Newsletter and Technical Publications
<International Source Book On Environmentally Sound Technologies
for Wastewater and Stormwater Management>
3.9 Financing (Topic i)
The problem of lack of central financing for environmental
protection, is compounded in many of the developing cities of the region by the
fact that, whilst they are extremely large, the vast majority of their
population live in slums and squatter settlements and so do not make any
contribution to the revenue base available to the city's administrators. The net
result can be that those regions of a country which require the most funds for
environmental management are the least able to raise them. However, in recent
years there have been renewed efforts to devise mechanisms whereby the cities
could be financially self-sustaining, primarily by involving the private sector
in public utility management. This approach has proved to be effective in
recovering operational costs, thereby raising funds for required infrastructure
investment. Other steps taken by local authorities include generating revenue
through sales and property taxes.
3.9.1 Financing sources
The financial mobilization and management program involves the
development, approval and implementation of a revenue improvement plan for
sanitation and sewerage. The strategic plan for each local government will
identify how a local sanitation and sewerage program will be financed. The
strategic plan will also establish a revenue improvement plan, focused
presumably on those sources of funds which are deemed most important for program
financing. Under the new Local Government Code, local government units have the
authority to enact comprehensive revenue codes. While this may generate new,
creative tax options in some jurisdictions, the following nine conventional
sources of funds are the most likely means of financing a sanitation and
sewerage program. It is recommended that national technical assistance and
training efforts concentrate on these nine options:
Internal Revenue Allotment
|∑ Special Levies.
∑ Development Fees.
||∑ Permit Fees.
∑ Development Impact Fees.
∑ Groundwater Protection Fees.
|∑ Surplus Funds
∑ Sewerage Surcharges.
∑ Property Taxes
∑ Build-Operate - transfer/privatization
∑ Other Private Sector Finance
||∑ Beneficiary Cash Contributions
∑ Contributions in Kind
∑ User Fees.
The above is a brief description for each of the sources of
funds and its potential for contributing to the financing of a sanitation and
In Vietnam, locally funded investment projects are divided into
three categories and their approval is sought from the relevant authority as
Investments exceeding VND 200 billion (USD 16 million) are
approved by the Prime Minister's Office.
Investments between VND 30 - 200 billion (USD 2.4 - 16 million)
are approved by the relevant ministry upon authorisation from the Prime
Investments which are less than VND 30 billion are approved
by the People's Committee of the province.
Investments funded fully or partially from foreign sources in Haiphong should
be submitted for the approval of the Prime Ministerís Office, if the investment
exceeds (USD) 5 million. All consulting assignments exceeding 1 billion Vietnam
Dong (VND) 10 billion (USD 0.8 million) are approved by the Prime Minister's
Within the city all investment projects, big or small, are subject to HPPC's
approval. The authority of TUPWS to approve design and costs estimates of projects
is limited to projects not exceeding VND 1 billion. For projects exceeding this
limit endorsements of various service, e.g. the Construction Service, Financial
Service, Land Administration Service, Department of Planning and Investment
(DPI), Department of Investment and Development (DID) shall be sought prior
to the approval of HPPC.
Tariff setting is also approved by HPPC after a clearance of the Tariff Committee
comprised of representatives of the Financial Service, Department of Capital
Fund Management. Service for Labour, Invalids and Social Welfare and TUPWS.
The tariff is subject to endorsement of the People's Council before implementation
by the decision of HPPC.
3.9.2 The problem in financing for developing countries
Lack of financial objectives and revenues
The ongoing restructuring of the economic aspect of the sewerage and
sanitation sector has started slowly, and the target degree of the
self-financing of utilities is still unclear. The officially accepted policy
that the polluter pays, has not materialised, as yet. The government has showed
little interest and attention to the sector requirement, and has taken only a
few measures for overall improvement of the sectorís operations and cost
recovery. Therefore, clear and urgent decision making is about financial
objectives, strategies and policies together with establishment of a sustainable
base for the sector.
The tariffs for waste management and sewerage are too low or either totally
missing in all the utilities in Vietnam. Only in Hanoi is there a surcharge
levied on the water billings for drainage and sewerage cost coverage. The
connections to public sewers are not charged at all, which has led to increasing
government subsidies for operation and investment purposes. In those cases when
a fee has been levied on a particular service, like sludge collection, resulting
revenues are usually disproportionately low in relation to the cost of the
Low priority in budgetary allocations
In 1994, the share of water supply projects including sewerage and sanitation
was about 5 % of the government's capital budget or VND 490 billion out of which
the assumed portion of sewerage and sanitation is only 10 - 20 %. The central
government has a strong control on local investments regardless of stated
policies that underline decentralization of decision making and administration.
Even where decision making was decentralised, local authorities have very
limited financial potential for investment and knowledge to identify and
negotiate external finance.
Due to the substantial and lengthy under investment, the physical facilities
of utilities are often in poor condition and still wearing out without
replacement, let alone new investment. Another factor contributing to high cost,
low revenue operations is the poor standard of managerial skills and development
held by Utility personnel relative to modern practice.
Constraints in funding availability
Apart from insufficient budgetary financing, the sector utilities have been
unable to raise funding from other sources. Reasons are both structural and
managerial. The financial market consists essentially only of four commercial
banks which are now in transition, operating inefficiently and unable to extend
long term loans for investment purposes. New and usually foreign supported banks
and their branches are being established in increasing numbers but they are
mainly for short term financing needs of high growth sectors like industry,
commerce, tourism and foreign trade. Another structural constraint is that
savings mobilisation in Vietnam is low and other specialised financing
institutions like insurance companies and pension funds are either non-existent
or unable to fill expanding need for long term finance.
As for management limitations, utilities themselves are not responsible for
or experienced in raising foreign or local capital for investment. Instead, they
have been awaiting help from local governments, which are dependent on central
government funding and inexperienced in raising finance from alternative
sources. As a result the sector has not succeeded in competing for foreign
Poor financial management and low autonomy
Utilities' financial responsibilities are often limited to basic book-keeping
and periodical reporting for government and statistical purposes, whereas the
core financial function (such as tariff setting, staff remuneration, asset and
depreciation management, capital budgeting, investment financial) have remained
in the hands of urban and provincial authorities. Under these conditions,
managers consider themselves as civil servants with limited initiative and
motivation to improve the revenue base or cost efficiency of operations.
The present accountancy system does not fulfil management requirements and
internal cost accounting and capital budgeting is either insufficient or
non-existing. The large numbers of financial reports currently generated are
mainly for the benefit of centralised planning, various authorities and
statistical purposes. These deficiencies are also a serious obstacle for
obtaining finance from international financing institutions and many other
potential sources as well. To correct the situation, the Ministry of Finance
introduced an accountancy reform in 1995 to be adopted by state owned
enterprises. Its application to the sector utilities is also urgently required
and a precondition for improved financial performance.
Financing of private sanitation
Traditionally, investment plans of government utilities have not included
on-site needs, nor have financiers of the utilities included provisions or
financial means for on-site purposes. In spite of it, households have upgraded
their sanitation systems by relying on savings and borrowing from the informal
financing sector and private lenders. The borrowing cost from private lenders is
high (2-4% /month) and availability of finance is spasmodic.
Due to financial constraints, many of the households which prefer better
sanitation conditions may not be able to improve their situation. Almost all the
respondents in a socio-economic study answered that they prefer to pay by
monthly installments rather than in a lump sum when installing improved
sanitation systems. At the same time, respondents wanted to get financial
support from the government to assist them in improving their sanitation