8.4.1 Overview and Issues

Categories: 8.4 Subsidies
Time of issue: 2022-04-28 10:58:49
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An investment in sanitation by an individual household has benefits for society as a whole (by removing pathogens from the environment). But an individual household’s decision to invest in sanitation provides little benefit to themselves, if others do not make similar investments. This consideration, combined with high costs leads many households to under-invest in sanitation. The public sector has an obligatory interest in changing individual choices to increase the level of investment in sanitation and move society towards universal sanitation because investment in sanitation produces high levels of societal benefit (Evans et al., 2009).

Poor households have limited funds and tend not to give high priority to investments in sanitation. Many governmental and non-governmental organizations argue that to improve sanitation in rural parts of China will require substantial investment and subsidies. It is important to understand that while the use of subsidies can encourage and increase the rate of investment in sanitation, if the subsidies are poorly designed, targeted, and delivered they may not achieve the intended goals and in some instances may decrease the long-term sustainability of the project.

Reliance on highly subsidized financial schemes can have several unintended results, including:

High cost solutions are implemented that the community may not be financially able to support from a long-term operation and maintenance standpoint;
Subsidies displace other sources of funds. Given the prospect of a subsidy, households will elect to wait for ‘free’ goods rather than paying their own way from savings or through accessing credit.
Subsidized programs are usually designed and managed by the subsidizing entity. That implies the type of sanitation solution may be decided by outside expertise. This approach can prevent or stifle local innovation or can lead to the selection of inappropriate technologies.
Many subsidy programs are simply not financially sound and there is not enough money to pay for them. Subsidy schemes that are not well financed eventually cease to function, resulting in low coverage or poor sustainability and lots of un-served people who are dis-incentivized/de-motivated to pay for their services since their ‘neighbors’ were given a subsidy.
Poorly targeted subsidies may result in the subsidy benefiting a biased selection of households. Depending on how the subsidy scheme is setup, the more wealthy households may be more adept at capturing the subsidy to the detriment of the poorest households.
In some instances material subsidies can create a ‘false’ demand for services, as when, for example, a household takes a subsidized toilet or service because it is available, while there is no demand or need for it. This is likely to occur when there is sufficient funding for the hardware, but limited or no funding for the software (community education and promotion).
Many subsidy programs are limited in duration and lack of sustainability. After the end of the program, potential users who didn’t benefit from the program may wait for another subsidy program rather than financing their own sanitation, as they might otherwise have done.

One of the main problems with the design of sanitation financing appears to be that the disparate objectives of any public subsidy remain non-explicit (Evans et al., 2009). Different project proponents attach different levels of priority to different objectives. For instance the main objective of a subsidy scheme might be to ensure inclusion and empowerment of certain disadvantaged groups, but it may equally be to protect the environment or to improve public health. These issues highlight the need for care and caution in the overall design of the public financing of sanitation. The design of any subsidy needs to take into account not only current, but also future considerations, and not only the intended but unintended consequences including those identified above.

The Water Supply & Sanitation Collaborative Council/World Health Organization (WSSCC/WHO, 2005) Programming Guide publication sets out the following principals, which are useful and valid for the design of sanitation subsidies:

Subsidies should achieve the intended policy outcome: this requires not only smart subsidy design but clarity upfront about what the policy objectives area. Choices and tradeoffs need to be made between different interest groups, the wealthy and the poor, and short- and long-term objectives.
Subsidies should reach the intended target groups: this again requires clarity on who is the intended target group and how they can best be reached. It also requires that rigorous monitoring is in place to track how subsidies are reaching intended groups.
Subsidies should be financially sustainable: this requires a solid understanding of the potential scale of needs and the costs of the program. Costs include both upfront capital costs and long-term operational and maintenance costs. It also requires a good understanding of how to get the best possible leverage (increase) in funding from other sources (typically households and market sources). Only on this basis can a sustainable financial regime be put in place.
Subsidies should be implemented in a clear and transparent manner: finally, since they involve the use of large sums of public money, subsidy programs need to be clear and transparent, enabling eligible households or communities to access them and providing clear recourse mechanisms in cases where there is a suggestion of impropriety. Proper monitoring and evaluation is an essential element of such transparency and must be fully financed as part of the subsidy program.