other rural water
technologies in addition to the conventional hand pump, and the process developed, as presented
here, can also be applied to them.
1. Recurrent O&M costs: the first step is to calculate recurrent O&M costs, which include replacement
of minor components and routine preventive maintenance, and any wages associated with these. Table 1
gives an example of components, costs and estimated frequency of replacement for an India Mark II
hand pump. The total annual cost of components, C can be determined by dividing each unit cost by the
estimated frequency of replacement and summing these.
The annual cost of components may vary considerably, even for the same technology, and depends on
the local environment. For example, hand pumps operating in areas of deep, aggressive (low pH)
groundwater which are subjected to heavy usage, may have much higher O&M costs than those
operating in shallow, neutral conditions with low usage. The only reliable way to obtain guidance for
costs in specific local conditions is through appropriate monitoring.
Once the total annual cost of components, C, is determined the annual maintenance cost, M, can be
determined by adding the required labour and transportation cost, L. This will vary depending on the
local economy and type of maintenance system utilised.

Annual maintenance cost; M ¼ Annual cost of components; C

þ Labour=transport costs; L ð1Þ

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Table 1. Example of recurrent O&M component costs for an India Mark II hand pumpa.
Estimated frequency of replacement, Unit cost, U Annual cost, U/f
Component f (year) (US$) (US$)
O-ring seal 2 1.60 0.80
Cup leather 2 1.00 0.50
Chain 3 3.60 1.20
Handle axle 3 6.00 2.00
Axle bearing 3 7.50 2.50
M12(10 nut 1 1.50 1.50
M12(50 nut 1 1.50 1.50
Foot valve rubber 3 6.00 2.00
Piston valve rubber 2 1.00 0.50
Grease 1 2.50 2.50
Total annual cost of components, C ¼ 20.00
a
Based on data from Ghana. This is an example only; f and U will depend on local economy, quality and age of equipment,
environmental conditions and usage pressure.

Using the example in Table 1 and average figures obtained in Ghana, assuming the area pump mechanic
has to make an average of two visits per year and charges US$5.00 per visit, plus US$2.50 for
transportation, the total annual cost of labour and transportation is US$15.00. Therefore:
Annual maintenance cost; M ¼ C þ L ¼ 20:00 þ 15:00 ¼ US$35:00 ð2Þ
Since the costs are relatively low and are set in hard currency, any inflationary increases are not
considered since these are likely to be negligible.
2. Current replacement costs: the second step is to calculate the current replacement costs and the
projected lifespan of major components which are likely to need to be replaced. Depending on the
technology and environment this may be based on the replacement of the entire facility (e.g. hand pump)
or specific components of that facility. Table 2 gives an example of the major components of an India
Mark II hand pump which may need replacing after a five-year period of use, and their respective costs.
Once calculated, the estimated replacement cost should be compared to the total current cost of a
complete facility. For example, in some cases the cost of a complete hand pump may be lower than or
similar to that of the component parts, particularly where pumps are ordered in bulk. If this is the case the
entire hand pump could be replaced after five years rather than the major components listed.
The current replacement cost, R is the current cost of complete facility or major components and n is
the estimated number of years before replacement. The value of n may be greater than 5 and will depend
on the particular technology, model, manufacturer and conditions under which it is operating.
3. Annuity: the next step is to calculate the annual amount or annuity which needs to be put aside each
year to meet future replacement costs. This is based on an annuity factor (AF), which is a function of the
expected lifespan of the equipment in years (n) and the interest rate (r) in the local economy (Wedgwood
& Sansom, 2003). This does not consider inflation but allows for devaluation, which is especially
important for imported components and overrides inflation effects in many developing countries. The
following equation can be used:

Current replacement cost; R

Annuity; A ¼ ð3Þ
Annuity factor ðAF r;n Þ

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Table 2. Example of 5-year replacement costs for an India Mark II hand pumpa.
Component Unit cost (US$)
Hand pump cylinder 115.00
Foot valve 8.00
Hand pump tank 22.00
Hand pump head 81.00
10 Connecting rods 80.00
Apron and drainage repairs 30.00
Total replacement cost, R ¼ 336.00
a
This is an example based on data from Ghana, which identifies components requiring replacement five years after installation,
assuming that stainless steel riser pipes are used. Where galvanised iron pipes are used which are likely to be subject to
corrosion, these should be included in the cost estimate.

