Financing for Rural Water

Transcription

1 23608 December 1999 Water and Sanitation Program Growth of Small-scale Private Sector and Micro-credit Financing for Rural Water and Sanitation Services An international S C - partnership to help the poor gain sustained access to improved in Bangladesh water supply and sanitation services South Asia Region '4j F ~ _ - A -4 Dhaka, Bangladesh July 14, 1999

2 Photographs by Guy Stubbs December 1999 This document is published by the Water and Sanitation Program - South Asia. Copies are available from the Program, 55 Lodi Estate, New Delhi Tel: , Fax: ; or from the Bangladesh Country Office of the WSP-SA, The World Bank, GPO 97, Dhaka, Bangladesh. Tel: (+2) Fax: (+2) , The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or its affiliated organizations. The findings, interpretations and conclusions are the result of research supported by the Bank. The designations employed and the presentation of the material are solely for the convenience of the reader and do not imply the expression of any legal opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitations of its boundaries or national affiliation. Acknowledgements Haroon Rashid for facilitating the workshop; Abu Jafar Shamsuddin and Iftekhar Haider for preparation of Case Studies; Mohammad Murtoza for presentation of the Micro-credit Case Study; Babar Kabir for his support; and Shantana Bannerji for compiling notes.

3 Contents Abbreviations 2 Foreword 3 Introduction 4 Lessons on Private Sector Involvement 5 Lessons on Micro-credit in the RWSS Sector 8 Conclusion 11 Annexure One - Workshop Agenda 12 Annexure Two - Participants 13

4 Abbreviations ASA BRAC CBO DPHE GO GOB MFIS NGO PS RWSS SL SSA TL W&S WSP Association for Social Advancement Bangladesh Rural Advancement Committee Community-based Organization Department of Public Health Engineering Government Organization Government of Bangladesh Micro-financing Institutions Non-governmental Organization Private/Public Sector Rural Water Supply and Sanitation Sanitation Loan Society for Social Advancement Tubewell Loan Water and Sanitation Water and Sanitation Program 2

5 Foreword These proceedings document the disclssions on the findings of two important studies carried out by the Water and Sanitation Program - South Asia (WSP-SA) in Bangladesh. One study assessed the extent of private sector involvement in the provision of goods and services for Water and Sanitation (W&S) facilities. In accordance with conventional thinking, about 25 years ago, W&S in rurol Bangladesh was entirely controlled bythe public sector. Since then, however, the presence of the private sector has steadily increased. At the private end of the public-private continuum, users procure and maintain W&S facilities privately, self-financed and procured from the free market. While private entrepreneurs comprise a major segment of the market today, the market for privately procured and maintained W&S systems and facilities is still underdeveloped. This market needs to expand, for which entrepreneurs require funds for investment, and it must develop rigorous quclity standards that are monitored so that customers can trustw&s systems procured privately from the market. The second study examined the impact of microcredit in this sector by studying five organi2ations that offer such credit. High interest rates and lack of institutionalized systems of access to funds are some of the determining factors which inhibit users from taking the initiative to establish and maintain their own W&S facilities. While both studies confirm the impression of progress and increased coverage, they also reveal important trends and concerns: * Very significantly, the studies confirm the willingness and ability of individual households to 'buy' W&S facilities from the market, paying interest on loans to do so. * They reveal the importance of the availability of affordable and appropriate technology options in increasing coverage. 0 They identify the lack of access to capital for business as a major inhibitor of private sector involvement. * The need for well-defined standards of quality is increasing with rising private sector participation, as highlighted by the study on private sector involvement. Currently, there is a vacuum in this regard that needs to be addressed. * Both studies reveal the same major constraint in accelerating sanitation and water supply coverage in rural Bangladesh. The absence of appropriate funding institutions suited to the needs of rural users/consumers and providers of W&S facilities may well be the single most important factor that needs to be addressed. The development of the 'market' for W&S facilities requires not only suppliers but buyers as well. Both categories appear willing to participate as independent autonomous economic agents. What is needed is a healthy market offering appropriate goods and services with minimal distortions created by subsidies, and access to the means to participate - funds through credit for income generation and targeted loans for W&S facilities. K.M. Minnatullah Senior Program Officer 3

