House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by WaterAid

DFID-WB/IMF POLICIES ON GOVERNANCE AND CONDITIONALITY IN WATER AND SANITATION

1. BACKGROUND

1.1 DFID is increasingly channeling water and sanitation financing through International Financial Institutions (IFIs), including the World Bank and the Regional Development Banks. In 2003-04 it is estimated that £76 million, 35% of DFID financing for water and sanitation was channeled through IFIs, up from £45 million in 1999-2000.[164]

1.2 IFIs and donors in the urban water and sanitation sector frequently prescribe particular urban sector reform policy paths in aid and loan packages. These come with conditions clear preferences for the reform design. In the 14 countries[165] investigated by WaterAid, World Bank and IMF stipulate conditions that expand private sector participation in water services. These conditions are mandated through prior actions, trigger conditions, performance criteria and quantitative and structural benchmarks and indicators used by WB and IMF.[166]

1.3 The UK Government accepts the evidence that conditionality cannot "buy" policy change which countries do not want.[167] In the words of the policy document: "Reforms will not be implemented—or will not be sustainable—if a partner country is acting purely in order to qualify for financial support and does not consider that the reforms are in its own interest. The UK will not make our aid conditional on specific policy decisions by partner governments or attempt to impose policy choices on them (including in sensitive economic areas such as privatisation or trade liberalisation). Instead we will agree with partners how aid will contribute to poverty reduction in a manner that can be sustained over the long term, and agree benchmarks to show what progress is being made. These benchmarks should focus on the impact of the government's overall programme, rather than on specific policies".[168]

Sustainability of IFI Sector Finance

1.4 Given DFID plans to increase sector expenditure and faced with a policy of reducing departmental staff levels; it is likely that the proportion and level of financing channeled through IFIs will continue to rise. Much of IFIs financing is in the form of loans awarded with accompanying sector reform conditions. However, many public utilities in low-income countries are operating with high levels of indebtedness or are functionally bankrupt. In this instance, DFID needs to consider whether it is advisable for financing urban WSS investments to be delivered in lending operations—even where the levels of concessionality in lending instruments are high.

2. MULTILATERAL CHANNELS AND DFID'S CAPACITY TO EFFECT CHANGE IN WEAK ADMINISTRATIONS

2.1 Multilateral Financial institutions lend to the poorest countries at concessional interest rates. However, a study by WaterAid on Asia Development Bank sector financing in Nepal, Bangladesh and India, found that concessional loans for water and sanitation projects to sovereign governments are on-lent by sub-sovereign authorities at increasing rates of interest.[169] Concessional funding can often reach end borrowers with interest rates of between 8 and 14 percent per annum—or, on a par with market rates. DFID should work with the IFIs to review on-lending policies to ensure that that DFID's own grant aid does not pass through a chain of multilateral, sovereign and sub-sovereign authorities and end up costing end borrowers at near market rates and result in unaffordable services and add to unsustainable debt burdens.

2.2 Given the significant level of financial support provided to IFIs for water and sanitation, WaterAid has concerns that DFID is not maintaining adequate oversight of or influence over the World Bank's sector policies, programmes and projects.

2.3 DFID can better protect the grant element of its financial support to the World Bank's aid by increasing the level of its investments and support for Trust Funds. These Funds can help support poverty and social impact analyses prior in all project implementation, including mapping the incidence, geographic location and gender, social identity of the poor, in the project design process. DFID should also consider placing more DFID staff with skills in pro-poor policy and service delivery in the Bank. Engagement of country programme staff in project activities should be stronger. WaterAid argues that the replenishment rounds of IFIs provide DFID with an opportunity to push for pro-poor changes in the design, implementation and evaluation processes and to make additional resources dependent upon improvements in these areas.