Annuity factors are based on number of years and interest rates and can be read directly off financial cost
tables. In order to adjust for inflation the annuity can be multiplied by the cumulative inflation rate.
4. Average annual cost of O&M: the final step is to calculate the average annual cost of O&M per
household. Ideally, the annual amount paid each year (or saved in a communal/private fund) should be
slightly higher than the calculated annuity to allow for unforeseen events and inflation. A contingency
factor of 20% can be used to compensate for this and will ensure that the users have saved enough to
compensate for future price changes for the required component. The household tariff per year, H, can be
estimated using equation (4), where N is the number of households in the community:

 
MþA
Annual household tariff; H ¼ 1:2 ð4Þ
N

This is based simply on the total number of households using the facility. To ensure equity, household
tariffs can be modified by three factors: the distance from the source, the number of people in the
household and “special” factors such as poverty or disability (Deverill et al., 2002). Box 1 gives a
worked example for a hand pump water supply.
The household tariffs calculated for low-cost community water systems, such as hand pumps and
gravity-fed systems, are generally very low and normally below US$0.50 a month (Harvey & Reed,
2004). The process above can be repeated after five years to assess whether an increase in tariff is
required based on the costs at that time. Alternatively, tariffs may be calculated for a twenty-year period
from the start of the service, accounting for repeated replacement of major components and/or pumps.
Ongoing monitoring and regulation is essential to make appropriate adjustments for changing
circumstances. The above process does not include costing for rehabilitation and expansion.

Costing institutional support

The assumption that supporting community-based O&M is a less onerous task than running a
centralized maintenance system has not been borne out in the field (WHO, 2000). In recent years there
has been a growing awareness and acceptance of the need to provide institutional support for

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Box 1 Example of household tariff setting for a hand pump water supply
Using the example for the India Mark II hand pump above:
Total annual maintenance cost, M ¼ $35
Current replacement cost, R ¼ $336
Estimated number of years before replacement, n ¼ 5 years
Approximate interest rate, r ¼ 20%
Annuity factor (read from table) AFr,n ¼ 2.83
Annuity, A ¼ R/AFr,n ¼ 336/2.83 ¼ US$119
Number of households,   N ¼50 (300 people)
35þ119
Annual household tariff, H ¼ 1:2 MþA
N ¼ 1:2 50 ¼ US$3:70
This can then be divided by 12 to convert to a monthly household tariff of US$0.30.

community-based management systems (Schouten & Moriarty, 2003). Appropriate institutional support
comprises the following components:

. encouragement and motivation

. monitoring and evaluation
. participatory planning and regulation
. capacity building and
. specialist technical assistance (including financial support where required).

Such support obviously has an ongoing cost associated with it and although this has been largely
ignored in the past, some governments are now attempting to address this. Nedjoh et al. (2003) cite the
case of the Volta Region of Ghana where local government institutions earmark 6% of investment funds
to increase access to rural water supply for monitoring and O&M of all new and existing systems. This is
based on an ongoing programme to construct 100 new water points per annum, in an area with 500
existing water points. Obviously, institutional costs will vary considerably from location to location and
it may be that a direct relationship with expansion investment is not always appropriate. It is essential,
however, that the cost of institutional support is estimated and that appropriate budgetary allocation is
made for this. Table 3 presents an example breakdown of costs for institutional support which shows the
aspects which should be considered and estimated cost ratios for these. These costs are based on
consultation with government agencies and NGOs in Ghana and are indicative only.
The above costing example equates to US$100 per supported community per year. Such a cost should
not be excessive to a local government authority and for 100 communities is roughly the cost of one hand
pump-equipped borehole in many African countries. The figure quoted could be reduced considerably
further where institutions support a greater number of communities, where communities develop
increased self-sufficiency, or where support from other stakeholders (e.g. non-profit organizations) is
available. What is vitally important is that institutions attempt to estimate costs and budget accordingly.
Support costs need to be determined locally and appropriate long-term funding mechanisms sought. If
full-cost recovery were to be realised from users, communities would also be expected to meet the cost
of institutional support. Using the example of the hand pump water supply in Ghana, this would result in
a tariff increase of 100% for an average community of 300 people. It would also mean that they would be
required to pay this increase in taxation to local authorities, which would require the establishment of

