Sanitation: The Role of the Public Sector Despite the initial promising results, the sanitation-lending model is still young and has yet to expand significantly to other markets outside of pilot initiatives without the help of NGOs. Similar to water, this dependency on NGOs to initiate and expand the credit model points to a potential role for government. To help the growth of the market in the context of sanitation loans, government and the public sector could: •
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Help to establish linkages between potential sanitation loan customers and financial institutions, including assistance in marketing loan products and promoting household sanitation generally. This promotion could be “carrot-based” (i.e. providing incentives to households through subsidized sanitation loan terms, etc.), or “stickbased” via increased enforcement of household sanitation regulations that would encourage households to invest in appropriate sanitation infrastructure using new financial products being promoted around sanitation. Provide technical assistance to households and the private sector around different sanitation options that are both affordable and meet government sanitation regulations. When the legal framework permits it, establish a specific sanitation capital fund from which financial institutions could draw or borrow from in order to increase their own lending capital for sanitation loans. As DINEPA is carrying out in Haiti, refine and clarify sanitation subsidy policies at the national and/or local levels, including policies and protocol (such as objective and transparent poverty classification criteria) to better identify households that truly need sanitation subsidies, and those that can afford sanitation infrastructure on their own or through a sanitation loan. Moreover, governments should take steps to instill this subsidy policy across districts so that sanitation subsidies and the promise of free W&S infrastructure is de-politicized, and that households have a clear understanding of how, when and under what circumstances W&S subsidies are available. As with water services, utilize information management systems to better understand and segment different household financial constraints so as to improve and better target financial support mechanisms such as subsidies. For sanitation loans specifically, if there are households that have expressed demand for a sanitation credit product but do not necessarily qualify under the stipulations of the particular financial institution’s lending criteria, or are unable to afford the cost of accessing the loan given high interest rates30 and terms, governments could take steps to mitigate and diminish the perceived risk to financial institutions of lending to households in this segment. Identifying households that do not qualify for sanitation loans and do not have sufficient income to invest their own resources could indirectly be a way for government to effectively classify households that should receive government assistance for sanitation in the form of a subsidy.
Overall, in the last few years, NGOs and financial institutions have made great strides in expanding credit access to households for sanitation infrastructure, alleviating financial constraints and supporting market growth among market segments that had previously not been able to access improved sanitation services. To continue this growth and capitalize on the financial sector’s interest in expanding their sanitation-lending portfolio, government could play
30 In Peru, interest rates for sanitation loans, although reflective of market rates, can often surpass 30% annually. It is also important to highlight that sanitation loans, like most home improvement loans, do not necessarily generate additional income (like a business loan), and the “cost,” through interest rates, of acquiring a sanitation loan can be too great a financial burden for households to take on, despite the ability to spread out payments over time.
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