Financial costs represent the money or cash that has to be paid by householders and donor agencies to build and operate a sanitation system (together with allowances for depreciation and bad debts). Financial costs are the main concern of householders and donor agencies whereas economic costs are of greater interest to project planners.
Financial costs of sanitation systems
Although it is often assumed that the householders can provide much of the labour themselves, this is usually only correct in rural areas. Particularly among disadvantaged groups, such as the disabled, the elderly, and households headed by women in urban areas, skilled and unskilled labour has to be paid for.
Most items, such as concrete blocks or bricks for pit linings or superstructures, cement for the slabs, water seals, vent pipes, fly screens, roof sheeting and doors, have to be paid for. Only in the rural areas are timber and other materials normally free of cost. Routine maintenance, such as repair of superstructures and renewal of fly screens, will involve costs in the future.
For septic tank systems in particular, but also for pour-flush latrines, an allowance must be made for extra payments for the water required for flushing.
Cost of money
Interest rates may be payable on loans either at market rates or at subsidized project rates.
Emptying and disposal
Allowance should be made for possible future hiring of labourers for the emptying of double pits and the removal of digested sludge, or for the hiring of a vacuum tanker for sludge disposal.
In certain limited situations there may be a cash income from selling sludge to farmers.
Governmental and agency management
Management costs are not normally passed on to householders but remain as a hidden subsidy. Mara (1985b) suggested that the institutional and project delivery costs may be assumed to be about 45% of the sum of labour and material costs.
Affordability and financial assistance policy
Economic analysis of development projects attempts to show where scarce resources such as capital might be used to best effect. Economic theory requires that, to maximize the benefit to a nation, the financial costs charged to the users should reflect economic costs as closely as possible. However, if the users cannot afford to pay the recommended costs, they will never install a sanitation system and the society as a whole, as well as individual households, will fail to receive the anticipated benefits.
The general policy of international lending agencies is that if the cost of the minimal sanitation facility necessary to ensure adequate health is more than a small part of the household income, then the central or local government should subsidize its construction to make it affordable. Any operation or maintenance costs should be borne by the beneficiary. If, however, some consumers wish to have better or more convenient facilities, they should pay the additional cost themselves. Similarly, if more affluent communities decide that, beyond meeting basic health needs, they wish to safeguard the cleanliness of their rivers or more general environment by building a more expensive sanitation system, they should pay for that system either through direct user charges or through general municipal revenues (Kalbermatten et al., 1982).
Affordability is generally believed to be in the region of 1.5-3% of total household income, that is, total financial costs incurred in a year (initially high investment costs may be spread over a period by use of loans) should not be higher than 3% of total household income for that year. Among the poorest in a poor community, this figure of affordability falls to 1-1.5% of household income.
In many countries, any subsidy of costs over and above this level of affordability has to be rigorously controlled. Development budgets are normally insufficient to subsidize to any significant extent a large number of latrines. There is a danger that small-scale pilot projects with external donor assistance might be given a large subsidy, on the basis of the need to promote the concepts of effective sanitation, when such subsidies could not be extended to a larger scale during expansion of the implementation programme.
There are two other reasons for carefully controlling the level of any subsidy. (1) In some countries, private enterprise can become involved in making and selling the components for sanitation on a large scale. Any subsidy to government projects reduces the profit potential and, therefore, the incentive for private contractors to become involved. Direct subsidies to nongovernment enterprises are usually unacceptable in countries where there is a risk of poor administration. (2) Where a system is not affordable it is usually not maintainable, that is, where the people cannot afford the technology chosen, it is likely that they will also not have the funds to maintain the structure and empty the pits or tanks. The system will then quickly fall into disrepair and the investment will be wasted.
The financial costs of any proposed sanitation system therefore need to be examined very closely. If necessary, installation of pit linings, water seals, vent pipes, cement slabs and superstructures may have to be postponed in order that, at the initial stage, the maximum number of people may benefit from a system which, however simple, leads to a reduction in excreta-related disease.