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Table 3. Example breakdown of costs for institutional support.

Activity Annual cost per 100 communities (US$)
Monitoring and evaluation: 3,000
quarterly monitoring visits to all communities
Participatory planning and regulation: 2,000
liaison with problem communities and CBOs to develop solutions
Specialist technical assistance: 2,000
advice and intervention for unforeseen technical problems
Capacity building: 3,000
training of stakeholders (staff, communities, private sector etc.)
Total annual cost per 100 communities ¼ 10,000

community-based organisations (CBOs) as legal entities and an effective regulatory framework. This
remains a far-off goal at present and it is difficult to envisage CBOs ever agreeing to pay local
government a proportion of the revenue raised from water users, particularly as there is often a
traditional expectation that government should provide water services free-of-charge. The reality is that
local government institutions need to develop budgets which recognize the need for such expenditure on
a long-term basis.
Even where water supply management systems are not community based, institutional support costs
are likely to remain at similar levels. In public-private models community-based support costs would be
replaced with those related to regulation of the private sector. The added advantage of this model is that
taxation of the private sector has the potential to contribute to funding this support. Although the cost of
this would ultimately fall on rural communities, it removes some of the complexities that would be
involved if local authorities attempted to recover costs directly from users. Private sector (rather than
community-based) delivery of rural water services has been applied only on a small scale and in a small
number of African countries, and these have not developed such taxation frameworks to date (Bernage,
2000; van Beers, 2001; Harvey et al., 2003).

Costing long-term rehabilitation and expansion

Any water system has a finite lifespan and will eventually require rehabilitation. In addition, the
pressures of population growth on demand for services, and desired service levels among rural
communities may change over time. When determining service delivery costs these aspects should also
be considered. The cost of long-term rehabilitation does not refer to the replacement of equipment or
components (as covered by O&M) but to larger scale measures, such as upgrade of systems. For the
example of a hand pump-equipped borehole, eventually the borehole itself may need rehabilitation
owing to problems such as siltation, insufficient yield and corrosion of screens or casing. Such measures
may entail considerable cost and this must be met by the supporting institution and/or the users of the
system.
Currently, most rehabilitation, upgrade and expansion costs are met by the supporting institution,
whether government or NGO. Many government policies and strategies do not recognize the need for
rehabilitation or, if they do, accept that they will have to finance this. For example, the five-year Rural
Water and Sanitation Operation Plan in Uganda states that “Government will support major

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rehabilitation expenses in the interim, in the long-term it is expected that communities will also take over
these expenses”. (DWD, 2002). While this is a long-term strategic “expectation”, it is a gross
overestimation to assume that communities will be able and willing to finance major rehabilitation costs
where they often fail to finance the simplest repairs. It is most likely that this will only be achieved, in
Uganda and elsewhere, by adopting an incremental process where costs are clear from the beginning. If
communities of users are to be expected to finance rehabilitation, even in the “long term”, appropriate
financing mechanisms must be established in advance. Using the method described above, the
“rehabilitation annuity” needs to be estimated in addition to that for replacement. This can be done using
the same equation and the current cost of the rehabilitation measure that will eventually be required.

