BLENDED June 2018 Building the Market for FINANCE Urban Sanitation in Ghana COUNTRY Ghana GPOBA PROJECT YEARS 2014–2018 PROJECT PARTNERS Government of Ghana; Metropolitan and Municipal Assemblies; financial institutions. OVERVIEW latrine; in GAMA, only one-third have access to In Ghana, output-based aid (OBA) was used to a flush toilet.3 Sanitation has become a growing improve affordability for households in crowded problem, with periodic outbreaks of cholera and the low-income areas of the Greater Accra Metropolitan second-highest open defecation rate among African Area (GAMA) to invest in improved household toilets. countries.4 Private investment in sanitation at the OBA was provided as a subsidy to reduce the up- household level is limited, with issues of affordability front cost for toilets and stimulate demand, which in and access to finance to cover the upfront cost. turn made it more attractive for financial institutions to enter this market. BUILDING A MARKET FOR TOILETS In 2013, the World Bank and the government of DEVELOPMENT CHALLENGE Ghana approved the GAMA Water and Sanitation Recent economic growth in Ghana1, 2 has been Project, linked to Ghana’s 5-year Strategic accompanied by rapid urbanization, putting a strain Environmental Sanitation Investment Plan adopted on infrastructure and the provision of household in 2011. The project was designed to support basic services. Among competing demands for improvements of the water distribution network as public investment (including education, health, well as waste collection, treatment and disposal transportation, electricity, and water), sanitation services, with emphasis on low income communities has not been prioritized. Nationwide, only 23 (LICs).5 Besides infrastructure investments, the percent of households have a toilet or improved project sought to facilitate private investment in improved sanitation. Technical assistance was 1 GNI per capita has increased from US$ 340 in 2000 to 3 World Bank, 2013. US$ 1,380 (2016) and national poverty levels have declined to roughly 24 percent (2010). 4 “Ghana ranked 2nd in open defecation,” Daily Guide Africa, 19 November 2015 2 World Bank. DataBank: World Development Indicators. (2017); Bank Data Poverty Report using GLSS-VI/SSAPOV/GMD. 5 World Bank, 2013. This learning note is part of a series developed by the Global Partnership on Output- Based Aid (GPOBA) to analyze and showcase experiences where results-based finance (RBF) has been used to leverage private finance through a blended finance approach. provided to (i) build the capacity of small and discussions found that homeowners were reluctant medium enterprises to supply toilets; (ii) help develop to borrow for an investment that does not generate the market for financing household sanitation income. Likewise, MFIs were accustomed to lending investments; and (iii) support financial institutions for income-generating businesses and lacked interested in partnering with the project to develop experience with home improvement loans. suitable savings and loan products. Two measures were taken to stimulate demand for The high cost of improved household toilets toilets and for borrowing, if necessary: (i) the subsidy suitable for densely populated areas raised issues was raised to 70 percent in LICs, accompanied by of affordability. Hence, a US$4.85 million GPOBA publicity that the cost of toilets had been reduced; grant was provided to pilot the use of OBA subsidies and (ii) the MMAs undertook stricter enforcement to improve affordability of household sanitation in of by-laws requiring each house to have a these communities.6 The OBA grant was initially toilet, reminding registrants to keep paying and designed to subsidize half the cost of 6,600 toilets periodically imposing fines to pressure landlords to in compounds in LICs of GAMA. It was also assumed comply. that about US$7.8 million in microloans would be provided by non-governmental organizations (NGOs) Steps to make the supply of financing more and other microfinance institutions (MFIs) operating accessible included: (i) workshops with MFIs to in Ghana, and a revolving fund would make funds ascertain their concerns and inform them about available at low interest rates. successful experiences in other countries with lending for sanitation investments; (ii) providing The OBA grant was channeled in the form of a data on toilet registrants showing that the majority partial subsidy to private toilet suppliers to cover 50 had micro and small businesses that would percent of the total cost for a standalone toilet with make them suitable clients of MFIs; (iii) signing a a digester. Consistent with the principles of OBA, memorandum of understanding with interested the grant was paid only after toilet installations had financial institutions; (iv) providing technical been inspected by engineers engaged by the project assistance in developing savings and loan products and verified (on a sampling basis) by an independent suitable for sanitation investments; and (v) getting verification agent. The household’s contribution was MMAs to sign up registrants for a savings or loan generally made through the local Metropolitan or program to complete their payments. Further, Municipal Assembly (MMA), and paid to the supplier proposals are under consideration for potential as an advance. additional credit enhancements, including (a) a guarantee fund to share a percentage of losses During implementation, however, realities on the on toilet loan portfolios, and/or (b) an incentive ground and market failures presented challenges scheme to provide a bonus per installation resulting to the underlying assumptions made at project from a loan that financial institutions could use to inception. While interest in household toilets in offset losses and costs. the GAMA was high, ability and willingness to pay remained below expectations, despite the 50 RESULTS percent subsidy on the cost of toilets. A rapid results The partial OBA grant for toilet installations in initiative by the MMAs in 2015 registered over 5,500 LICs was the primary instrument to leverage applications for toilets