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United Nations Environment Programme
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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
∑ Credit
∑ 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 sewerage program.

In Vietnam, locally funded investment projects are divided into three categories and their approval is sought from the relevant authority as follows:

  1. Investments exceeding VND 200 billion (USD 16 million) are approved by the Prime Minister's Office.

  2. Investments between VND 30 - 200 billion (USD 2.4 - 16 million) are approved by the relevant ministry upon authorisation from the Prime Minister's Office.

  3. 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 Office.

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 service.

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 development assistance.

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 facilities.

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