Current rehabilitation cost

Rehabilitation annuity; AR ¼ ð5Þ
Annuity factor ðAF r;n Þ

The “rehabilitation annuity” can then be combined with the recurrent maintenance costs and
replacement annuity to calculate the household contribution needed to finance recurrent O&M, medium-
term replacement and long-term rehabilitation. This is demonstrated in the following equation:

 
M þ A þ AR
Annual household tariff; H ¼ 1:2 ð6Þ
N

Box 2 uses the previous example of the India Mark II hand pump to illustrate the impact of incorporating
rehabilitation costs in household water tariffs. By incorporating the need for borehole rehabilitation in
twenty years’ time, the monthly household tariff increases by almost two-and-a-half times from the
previous value of US$0.30. This may not seem a large amount but has a significant impact on planning
and may affect the users’ willingness to pay for the service.
The biggest problem with this method is the difficulty in estimating future rehabilitation needs and
when that rehabilitation will be required. There is always an element of unpredictability about any
system and what the users may demand in the future. For example, in future it may be that a borehole
becomes contaminated or damaged and is beyond rehabilitation, meaning a new one must be drilled, or
that a community decides it wants a newly available technology. In such situations, adequately financing
rehabilitation from the outset is almost impossible. The best option may be to work in a degree of
flexibility in tariff setting which allows for some funds to be put aside to contribute to future
rehabilitation costs. It remains likely, however, that the majority of these costs will continue to be met by

Box 2 Example of household tariff setting to cover rehabilitation costs

Using the earlier example for the India Mark II hand pump:
Current rehabilitation cost, R ¼ US$1000 (for airlift and hydrofracturing)
r ¼ 20% n ¼ 20 years N ¼ 50 households
AR ¼ R/AF r,n ¼ 1000/4.67
MþAþA  ¼ US$214
35þ119þ214 
H ¼ 1:2 N
R
¼ 1:2 50 ¼ US$8:83
This can then be divided by 12 to convert to a monthly household tariff of US$0.74.

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governments or external support for the foreseeable future. A water tax which consolidates taxation
funds for upgrading and rehabilitation may be one way in which appropriate finances can be generated.

Tariff hierarchy development

Once the different categories of costs related to service sustainability have been determined, a tariff
hierarchy can be developed which indicates the different tariffs that would need to be charged for
different levels of cost recovery. Table 4 presents an example for the hand pump-equipped borehole
whereby four levels of monthly household tariff are indicated. More complex water supply systems
which rely on consumable energy sources such as electricity and diesel would obviously result in higher
tariffs, especially for direct O&M costs. This approach can be used as a planning tool when conducting
willingness to pay studies with communities and determining what costs can be met by users and what
costs need to be met from alternative sources.
The last row in Table 4 is included to facilitate comparison with full cost recovery for the initial
construction and associated costs (based on the same interest rate of 20% and repayment spread over ten
years). This amount would need to be added to each of the above hierarchy levels if construction costs
were also to be met from tariffs. As can be seen, this is a significant amount, even for a relatively low-
cost technology, and is highly unlikely to be affordable by user communities.

Community financing strategies

The importance of an initial contribution to capital costs by the community remains open to debate.
Indeed, some studies have shown that a higher demand for a water supply service as expressed through
initial payments in cash and/or kind is actually negatively related to sustaining the service (IRC, 2002).
This may be because a small percentage contribution leads to high cost solutions which are expensive to
sustain. The ability of a community (or its sponsors) to make an initial contribution to project inputs does
not necessarily reflect an ability, or willingness, to pay for service delivery costs over time. There is also
the danger that once communities have “paid” for their facility they consider that they have already
fulfilled their responsibility.
Despite growing acceptance that full cost recovery from rural water users is an unrealistic goal, there
is no doubt that community financing of operation and maintenance remains a crucial issue in the quest
for sustainable rural water services. The assumption that poor people have no resources at all inevitably

Table 4. Tariff hierarchy examplea.

Level of cost recovery Estimated monthly household tariff (US$)
O&M (direct costs only) 0.30
O&M (direct costs and indirect costs) 0.63
O&M (direct costs) þ rehabilitation/expansion 0.74
O&M (direct and indirect costs) þ rehabilitation/expansion 1.07
Recovery of initial construction costsb þ 4.23
a
Example for India Mark II hand pump for a community of 300 people in Ghana.
b
Based on cost of US$10,000 for borehole, hand pump and all associated start-up costs paid over 10 years.