2.4 The following two sections review specific experiences and impacts of WB-IMF conditions in Urban Water and Sanitation Sector Reform Programmes in sub-Saharan Africa and South Asian Countries and offers key recommendations:

3. DFID-WB/IMF CONDITIONS IN WATER SUPPLY SERVICES (WSS) IN SUB-SAHARAN AFRICA AND SOUTH ASIAN COUNTRIES

PSP without commensurate regulation

3.1 In the 14 countries[170] investigated by WaterAid, 12 countries, undergoing various World Bank lending processes or already in project implementation phasees, had conditions stipulating the involvement of private water operators in the operation, management and control of public water utilities and the outsourcing of activities to the private sector. In Malawi, for example, one of the performance indicators, in the PAD for the Privatization and Utility Reform Project (2000), is the divestiture of the public water boards by June 2004. In Mozambique, private management contracts in place for five major urban water supply systems by 1999 are used as a performance indicator. Given importance of robust regulatory mechanisms for public accountability of private water service providers, there are no concomitant performance criteria requiring regulatory mechanisms to be established, for example in Nepal and Nigeria. In none of these cases was there an informed public debate over differing public sector reform options.

Cost recovery & tariff increases without support for the poor

3.2 Full-cost recovery, tariff increases and establishment of automatic tariff adjustment formulae are common structural benchmarks stipulated in IMF Memoranda of Economic and Financial Policies, for example in Mozambique, Tanzania. However, there are no supporting conditions that governments should ensure that poor people's access to WSS services is protected once tariffs rise.

Inappropriate sanitation projects

3.3 The focus of IFI supported interventions has been on large scale projects often with inappropriate central sewerage systems. Existing technologies of networked sewerage systems where on-site sanitation systems are linked are expensive, water-dependent and not always appropriate especially in countries that are suffering from water stress and scarcity. World Bank investments in urban sanitation have not adequately encouraged alternative sanitation solutions and the promotion of locally appropriate designs. Experiences of development NGOs in Karachi, Lahore, Faisalabad in Pakistan in designing low-cost sanitation and sewerage and wastewater treatment, in collaboration with the public utilities in those cities need to be better understood by the Bank, and the lessons promoted.[171]

PSP has become the language of PRSP and WB CAS

3.4 This focus on expanding and facilitating the role of the private sector in water supply and sanitation services is usually carried forward in World Bank Country Assistance Strategies plans ( in Ghana, Madagascar, Mali, Mozambique and Zambia). PSP options also appear in PRSPs without sufficient national debates around plausible policy alternatives.

4 IMPACT OF DFID-WB/IMF CONDITIONALITIES ON PSP IN BANK SUPPORTED URBAN WATER SECTOR REFORMS PROGRAMMES:

4.1 Urbanisation is contributing to a major sanitary crisis in urban areas. And in many low-income countries the dismal state of sanitation in dense urban slum settlements has been the cause of cholera outbreaks. By historical design, water and sanitation are not the direct responsibility of the same government agency—water ministries or the public utilities. Instead, the responsibility for sanitation and environmental sanitation (sanitation in public spaces, waste collection and disposal) is fragmented amongst a number of government agencies and departments. DFID need to encourage the World Bank to support sub-sovereign investments in alternative urban sanitation solutions and the promotion of locally appropriate designs, involving civil society and in collaboration with the public utilities in cities.[172]

4.2 Urbanisation is enlarging the areas and number of people un-served by public water supply utilities. In all developing countries, the public sector carries the primary responsibility for service delivery in urban areas. Public utilities currently serve up to 95% of the population served through piped network systems. However, by and large the record of Public utilities' performance in delivering services that reach impoverished communities is poor and in need of pro-poor reform.[173] The challenge is in understanding the causes of poor performance in order to enable effective reform to happen. Successful reform of public utilities has happened—in Kampala, in Tamil Nadu, in Phnom Penh—and it is important for DFID to learn the lessons and promote and share these lessons in support of pro-poor public utility-led reform processes.[174]

4.3 The World Bank[175] has identified a range of desired reforms in public utilities. These include securing the operational and financial autonomy of the public utility from political interference; ensuring a clear performance contract between the utility and the government agency responsible for its control; establishing independent regulation of the public utility, changing culture so that there is attention to `customer care'. In addition, experiences especially in Latin America highlight the importance of independent, citizen-led accountability mechanisms.[176]

4.4 The challenge facing public utilities is designing tariffs and subsidies so that people gain sustainable and affordable access, and price does not become a barrier, and that those who are poor and unable to pay are able to consume water to the required levels for health and hygiene. Experience and evidence points to a need to subsidize connection fees[177]—making connections free for the poor, investing in widening the coverage of water supply systems, and establishing a subsidized water fee system that is transparent and targeted primarily at poor people. DFID needs to consider how its funds channeled through the IFIs for investments in urban water and sanitation services can help governments to meet these goals. One way to do this is for DFID to support economic and social impact analyses to inform the design of utilities' tariff and subsidies.

