IRC Ghana, in conjunction with major stakeholders in the water, sanitation and hygiene (WASH) sector in Ghana, is considering various innovative ways of financing for Capital Maintenance Expenditure (CapManEx) for WASH facilities.
Published on: 12/10/2012
To this end, IRC Ghana, through its WASHCost and Triple S Projects, and in partnership with the Community Water and Sanitation Agency (CWSA) and other stakeholders, has formed a committee to work on the initiative.
The committee is tasked to develop innovative mechanism options to financing systems and point sources in the country when there are major breakdowns.
What is CapManEx
Capital Maintenance Expenditure (CapMaEx) is the expenditure incurred on occasional large maintenance costs. It is used for the renewal, replacement, rehabilitation and expansion of a system. These essential expenditures are required to fix a system when it breaks-down. This cost is mostly not very regular but it constitutes the largest proportion of total cost of expenditure cost.
According to the Chairman for the (CapManEx) Committee, Mr. Emmanuel Gaze, who is also the Director for Technical Services at CWSA “Capital maintenance is the cost communities will incur in the maintenance of a major part of their system when it breaks down”.
He stated that “at CWSA we have a corporate strategy which enjoins communities to operate and maintain their own systems. Under the strategy, 70 percent of the revenue they generate is supposed to go to normal operations and maintenance, then 20 percent is supposed to be set aside for capital maintenance and the remaining 10 percent is set aside for sanitation”.
The need for Innovative mechanism for CapManEx
However, judging from the income generation and expenditure patterns of the communities in operating and maintaining the facilities, the funds raised are not often adequate for them to set aside the 20 percent required for capital maintenance. This, Mr Gaze, attributes to the inability of communities to generate the required income from the sales of water, while another factor could be due to mismanagement of funds generated by system managers.
“We have realized that many of the communities are doing well with operating and maintenance of the facilities. However, when it comes to capital maintenance which has to do with replacing major parts or expanding the system after its design period, communities are not well able to do that at all” Mr. Gaze said.
He observed that this has resulted in many small town water systems and water point systems breaking down for a long time without repairs due to lack of funds.
Mr. Gaze said it is this concern that necessitated the formation of the CapManEx committee, with some other stakeholders in the sector, to look at ‘how best we can mobilize finance for major maintenance and also expand facilities”.
Proposed Innovative Mechanisms
Mr Gaze stated that the committee’s work has progressed substantially. “So far the committee has identified key areas that could be developed further to finance capital maintenance of systems and point sources. These are Insurance (Deposit and Risk Insurance) and Pooled Funding (Fund Mutualisation).
Explaining the mechanisms, Mr. Gaze said with the Deposit Insurance mechanism,managers of the systems will pay the 20 percent meant for capital maintenance out of their total sales to an insurance company for it to be invested. After a certain period of time if there were no major damage that required the money to be withdrawn, the total deposit with some interest could be recouped by the system management.
The system managers and the insurance company will look at the interest accrued on the deposit over the period under consideration. Any interest accrual is shared it between system managers and the insurance company according to the terms of arrangement .
The Risk Insurance mechanism involves insuring some vulnerable component parts of the system that are prone to breakdowns. These include the electro-mechanical parts (eg. the submersible pump and its starters).
“These are the most risky parts of the system because they are easily affected by power outages” Mr. Gaze said.
The insurance companies will assess the parts that are insurable to decide on the premiums the communities will have to pay and then negotiate on the payment timeframe (monthly or yearly). Once this is done, whenever there is trouble with any of the insured parts the community can fall on their insurance company to replace the broken parts. This involves mainly major components of the system.
“Looking at the cost of the systems, the premium to be charge for insuring them is not expensive and not beyond the income power of the systems” Mr. Gaze said. .
The third innovative mechanism that the committee considered is Fund Mutualisation. With this, communities with water facilities will pool their funds together depending on their levels of investment and the system. This will be handed over to a fund manager who will manage and invest the funds. At any point in time when a system breaks down or requires expansion, the fund manager will engage the requisite specialties to assess the system to see how much it will cost to expand the system or replace those major components. Funds will be provided by the fund manager to get the job done.
The fund manager will render accounts and declare profit (if any) at agreed time intervals (quarterly, bi-yearly or yearly). For the purposes of transparency, anytime a community undertakes an activity that draws fund on the pool, the other member communities must be informed.
Next line of actions
According to Mr. Gaze, the CWSA has the responsibility to sensitize the communities to buy into these ideas since “this it is the most feasible method to ensure capital maintenance financing“
The insurance companies will be expected go out to the communities to solicit for the business from the system managers. The communities would also have the assurance that the insurance companies will pay for the repair, replacement some major components of their systems when they break down.
Conclusion
It is the expectation of IRC Ghana and the major stakeholders in the sector that these innovative financing mechanisms for capital maintenance will be acceptable by the communities to provide financing for systems and help reduce downtimes of facilities when they break-down. This is ultimately aimed at making water, sanitation and hygiene services accessible and sustainable to intended recipients.
Compiled by;
Victor Narteh Otum
DCO-IRC Ghana
October 12, 2012.