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leads to unsustainable subsidies and is usually inaccurate since many people are already paying a high
price for sub-standard services (Evans, 1992). Indeed, the poorest people in developing countries pay
more on average per litre of water than their better off compatriots (Webb & Iskandarani, 2001). Most
communities do have resources and hence the ability to pay (at least something) for service delivery;
however, the way in which those resources are managed will influence the ability of communities to
access resources when needed, and the value assigned to a water service will affect the willingness to pay
for services.
There are a number of key measures that need to be fulfilled to ensure sustainable community
financing:

. Ongoing costs must be calculated and this information must be packaged in a way that communities
can understand in order to make informed decisions.
. People need to be convinced of the concept of paying for water through appropriate community
sensitization.
. Transparent and efficient financial management systems need to be developed.
. Willingness to pay among communities needs to be sustained through ongoing institutional support
and promotion of income generation.
. Incremental strategies to phase out unsustainable subsidies, and/or develop mechanisms for
sustainable cross-subsidy, need to be developed.

Costing O&M is the first step to ensure that communities are aware of ongoing costs and the financial
commitment required to sustain their water systems. This allows them to select the most appropriate
technology and system for them. Whatever financing system is to be used, it is essential that users are
aware of typical costs from the outset and that those responsible for management are assisted in setting
realistic and adequate water tariffs.
Convincing people to pay for water is often not easy in communities, especially where there is a
history of receiving services for free. Past activities may have reinforced the perception of poverty
and dependency among communities, which retard efforts to encourage them to pay. Political
interference can also be a significant barrier to sustainable community financing since politicians
commonly make promises of free services to communities for political gain (Komives & Stalker
Prokopy, 2000). Changing attitudes can be difficult in such situations and requires considerable
time and skills.
Accountability and transparency can go a long way to convince community members to contribute to
O&M costs (Tayong & Poubom, 2002). It is important that users can see where their money is going and
how it is being used, if they are to be convinced to contribute and to continue contributing. This is why it
is sometimes easier to raise funds for the installation of a new facility than for its maintenance. Users
may be unclear about why they should pay and what their money is being used for. If the principle of
paying for water can be instilled, however, this dilemma disappears.
Community financing strategies need to include appropriate mechanisms for revenue collection and
storage and investment of revenue, as well as measures to sustain willingness to pay within the
community.

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Revenue collection

There are many different mechanisms by which maintenance funds can be collected and stored, and
locally appropriate systems should be developed through consultation with communities. The most
common funding systems are:

. reactive financing
. monthly tariffs and
. pay-as-you-fetch.

Reactive financing simply means that when a system fails or breaks down the community or better-off
households club together to pay for repair. Monthly tariffs are perhaps the most widespread system
whereby each household (or adult) in the community is expected to contribute a given amount each
month. Pay-as-you-fetch systems require a caretaker to be present at the facility at all times (except when
it is locked) to collect water tariffs from the community. Users pay a fixed amount per container which is
filled by the caretaker.
The advanced collection of maintenance funds does not necessarily shorten the downtime of a given
water system (Batchelor et al., 2000), although seasonal cash flow variations may have a big impact on
whether finances can be raised rapidly (van Miert & Binamungu, 2001). Where household tariffs are
paid monthly and funds are stored safely, such systems can be highly successful. Revenue collection can
be conducted by CBOs or private service providers, but can be a time-consuming process, particularly
where non-payers need to be chased up. Traditional leaders and respected community members can play
an important role in exerting pressure and deciding where exemption or subsidy is appropriate. The most
common problem encountered, however, is that willingness to pay among households is difficult to
sustain and this often reduces over time, often because of a lack of trust or confidence in the water
management body. Pay-as-you-fetch systems are undoubtedly the most successful in terms of revenue
generated but are only possible where there is a year-round cash economy.