in the targeted LICs; however, savings from households—by making the cost more by the end of 2017, only 3,000 of the registrants affordable—and commercial finance from the MFIs— had fully paid their contributions, with another 1,000 by keeping the loan size low enough for beneficiaries making periodic payments through their MMAs. Most to qualify for credit. The initial 50 percent subsidy of those who paid had mobilized the funds from their by itself was insufficient to generate adequate tenants as advances on rent, from family members, demand to reach project targets. Demand or their business activities. accelerated in response to a combination of (i) Further investigation challenged the assumptions raising the subsidy; (ii) marketing; and (iii) increasing that people would borrow if needed to supplement enforcement of regulations. their own funds and that affordable microloans Lowering the cost of the toilets by increasing the would be available. In reality, both demand and subsidy rate immediately affected the willingness supply for financing toilets were lacking. Focus group to pay of the target population: average monthly beneficiary contributions went up by 43 percent 6 World Bank, 2013. in the first quarter of 2018 over the previous 6 FIGURE 1. Financial Flows Structure World Bank (GPOBA) OBA Subsidies and Implementation Support Min. of Sanitation/ Project Coordination OBA Subsidy Unit Payments for Desludging OBA Subsidy Payment for Sanitation Facilities Independent Verification Agent Sanitation Contractors User Contrubution for Facilities Microfinance Desludging Provider Service Providers Loan Debt Loan Service Payment Landlords Payment for Desludging Fees Tenants months. Installations likewise picked up, increasing toward attracting financial institutions to enter by 270 percent from 191 installations per month this market. Previously, the only loans available for during the second half of 2017 (with a declining toilets were through NGOs and MFIs with a social trend) to 705 per month in January-February orientation. These depended on grants and low- 2018. This increase was facilitated by engaging cost funds to make toilet loans available at below- larger contractors who were better able to clear market interest rates. The project sought to mobilize the backlog of orders and service the increase financial institutions able to commercialize lending in demand—and who also were better than for toilets on a larger scale. Market information the smaller suppliers at marketing to mobilize showing that most registered project beneficiaries additional beneficiaries in the areas where they had micro and small businesses made them were operating. Monthly installations had risen to attractive to MFIs as an entry point to gain more over 1,000 from under 200 in the second half of potential clients for their normal business of savings 2017, and as of June 2018, 7,685 toilets had been and loans for income-generating activities. Technical installed in LICs as a result of this project. assistance for product development and partial guarantees were important incentives to address In addition to attracting larger contractors, the concerns regarding the costs and risks. In addition, demand stimulus was also an important step the subsidy on the cost of the toilet helped make borrowing more affordable by reducing the amount Financial institutions were further incentivized by the that had to be borrowed, thus offsetting the cost of inspection and verification service provided under Ghana’s high interest rates. the project as a condition for OBA grant payments, as well as to ensure technical quality of installations and customer satisfaction. They were concerned SUCCESS FACTORS that customers would stop repaying loans if toilets OBA subsidies played an important role in stopped working, but lacked the technical capability developing the market for financing investment in to inspect and solve problems. sanitation by making the cost more affordable to LICs, thereby increasing demand and willingness Although the project provided technical assistance to pay and borrow, and by keeping loan sizes small to the small suppliers that initially came forward to enough for them to access loans from MFIs. implement the project, engaging larger contractors was critical to be able to install larger numbers of Market information, technical assistance, and toilets in a timely manner and to achieve economies credit enhancements are also important to offset of scale through bulk installations in a given area in the costs and risks that tend to deter MFIs from order for costs to fall over time. Reducing costs is developing new products for non-income generating important both to phase out subsidies in targeted investments. LICs and to make toilets more affordable to households that do not qualify for subsidies. References Steel, W.F. (2017). Final Report: Developing the Market for curated/en/937461468249311280/Ghana-Greater-Accra- Financing Sanitation Investment in Ghana. Accra: Ministry Metropolitan-Area-Sanitation-and-Water-Project of Sanitation and Water Resources, Consulting Services for World Bank. (2013). Official Document – Commitment Paper Ghana Household Sanitation Financing. on OBA Urban Sanitation Facility for the Greater Accra World Bank. (2013). Ghana Greater Accra Metropolitan Metropolitan Area (GAMA). Washington, DC: World Bank Area Sanitation and Water Project (English). Washington Group. DC ; World Bank Group. http://documents.worldbank.org/ ABOUT Part of the World Bank Group, the Global Partnership on Output-based Aid (GPOBA) provides innovative financing solutions that link funding to actual results achieved. Our results-based financing GPOBA (RBF) approaches provide access to basic services like water and sanitation, energy, health and education for low-income families and communities that might otherwise go unserved. By bringing together public and private sector funders to maximize resources, and designing effective incentives for service providers to reach underserved low-income communities, we give people the chance for a better life. Visit www.gpoba.org to learn more.