Where financial subsidies are employed, they should not favour one sanitation system over another in such a way that the economic ranking of alternatives is changed (Kalbermatten et al., 1982).
Financial assistance may be necessary to start a sanitation programme and, in countries with appropriate resources, subsidies may be a useful means of quickly propagating public health improvement. Where people cannot afford even the simplest form of sanitation, particularly in urban areas, society as a whole has to pay for the required social benefits through general taxation. However, the use of direct grants is not recommended because of the danger of funds being diverted for purposes other than sanitation.
From India, Roy et al. (1984) suggested that if a programme is designed to serve the poorest groups, a subsidy has to be provided. One method of determining the extent of the subsidy is to use a means test. This may be based on the public utilities (water, electricity, etc.) available in the household. For example, households with no utilities might receive a 75% grant and a 25% loan. Where more utilities are available, the proportion given as a grant decreases. However, even for the poorest households, a small loan component requiring repayment is generally recognized as being vital to ensure effective care and use of the latrines, which only occurs when ownership is clearly vested in the householder rather than the agency.
A revolving fund or loan scheme, whereby money is lent at normal or subsidized interest rates for varying periods of time, may be of great importance. Monthly repayments on loans should be fixed at an affordable level. It is recommended that, if possible, loans for latrines should have a shorter repayment period (for example two years) than loans for housing. This is because benefits perceived by the householder are often limited and they may therefore lack motivation to continue payments over a longer period. Where the people have been fully involved in the construction of their latrines, small loans are usually repaid. If a programme is pushed through by an agency without effective community participation, it is likely that there will be a low return.
Revolving funds are a particular form of loan scheme where initial finance from government or a donor is distributed. The fact that there is only a certain amount of money available provides added incentive for borrowers to repay their loans, since other borrowers may have to wait for a loan while their neighbours repay.
There are many possibilities for combining the different types of financial assistance. A government agency might implement and maintain a sanitation system with full or partial cost recovery through tariffs or local taxation. This is more usually the case with a waterborne sewerage system than with on-site sanitation. The householders might do all the work themselves, assisted by grants or loans. They may achieve viable systems simply by accepting advice from external sources. Or the substructure might be constructed by an agency with costs recovered through a tariff, and with the householders building the superstructure with the help of a loan.
Wherever possible, financial assistance should be kept to a minimum, with design and technology appropriate to affordability in the various income groups targeted.
Costs of sanitation systems
A survey of sanitation by WHO (1987c) suggested that funding limitations are still the most serious constraint on achieving the goal of sanitation for all. The costs of different sanitation systems vary greatly according to country, current exchange rates, and skills needed for designing and implementing on-site technology. The figures given here (from WHO, 1987c, and other sources) are an indication of current costs per person served. However, it should be recognized that these costs are liable to considerable change, even over a short period. The WHO survey discovered increases in median figures between 1980 and 1985 of 131% for individual urban household sanitation in the least developed countries. The survey also noted a 30% decrease in per capita costs for rural sanitation in one region.
In South-East Asia, the per capita cost of sewer connections in urban areas in 1985 varied from US$ 45 to US$ 400 with a median cost of approximately US$ 80. To this must be added an annual water charge in the region of US$ 5 per person served. Low-cost on-site alternatives were costing US$ 13-30 per person in urban areas, and US$ 5-20 per person in rural areas.
In Africa south of the Sahara, sewer connections were reported to cost US$ 120-300 with accompanying water costs in the region of US$ 8 per year per person. The median sewer connection cost was US$ 150, with urban on-site alternatives ranging from US$ 25 to US$ 70. Rural sanitation costs were in the range US$ 10-45 with a median of US$ 25 per person.
In Central and South America, sewer connection costs varied from US$ 120 to US$ 235 with a median cost of US$ 150, the same as for Africa. Urban on-site sanitation cost US$ 20-80 and rural sanitation ranged from US$ 10 to US$ 50, with an average of about US$ 25 per person served.