Storage and investment of funds

Since most rural African communities live from crisis to crisis and do not have a reliable year-round
cash economy one of the major challenges in developing sustainable financing strategies is the need to
establish functional mechanisms for storing funds in advance of breakdown. Where transparency and
accountability are in place, maintenance funds may be stored in a bank account or with a treasurer.
However, rural communities are often situated a long distance from the nearest bank, bank charges
commonly rapidly eat away at the investment, or currency devaluation negates the link between funds
and imported parts. An alternative strategy is for the treasurer to keep these funds for when they are
needed, which relies on considerable self-discipline and the trust of the rest of the community.
In agriculture-based communities, money may be more readily available following harvests than at
other times of the year. It is therefore important that alternative ways of storing resources are
investigated so that funds can be raised when needed. Rather than use a bank account, communities can
opt to run a cooperative whereby the water funds are used to purchase livestock or to support a

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community farm. Communal agricultural produce can then be sold when funds are required. This has the
added advantage of avoiding devaluation effects.
Rotating savings and credit associations (ROSCAs) are cooperative financing strategies which can be
used to mobilize savings for very small amounts of working capital and have been practiced for centuries in
many parts of the world. Some African examples of ROSCAs include Susu in Ghana, Stokvel in South
Africa, Tontine in most of francophone West Africa, “Merry-go-round” in Kenya, and Chilemba in Zambia
(Williamson & Donahue, 2001). ROSCAs are designed to assist members to save money and regulate their
liquidity. This is achieved by creating relationships of debt between members whereby monthly
contributions are allocated to each member on a rotational basis. Since the typical ROSCA member dislikes
owing the other members they are driven to fulfil their commitment to the ROSCA more reliably than they
would be able to independently maintain a regular habit of saving money (Aliber, 2001).
Traditional ROSCAs, such as the “Merry-go-round” scheme in Kenya, have been used to raise capital
for community contributions to construction and O&M costs for rural water systems (Harvey et al.,
2003). Where there is a history of cooperative financing, it is often significantly easier to raise water
revenue. Such schemes can also be used to build up credit worthiness with financial institutions and
generate capital for investment and income generation. There is, therefore, potential for the application
of ROSCAs to be expanded to meet long-term water supply rehabilitation and expansion costs.
However, this will only be successful if communities are convinced that this is their responsibility rather
than that of government. There is no well-documented evidence to suggest that ROSCAs have been
applied in such a way to date, but this issue requires further investigation.

Privately-managed O&M

Whether systems are managed by the community or the private sector, many of the same issues
surrounding community financing apply. For rural water supplies which are managed by a private
contractor or individual rather than the community, users regularly pay the contractor to run and
maintain the system and may be less concerned about where the money goes and what it is used for, so
long as the water supply continues to operate at the desired service level. The storage of funds becomes
the responsibility of the private company which removes one level of complexity at community level.
This does not, however, remove problems which may occur owing to seasonal cash-flow fluctuations.
Private contractors will also need to meet overheads and meet profit targets. These costs must be
included in estimating total O&M costs and setting household tariffs. However, where a company is
responsible for a large number of systems for many communities, the impact of these costs on each
community is likely to become very small. Given the negligible application of privately managed O&M
systems in rural sub-Saharan Africa to date, however, it is not possible to assess their potential impacts
on community financing adequately.

Sustaining willingness to pay

Services which rely on the users to finance ongoing running costs will only be sustainable if the
willingness of users to pay is sustained. Community members who are willing to finance O&M costs in

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the initial stages may soon become unwilling to do so. There are a variety of possible reasons for this
reduced willingness to pay:

. lack of transparency and accountability relating to the water management committee,

. no faults with the facility and therefore no clear reason for paying,
. dissatisfaction with water supply (location, time to queue, water quality/quantity),
. competition from cheaper water sources and
. change in individual priorities.