6 Introduction The Water and Sanitation Program in Bangladesh carried out two major studies during the year , as part of its work program tasks. The first set out to document the emergence and presence of vibrant small-scale private providers in the sector, delivering services to rural communities. It thus looked at the role ployed by the lead public sector agency and the factors that influenced the willingness of private operators to enter the field. The second assessed the success of five Micro-financing Institutions (MFIs) in providing micro-credit to rural communities for the constructionofw&sfacilities.bothstudiesfocused on the evidence they gathered to draw lessons for the future, particularly for the mainstreaming and/ or scaling up of such efforts to the national level. This workshop was organized to bring together sector stakeholders with the aim of sharing the findings of these studies and enabling a discussion of the factors and issues thrown up by them. The focus of the discussions was lessons learnt and their relevance for the WSP's plans for the future. This document collates and presents the key issues that emerged from the workshop. For each of the two studies, a summaryof findings is presented in brief, followed by a detailed presentation of the -4111i I ; t. - i s issues prioritized i, ad debated by participants. Finally, a conclusion draws tlessons from the two studies together, and F t I _ e l. 't4 _. highlights a possible agenda for the future The agenda of the workshop and the list 131 E. _.1,. of participants are provided at the end 11 - of RE this f - document. _Pi _- -< v,-* treports on the two -A studies can be accessed from the WSP-SA Dhaka Office (address given at the back of this report).

7 RURAL BANGLADESH Lessons on Private Sector Involvement The findings of this study indicate that long-term public sector intervention in the rural water supply Ratio of Handpumps: and sanitation sector has had a vital demonstration Public vs Private Sector effect. Rural communities exposed to the availability of a wide range of technology options and service levels have become capable of choosing the l affordable option and paying for it themselves. The demand for water supply and sanitation services has thus grown tremendously, and is now greater than the capacity of the public sector agency (Department of Public Health Engineering, or DPHE). Enterprising small-scale service providers, essentially producers of hondpumps and pit l latrines, have increasingly met this shortfall in supply. From a near absence 25 years ago, the private sector is nowo dominant force in rural water supply and sanitation in Bangladesh. Owing to the play of market forces, private operators now W&S progrom also played important roles in account for nearly two-thirds of all installed limiting the growth in coverage. These procedures handpumps (see chort), as well as the majority of are often exploited by the elite and influential in latrines. vi lages and restricted benefits within small groups In the initial stages of the WSP's efforts, the of people. public sector played a crucial role (with UNICEF The introduction of cheaper materials, for assistance) in introducing low-cost technology. instance PVC as compared to galvanized iron However, a number of factors impeded pipes, and of multiple technological options as acceleration in coverage: for instance, there were opposed to standard scheme designs through R&D few alternatives to the available technology, and it by the private sector, has increased demand as was too expensive for the bulk of users; and the more and more users are able to choose an option availability of subsidized W&S facilities through based on both need and affordability. Greater existing projects served as a disincentive for users demand has increasec confidence and who thus refrained from investing their own encouraged more entrepreneurs to enter the resources to instal handpumps and latrines. Other market. Improved user satisfaction has also had a factors such as the bureaucratic and non- multiplier effect; undisputed ownership in case of transparent procedures of the government-assisted private tubewells has led to greater satisfaction than 5

8 that achieved with facilities installed by the government where ownership is ambiguous. The following table summarizes the promoters and inhibitors of private sector involvement/ participation revealed by the study. Seventy percent of the private producers covered by the study self-financed their businesses. Quality assurance rated second in the list of concerns drawn up by the workshop participants. There is a dire need for product and service standards that Demonstration effect of the public sector Social mobilization campaign Participation of NGOs Cheaper and simpler technology Low capital intensive business Informal credit to consumers Multiple options/service levels Growth of private producers, competition Continued service delivery by the public sector Subsidized government program through the public sector Centralized delivery mechanism No access to credit for higher cost schemes Use of high-cost technology Vaguely defined ownership Supply of spore parts by the public sector for some technologies Funding mechanism routed through the public sector Prioritizing Issues private providers must match. Users must be assured of the quality of goods they purchase in order for the market in this sector to prosper, and there is no system in place for this yet. Limited user liquidity is another constraining factor that needs to be addressed. Most consumers lack access to liquid cash to utilize for expenses related to W&S. This can be addressed through micro- credit and other funding mechanisms, as detailed by the study on micro-credit. The fourth issue is the need to focus policy on public sector subsidy. The presence of subsidized public Participants prioritized four issues through a voting process. Private sector's access to credit was identified as a major constraint. Limitations, such as the absence of appropriate funding mechanismsand stringentterms underwhich credit is available, restrict the entry of private entrepreneurs into this area. Small-scale enterprises cannot put together the capital required to set up their businesses through credit, often due to an inability to meet collateral requirements. Growth of Latrine Manufacturing Centers RWSS projects acts as a deterrent 4000 to user initiative in purchasing goods from the market and setting 3500 up W&S facilities privately. As importantly, distribution of spares O 3000 / through the public sector agency o: 2500 inhibits private participation on the t5 /supply side of the market. p 2000 Each issue was discussed by a D 1500 i group - participants identified.e /specific actions to mitigate the MO 1000 issue/constraint, the agencies/ 6 actors responsible for carrying out z 500 the actions, and the level (national, community, individual, 0 O etc) at which the effort should be made. The outcome of these + Private Production Centers Public Production Centers deliberations is presented in the following matrix: 6