4.5 Water and sanitation investments have not tended to win large scale interest from the private sector.[178] In fact, private sector investments in water and sanitation were only 5% of total private investments in infrastructure, in the 90s.[179] There is now a sufficient body of evidence that casts serious doubt on the capacity of multinational corporations to provide affordable access to water and sanitation in developing countries.[180] In the past decade, private companies have managed to extend water service to just 10 million people, less than 1 percent of those who need it.[181]

4.6 The ability of governments to deliver on the MDG targets for water and sanitation in urban areas will be determined by the ability of public utilities to reform and improve performance, the ability of governments to capture the positive potential of NSPs, develop appropriate sanitation solutions and embrace public engagement and means for public accountability. DFID needs to consider the role it can play in this agenda.

KEY RECOMMENDATIONS TO DFID

— Increases in multilateral aid should be accompanied by strengthened engagement with international financial institutions to ensure that the policies and lending practices of these institutions are pro-poor and do not impose policy conditions.

— Review the outcomes and effectiveness of donor facilities created to facilitate multinational company involvement in WSS infrastructure, and assess the degree to which private sector participation has led improvements in pro-poor service delivery.

— Recognize the increasing challenge of urbanization in the delivery of water supply and sanitation to poorer communities. DFID's should work with the Bank's water and sanitation anchor in the review and development of a fresh strategy to address the issues of public utility reform, the role of Non-State Service Providers, urban sanitation, and social control or citizen-led accountability mechanisms

— Develop a programme of work, with the World Bank and recipient governments, to support the reform of publicly-run utilities to deliver pro-poor services. Look to support the promotion of utility-led reforms, and the lessons from well-performing public utilities. Encourage the Bank to look into supporting partnerships between public utilities for purposes of learning and support for improving performance.

— Encourage the World Bank to assist governments to improve the regulatory environment and to create opportunities for local NSPs to be integrated into the public water and sanitation delivery system.

— Review the efficacy and value of DFID's grant financing support for IDA and other soft loans' facilities that pass through a financing chain of escalating interest rates and end up with sovereign borrowers accessing DFID's aid at near market rates. DFID should consider whether this is the best use of UK aid and whether its financing is leading to public utilities accumulating levels of unsustainable debt and, in effect, functional bankruptcy.

— Consider how best to target subsidies to the poor—at least their connection to public service providers—to help achieve universal access to adequate and sustainable access to water supply services.

— Work with the World Bank and partner governments and other donors to address the urban sanitation crisis, including the creation of national sanitation plans and coordination bodies capable of identifying systemic bottlenecks and building institutions with the flexibility to respond

— Ensure that the World Bank's policy reform preferences include the promotion of and pro-poor regulation of locally appropriate schemes.

182

ex ante

QUESTIONS FOR THE IDSC TO PURSUE IN THEIR INQUIRY OF DFID RELATIONSHIP WITH THE WORLD BANK:

1. Will DFID make its financial support for IDA conditional on the Bank developing all sector reform projects on ex ante poverty & social Impact analyses (PSIAs)?

2. How can DFID ensure the World Bank supports and enable a transparent and consultative decision-making process over the approaches to water services reform, and to the establishment of robust water and sanitation regulatory systems?

3. How has DFID promoted its expressed support for "public-public partnerships" (PuPs) in the reform of water utilities in developing countries, in its dialogue with the World Bank?

4. How can DFID prevent its grant financial contributions for the World Bank's IDA facility ending up with "end borrowers" at interest rates on a par with commercial lenders? How can DFID ensure that its finance does not pass along an interest rate escalator between the Bank and sovereign and sub-sovereign recipients? Should DFID consider rechannelling its support for IFIs financing of the water and sanitation sector to Trust Funds?