Perhaps the most effective mechanism that can be used to sustain willingness to pay is appropriate
institutional support for communities. Where communities are regularly visited by an overseeing
institution to monitor systems this reaffirms the need to contribute to the cost of O&M. The institution
can advise communities on how to make best use of unspent funds through investment, can regulate
water committees to ensure transparency, and can help to rectify any causes of dissatisfaction with a
particular water system. Quarterly monitoring visits provide an ideal mechanism to identify problems
early and find sustainable solutions.
The second measure that can assist greatly in sustaining willingness to pay relies on a major
mind shift among community members. If water supply users understand that they must pay for
water, rather than to maintain a system, many of the obstacles to sustained community financing
disappear. Such a mindset needs to be established early on in the community consultation process
and, where there are existing facilities installed under different programmes, this is likely to be
difficult to achieve. New programmes, however, have the opportunity to develop awareness and
place the emphasis on “water” rather than the “facility”. If users accept from the outset that they
have to pay for water from an improved water supply and that this will always be the case,
financing is more likely to be sustained, providing that the service supplied meets the standard
demanded by the users.
Another key measure to ensure sustained financing of O&M is to use water to generate income. Where
water directly leads to income generation, the problem of community financing may become
significantly less since water users have increased incentive to ensure that the system keeps operating
and are more likely to have finances readily available to enable O&M. Water-related income generation
ventures in rural areas include livestock watering, irrigation for market gardens, block making, beer
brewing and food processing. There is little documented evidence, however, of successful income
generation from systems designed primarily for the supply of drinking water.

Pro-poor financing strategies

The United Nations Committee on Economic, Cultural and Social Rights issued a statement in
November 2002 declaring access to water a human right and stating that water is a social and cultural
good, not merely an economic commodity (World Water Council, 2002). However, the necessary
financing and governance structures to guarantee access to safe, sufficient and affordable water are
commonly lacking (Mehta, 2004). In order to achieve this aim it is important to find ways in which to
serve the poorest and most vulnerable, while ensuring that sufficient finances are generated to sustain
services. As has been mentioned, full cost recovery for operation and maintenance from rural

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communities in Africa, at least on a large scale, has not been achieved to date. This indicates that capital
and recurrent costs are routinely subsidized by external support agencies or governments. This should
not be a cause for surprise. Most urban water authorities depend on subsidies to cover part of their
recurrent costs and virtually all their capital spending on expansion and modernization (Winpenny,
2003). There is, therefore, no logical reason why higher rates of cost recovery should be expected from
rural water users, who are in general, poorer.
Subsidy in itself is not a threat to sustainability provided that the subsidies themselves are either
transitional or sustainable. The World Panel on Financing Water Infrastructure recommends that
subsidies should be “targeted, transparent and, where they are intended to ease the transition to higher
tariffs, tapering” (Winpenny, 2003). Inherent within this statement is recognition of the fact that while
some subsidies may act as a bridge to the generation of higher revenues, equally some subsidies may be
required on an indefinite basis. What is essential is that such subsidies are affordable in the long term and
are budgeted for accordingly.

Least subsidy option

One way to ensure that the poor are adequately served is to offer direct subsidies to poor communities.
These are likely to be partial rather than total subsidies, and in effect this is often what happens since
users rarely meet the full cost of O&M. A formalized version of this is the bidding for least subsidy
approach (Figure 1). In this model private service providers bid for the minimum or least subsidy from
government to provide water systems at agreed service levels for a period of say, 10 to 15 years. These
private companies need to assess and negotiate the community contribution they will get for O&M. The
government then pays the minimum subsidy to the company and the communities pay their water tariffs.
This model has not been applied to rural water services in Africa to date but its application to other
sectors, such as rural telecommunications (Cannock, 2001), demonstrates considerable potential for
where services are delivered by the private sector.

Community cross subsidy

Many poor rural people are currently subsidized by other more affluent members of their community.
Community management systems often recognize that some households are unable to afford water
tariffs and therefore exempt them from payment (Harvey et al., 2003). This is a sensitive issue since it
may give rise to internal disagreement or envy and is open to abuse. It is, however, highly effective
where community management is strong and allows the poorest and most vulnerable to be supported and

Fig. 1. Least subsidy option.