9 Key Issues for Private Sector Involvement ISSUES ACTIONS/MEASURES LEVEL RESPONSIBILITY 1. Improve private * Banks should modify their policy for 0 National level 0 GO, GOBs, policy makers sector access lending to private enterprises to to credit enable greater access to credit. * NGOs should be apprised of banks' * National/regional/ 0 GOB loan policy for supporting small local level enterprises so they can disseminate 0 NGOs and grassrootinformation. level entrepreneurs, * Small enterprise skills should be CBOs/Gram Sarkar developed to reduce risk for investors. * Rate of interest should be 0 National level 0 National banks reduced for development work (W&S). 2. Quality * Setting standards and specifications * National level * Govt, NGO, public sector assurance for W&S goods and services is crucial. * These standards must be disseminated. 0 National level 0 GO and NGO * Awareness of quality standards 0 National and 0 GO, NGO and public should be spread. local levels sector * Training of users and entrepreneurs 0 National and 0 GO, NGO and is needed. institutional levels community * Quality monitoring systems 0 National/local * Govt are needed. levels 3. Limited user * Assessment of financial needs should 0 At the individual * Community workers/ liquidity be undertaken. and community level NGOs/GOs * Policy for WSS credit to individuals GOB (national 0 GOB with participation of and to institutions should be formulated. level) private sectors and donors * Information dissemination on credit 0 From national to 0 GO, NGO and other availability is needed. community levels; organizations also at the individual level * Credit facilities must be made * At individual, group 0 Banks, financial available widely. and institutional institutions, NGOs and levels private entrepreneurs 4. Focus public 0 The market is additionally distorted by 0 National level 0 Govt, policy makers sector subsidy subsidies and this needs to be and donors factored into strategy. * Subsidies need to be targeted to 0 Local level 0 CBO/Gram Sarkar/UP to ensure access to the poorest. identify target (at local level) * Withdrawal of general subsidy 0 National and 0 Public sector and (time-bound) should be worked local levels local government into plans. 0 Focused and limited subsidies should 0 National and 0 Public sector and be provided for their demonstration local levels local government effect. 7

10 RURAL BANGLADESH Lessons on Micro-credit in the RWSS Sector Five organizations that function as MFis were efforts. A dual approach is used: demand creation the subject of this study: through mobilization and awareness, and * Grameen Bank enhancing financial capacity through income * Bangladesh Rural Advancement Committee generation efforts to enable members to become * Association for Social Advancement credit-worthy and satisfy their demand for W&S * BURO Tangail services themselves. A total amount of $36 million * Society for Social Services for water supply, and another $13 million for All five provide micro-credit in rural areas for sanitation had been disbursed by these installation of W&S facilities.though this is not their organizations until These loans covered 9 sole area of operation, W&S is an important part million people - 8 percent of the total population. of their holistic development and poverty reduction The average credit repayment rate of 98 percent -r ; * A~ ~ ~ ~ ~~A [ Xit ) X s=p",o--li- WS8_

