A variety of components are factored in to provide a free flowing inclusive Sanitation value chain. These levers of the value chain have financial requirements that are primarily based on the cost of providing inclusive Sanitation services. The assessment of financial requirements is sectioned into capital and operative expenditures across value chain levers such as containment (access and collection), conveyance, treatment, and disposal.
- Containment (Access & Collection): The containment unit consists of the household level management of inclusive Sanitation. This involves a two-step process, that is, access to the user interface such as toilets and provision of septic tanks for collection. A onetime capital expenditure is incurred to build individual household toilets and septic tanks. In order to maintain and repair these septic tanks, an addition operations cost is levied.
- Conveyance: Conveyance is a key component of determining the financial requirement to maintain the sanitation of the septic tank once they are installed at the households. This involves emptying the tanks using suction emptier trucks, collecting it, and transporting it to the treatment facility. The desludging of these septic tanks is done on a periodic basis that requires capital financing for additional trucks. Further, an add-on operation expenditure is levied to maintain these machines, provide salaries to the drivers, and fulfil the fuel cost incurred at the time of transportation of sludge to the treatment facility.
- Treatment/ Disposal: Treatment of the sludge plays a crucial role in the value of inclusive Sanitation. The treatment facilities often require huge capital investments as the initiation cost in terms of cost of the land it would be built on, construction, planning, engineering, electric and mechanical costs. The cost of land acquisition often comes with 15 – 20% contingency included to account for uncertainty. The capital expenditure distribution is largely dependent on the type of treatment adopted. For instance, a complex hybrid system such as Moving bed biofilm reactors will require highly specialized material and labor costs. With higher costs of setting up complex treatment plants, the operating expenditure rises proportionately. The maintenance of these treatment plants is determined majorly by 3 components: energy, chemicals, and labor. Depending on the type of treatment, the cost of these 3 components can account for up to 90% of the total OpEx in electro-mechanical systems.
- CapEx and OpEx costs of FSTPs vary significantly, depending on the type of technology used, location, extent of treatment, and a myriad of other factors. Based on a 2019 costing analysis study conducted on FSTPs across India, the CapEx and OpEx costs of FSTPs can be as low as INR 100,000 per KLD, or as high as INR 1,700,000 per KLD. Additional efforts to ensure safe management of faecal solids can cost as high as 30-40% of initial CapEx. The cost of a technology with lower capacity generally costs higher compared to the higher capacity plants. The cost of the technology with same capacity having complete treatment solution is lower in comparison to the partial solution.
- Applying Life Cycle Costing (LCC) to FSTPs is appropriate due to this significant cost variability existing between different locations. This approach makes it possible to determine the most cost-effective solution amongst a range of alternatives by considering all cash flows over the lifetime of the system and allows practitioners to identify potential trade-offs between initial capital investment costs and long-term cost savings. Using concepts such as identifying present value, discounting, determining system lifetime, and calculating the CapEx, OpEx, and Replacement Expenditures requirements, a LCC analysis will help decision makers expose hidden costs that are not immediately apparent with traditional costing methods.
- Fully mechanized FSTPs tend to be the most expensive option, in the context of FSTPs available in India. However, the cost of the mechanized systems exponentially decreases with increase in treatment capacity. On the contrary, the reduction in cost for a FSTP with major civil components is not significant because of retention time demands.
The financing needs are based on components of the value chain in inclusive Sanitation that are funded through various sources. These financing sources are broadly classified into 3 types: public finance, commercial finance, and grants from philanthropies. Under the 15th Finance commission 30% of the total grants are to be earmarked for sanitation, including inclusive Sanitation. These funding strategies work extensively across the value chain to support inclusive Sanitation needs.