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 388 P. A. Harvey / Water Policy 9 (2007) 373–391

Fig. 2. Community cross subsidy.

Fig. 3. Hidden subsidies (dashed).

protected by the rest of the community. The service provider in this case may be a CBO or private
individual/organization (Figure 2).
This system of cross subsidy within a community is difficult to formalize and relies upon the goodwill
and objectivity of the management committee. For privately managed water supplies a more formalized
system is to apply individual means-tested water subsidies whereby the poorest households receive a
government subsidy and pay less for water. The subsidy may be funded entirely by the government or
from other users. This has been successfully implemented for urban water services delivered by the
private sector (Gómez-Lobo, 2001) but has not yet been transferred to the rural sector.

Hidden subsidies

Some subsidies for operation and maintenance of rural water supplies are indirect or “hidden”. These
commonly include support for spare parts supply, storage and distribution, and monitoring, regulation and
institutional support for communities. Here, the service provider may be a local mechanic who obtains spare
parts from a local NGO or subsidized dealer (Figure 3). It may be accepted that some level of such subsidy is
needed, particularly for institutional support, but where possible, attempts should be made to phase out
hidden subsidies over time and these costs should be worked into long-term financial plans.

Conclusions

There is growing acceptance that full cost recovery for rural water services is an unrealistic goal, since the
capital costs of water infrastructure provision remain beyond the means of most rural communities. Yet
while communities are widely expected to finance recurrent operation and maintenance costs, this goal is still

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not being realized in many parts of sub-Saharan Africa. One of the reasons for this is an ad hoc approach to
estimating costs and establishing tariffs. If sustainable financing strategies are to be developed, it is essential
that the cost of ongoing service delivery is determined, so that communities, local authorities and
implementing agencies are aware of the long-term costs involved and can plan accordingly.
One way in which this can be achieved is to develop a tariff hierarchy that provides estimates of the
tariffs required for different levels of cost recovery. This can be done only by conducting a
comprehensive assessment of the maintenance, repair and rehabilitation needs for different water system
technologies and costing these. The vast majority of implementing agencies do not do this and
consequently it is unclear what selected tariffs can be expected to cover and what additional financing
may be required. Unless this situation changes, rural water systems are likely to continue rapidly to fall
into disrepair and the need for rehabilitation projects is likely to continue ad infinitum.
The research in Ghana indicated that direct O&M costs are generally affordable for rural communities
but that there is a need to take action to sustain willingness to pay and to develop appropriate community
financing strategies which are matched to the specific characteristics of communities. These strategies
must consider both how water revenue is collected and also how it is stored or invested.
The costs of institutional support from local government authorities (or substitute agencies) need to be
met by public financing and must be budgeted for accordingly. If private sector service delivery becomes
more widespread, it is possible that this can be met from tax revenue raised from end users, but this
remains a far-off goal at present. The costs of rehabilitation and expansion of water systems can, in
theory, be met by user communities but this raises tariffs significantly and is largely dependent on
community acceptance of the need to pay for water. This also makes the need for appropriate investment
of water revenue even more crucial and new approaches need to be investigated.
There is a need for realism from all stakeholders to identify what costs can be met by water users and what
costs need to be met by national or external support. Just as the vast majority of urban water services require
some form of subsidy, so do rural water services. This issue cannot be avoided by pretending that the goal of
cost recovery for ongoing running costs is currently realistic. There is a need for policy makers and strategic
planners in international development agencies and national governments to face up to this issue. They will
only do so if sector professionals are prepared to calculate the real costs involved in service delivery and to
develop and advocate realistic financing strategies, which will almost certainly need to include targeted and
transparent subsidies, at least for the foreseeable future.

Acknowledgements

The initial research for this paper was conducted as part of a Knowledge and Research (KaR) project
“Guidelines for Sustainable Hand pump Projects in Africa” (R7817), funded by the Department for
International Development (DFID) of the British Government, and conducted by the Water, Engineering
and Development Centre (WEDC), Loughborough University. Opinions noted within this paper do not
necessarily represent those of DFID or the project team but are solely those of the author.

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