11 is very impressive. The most remarkable fact is that members from the poorest segment of communities have procured materials for construction of facilities completely through self-finance, often paying an interest rate of up to 20 percent to do so. The study examined the various lending mechanisms of these five MFIs, related influential factors and the extent of coverage made possible through such schemes. The findings contain significant conclusions regarding the viability of procurement of goods by rural users, including the very poor; access to credit as well as affordable and suitable technology options has proved to be strong and determinative. Salient aspects of the five MFIs are detailed in the table below: Grameen Bank BRAC ASA BURO-Tangail SSS Amount of loans SL: 7.73 SL: 3.7 SL: 1.8 SL: 0.07 SL: 0.08 provided to members TL: TL: 2.1 TL: 5.4 TL: 0.4 TL: 0.4 (figures in $ million) Numbers of members SL: 682,359 SL: 272,019 SL: 92,620 SL: 2,336 SL: 9,964 who have availed TL: 238,436 TL: 61,944 TL: 136,085 TL: 8,541 TL: 9,057 W&S loans Loan recovery rate SL: 97% SL: 98% SL: 98% SL: 100% SL: 99% TL: 98% TL: 98% TL: 100% TL: 100% TL: 99% Year of establishment 1976 (experimental project) (as Gromeen Bank) W&S loan ceiling SL: 20 SL: 20 SL: 20 SL: 20 SL: 20 per unit ($) TL: 100 TL: 40 TL: 60 TL: 100 TL: 50 Leasing loan: 300 Interest rate per annum SL: 8% SL: 15% SL: 5% SL: 10% SL: 20% TL: 20 o TL: 15% TL: 12.5% TL: 10% TL: 20% Note: SL - sanitation loan, TL - tubewell loan Group liability Group liability Group liability Group liability Group liability Prioritizing Issues As with the first study, participants voted to prioritize four issues from a list of 11. Lack of funds. for RWSS credit financing was identified as the ii most important constraint; more funds are needed - in order to ensure access to credit for the large numbers of rural poor who require such assistance. High interest rates for loans for W&S works is another crucial factor. Although users are willing to obtain sanitation facilities through the credit system, many are unable to because it is uneconomical. A factor that is relevant for all!' changes brought about by new systems is the slow I I i#--p1 pace of behavioral change. New ideas take time.. to percolate down and be accepted by individuals, F V

12 Key Issues for Micro-credit in W&S and communities. The fourth issue was the need for institutional arrangements for credit financing. As new ideas gain ground, new systems and structures are required for the operation of the new principles. Each of the above issues was discussed by a group, and participants identified specific actions to mitigate the issue/constraints, the agencies/ actors responsible for carrying out the actions, and the level at which the effort is to be made. The outcome of these deliberations is presented in the matrix below. ISSUES ACTIONS/MEASURES LEVEL RESPONSIBILITY Lack of funds 0 Social mobilization for awareness * National and 0 GO, GOBs, policy makers and mechanisms to generate and assess demand local levels for RWSS credit for credit is needed. financing * Funds should be procured from 0 National and local GOB, NGOs and grassroot- GOB and/or donors for levels level entrepreneurs, onward-lending. CBO/Gram Sarkar High interest * The scope for income generating * GO, NGO and * GO, NGO and rates for W&S activities should be increased. community levels community credit 0 Additional sources of resources * National level 0 GO, NGO and private should be explored. sector * Standard interest rate (declining) * National and local 0 GO, NGO and private should be determined. levels sector * Loan repayment period should be * National level 0 GO, NGO and private a maximum of 50 weeks. sector Slow pace of 0 Hygiene education is necessary 0 Community and * NGO, GO, CBO, behavioral to create demand for these household levels schools and institutions change goods and services. * Awareness and motivation * Individual (family * Family head, NGO, levels need to be raised. head) and CBO/staff community levels Institutional * Support institutions must be * National and local * GO, leaders, NGO, arrangements established, levels institutions for credit 0 Support organizations must * National and 0 Financial institutions, financing be adequately funded. community levels NGO/MFI * Technical assistance in formulating * National to local * GO, NGO, private proposals and improving levels, CBOs institutions credit-ratings should be available. * Credit for both income generation 0 Individual to group * GOB/ESA/private activities and W&S facilities must levels consultants be available. 10

13 Conclusion A panel discussion drew lessons from both case studies and identified linkages between access to finance, and the capacity to manage funds and buy goods and services from the market by the poorer segments of the community. The key constraints for accelerated coverage through selffinance were debated, in order to arrive at a set of priorities for the future. The discussion focused on limited access to credit, narrow range of technology options, poor quality of goods available, monopoly pricing and delayed delivery of goods and services. The panel concluded that in the majority of cases rural small-scale private providers require support to establish their enterprises. Mobilizing adequate fund is a challenge for them and they will thus benefit greatly from a credit financing mechanism, similar to those for users who avail of credit to buy goods and material. The panel thus suggested strengthening these micro-industries with the aid and assistance of the government and donors, through both enabling policy changes and demonstration. Lessons learnt from the effect of diversification of options in terms of both technology and service levels, and its impact on choice and affordability should be carefully analyzed and applied to further unbundle service delivery and introduce more competition. As viable supply chains come into place, the government will need to safeguard consumer interest by adopting and enforcing quality standards. Accelerating Self-financed Water Supply and Sanitation Improvements Poor consumers have demonstrated credibility in borrowing and managing funds, procuring goods and services, supervizing installation, managing systems, and above all, making timely repayments. The challenge now is to develop ways to mainstream this experience and adopt it on a national scale. The workshop participants concluded that an appropriate financing mechanism is the most important factor for the rural water supply and sanitation sector. The role of the public sector should thus be to create the enabling environment so that consumers are able to procure services from the market to meet their needs. Finally, a significant finding of the workshop is the commonality between both the studies. Users and small-scale entrepreneurs have displayed their willingness to use credit finance; the former for W&S coverage and the latter for businesses that provide the relevant goods and services. Private initiative from both the supply and demand sides is thus forthcoming, and there is a need for adequate infrastructure to translate this into increased RWSS coverage and greater private involvement.