- Containment component largely accounts for the cost of the new toilets and septic tanks
- Under SBM - Urban, ULBs were accountable for grassroot level sanitation linked to responsibilities such as construction of toilets, approving applications & plans, facilitating financial incentives to citizens and periodic desludging
- Individual households, CSR funds, and crowd funding sources also contribute to meet the capital expenditure while the housing societies jointly fund for the repair and other operations
- Conveyance accounts for most of the funding needs in FSSM value chain
- The financing of a major capital expenditure, suction emptier trucks, is segregated into two types i.e., demand-based and scheduled
- Funds are allocated by public and commercial financing authorities
- ULBs are funded by several state governments for procurement of suction trucks and incentivizes the local government to maintain ODF
- Commercial financing for suction emptier trucks is often induced based on the demand
- For scheduled FSM services, private providers are often ready to bring in investments for the trucks
- Treatment entails multifaceted methods to manage the septage which leads to variation in the costs incurred to build an FSTP
- A large portion of these costs are met by state and local government budgets such as government programs (AMRUT), state government annual budgets for urban sanitation, 15th commission grants, and funds allocated by ULBs for capital financing.
- To sustain the service chain, operating expenses are considered through sanitation taxes, user charge, tipping fees and focusing on reuse market of treated septage and water
(Figure-3: Funding strategies across the sanitation value chain. Source: NFSSM Alliance)
Augmenting Governmental Transfers with Own Revenue for inclusive sanitation
Municipal bodies have been dependent on state governments to allocate resources. State grants tend to be irregular and unpredictable however, stalling medium-term inclusive sanitation plans. Centrally sponsored schemes for urban development programs, such as AMRUT and Smart Cities usually focus on large cities. Although SBM–U covers all cities, it focusses mainly on solid waste and toilet construction vital services like inclusive Sanitation were not covered by any central or state program for small and medium cities until SBM 2.0 and AMRUT 2.0 were announced in Budget for 2021-22.
As a result, strengthening municipal finances is essential for both creating new infrastructure and improvement on service levels, as well as ensuring their sustainability. This makes it essential that municipal governments also have adequate own resources – with a property taxes being one of the most important sources of own revenue. There is a significant untapped revenue potential of property tax, with studies suggesting India’s current property tax coverage ranges from 63 to 80 percent among states.
Measures to Boost Tax Revenue
- Linking Property Tax Base to Market Prices of Property
- Regular periodic revision of base and rates for property taxes
- Reforms to increase coverage
- Geographic information system (GIS) mapping of properties
- Computerized Billing and Collection
- E-governance Reforms – such as digitizing building permits
Improving Collection Efficiency
Collection Efficiency is defined as the proportion of amount of property tax billed versus the amount collected. Property tax reforms under the JNNURM had mandated cities to increase collection efficiency to 90 percent, although collection efficiency of property tax in many cities ranged from 47 to 74 percent across different states during 2016–19. Many local governments have made efforts to simplify bill generation and payment by introducing online systems, providing incentives for early payment of dues, and amnesty schemes to clear past dues/arrears.
Cost Recovery for Services using Municipal Resources
Reasonable user charges are new reform measures being undertaken in several regions, with the objective of recovering the full cost of operation and maintenance over a period of time. However, Sanitation Services tend to see slower cost recovery, as opposed to water services. Distributing the burden among households and communities (front-end users) and users of treatment plant outputs (back-end users) can help offset consumer tariffs. Non-tax sources and Land-value capture can also serve to enhance local resources.
Financing models tend to be designed separately for conveyance and treatment and are defined around core parameters of capital expenditure (CapEx) and operational expenditure (OpEx), and also depending on the type of service arrangement, and contractual structure a ULB may enter into with partners for provision of services. There are a wide range of potential actors to fund these components, such as government (central/state/local), private sector, philanthropic/CSR organizations, grants, funds raised via taxation or user charges. Relevance of these models is determined by the nature and quantum of funding, availability of markets, financial capacity of ULBs, and commercial viability of the model for the specific requirement of each ULB.
The following matrix describes several common inclusive Sanitation business models and their financing mechanisms prevalent in India and other Low-Middle income Countries (LMICs), that may help ULBs make informed decisions about raising funding to establish/improve inclusive Sanitation services in their cities.