14 ANNEXURE ONE Workshop Agenda Wednesday, July 14, :15-10:00 Session I Plenary Brief introduction K.M. Minnatullah Purpose and objective of the workshop Participants' introduction Presentation of the findings from the Study on Private Sector in RWSS in Bangladesh A.J. Shamsuddin Question and answer session Group formation 10:00-10:15 Tea/Coffee 10:15-12:30 Session II Breakaway Group Group work Issues and constraints Group presentation 12:30 Lunch 13:40-14:00 Session III Plenary Presentation of the findings from the Study on Micro-credit Financing Mohammad Mortuza Group formation 14:00-16:00 Session IV Breakaway Group Group work Issues and constraints Group presentation 16:00-16:30 Session V Panel Linkages to be drawn between the private sector and micro-credit mechanism followed by the relevance of lessons for the development of viable supply chain of goods and services A.J. Shomsuddin; Iftekher Haider; K.M. Minnatullah; Mortuza; Haroon Ur Rashid 16:30 Conclusion Babar N. Kabir Closing tea 12

15 ANNEXURE TWO Participants S. No. Name Organization 1. Abdul Khaleque BRAC 2. Md Golam Mostafa BRAC 3. Kazi Nasiruddin Ahmad DPHE 4. Ammanullah al-mahmood DPHE 5. Md Shafiqur Rahman DPHE 6. Mohammad Mortuza Micro-credit consultant 7. Md Akhtaruzzoman ITN-Bangladesh 8. Shafiqul Islam UNICEF 9. Raibul Islam IDE 10. N.I. Sardar IDE 1]. Adele Beerling DASCOH 12. Dibalok Singha DSK 13. Chowdhury Mufad Ahmed LGED 14. A.T.M. Abdur Rashid LGED 15. A.B.M. Ashrcful Alom LGED 16. M. Mofazzal Haque WHO 17. Lawrence Nokrek CCDB 18. Shamina Yasmin RDRS 19. Manirul Islam BURO-Tangail 20. Abdul Hamid Bhuiyan SSS,Tangail 21. T.K. Barua World Bank 22. Zahed H. Khan World Bank 23. Muhammad Taher SDC 24. Abdul Motalib SDC-WPP 25. A.K.M. Abdul Malek Grameen Bank 26. A.R.M.M. Kamal NGO Forum for DWSS 27. Ziaul Haque NGO Forum 28. Md Thandu Mollah NGO Forum 29. Md Ramzan Ali NGO Forum 30. Astrid van Agthoven ISDTP, Dhaka 31. Tanveer Ahsan WSP-SA 32. Haroon Ur Rashid WSP-SA 33. A.K. Sengupta WSP-SA 34. Babar Kabir WSP-SA 35. K.M. Minnatullah WSP-SA 36. Iftekher Haider WSP-SA 37. M.A. Fayez Khan WSP-SA 38. S.K. Abu Jafar Shamsuddin WSP-SA

16 BANGLADESH COUNTRY OFFICE Water and Sanitation Program - South Asia The World Bank GPO 97, Dhaka, Bangladesh Phones: (+2) Fax: (+2) , wspsa@worldbank.org Website: Water and Sanitation Program 1818 H Street NW Washington, DC USA Phone: Fax: info@wsp.org World Wide Web: INDIA COUNTRY OFFICE Water and Sanitation Program - South Asia 55 Lodi Estate, New Delhi , India Phone: (+ 11) Fax: (+ 11) PAKISTAN COUNTRY OFFICE Water and Sanitation Program - South Asia The World Bank 20-A Shahrah-e-Jamuriat, G-5/1 Islamabad, Pakistan Phone: (+92-51) Fax: (+92-1) , An international partnership to help the poor gain sustained access to improved water supply and sanitation services. The Program's main funding partners are: the governments of Australia, Belgium, Canada, Denmark, Germany, Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom; the United Nations Development Programme and the World Bank. Reprint August 2000