The World Bank estimates that every dollar spent on water supply and sanitation in Africa yields up to seven dollars in return. Some analyses put it at $21. If a hedge fund offered you those numbers, you would think about putting a reverse mortgage on your house. Today, somewhere between 2.2 and 4.4 billion people still lack reliably clean water and sanitation.
If returns are so high, why do we not see more investment? Answering this question is critical right now. With USAID cut and Chinese loans to Africa falling off from their 2016 peak, two of the biggest external funding pipelines into African infrastructure are simultaneously collapsing.
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Mohenjo-Daro was a city in the Indus Valley that flourished around 2500 BCE. The settlement had over 700 wells and a dedicated sewerage system. The city featured covered drains running beneath the streets of residential neighborhoods. No one in Mohenjo-Daro had electricity or any idea what a germ was. Many of them enjoyed sanitation infrastructure that modern residents of Lagos or Karachi can only dream of.
Every single country on Earth today is wealthier than Mohenjo-daro was. Pipes, pumps, gravity, and sand filtration are tools that ancient civilizations mastered independently. I have written about many of these systems on this blog before, including Venice’s ingenious cisterns, Archimedes’ screws and Persian wheels, and China’s Grand Canal. These civilizations solved water distribution under far more severe constraints than any modern government faces.
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The underlying issue is rooted in mechanism design. The incentive structures surrounding the pipes are broken in specific and identifiable ways. Private capital cannot capture the vast positive externalities of public health interventions without the presence of a highly capable state, a state capable of enforcing tariffs, executing eminent domain, maintaining complex assets over decades, and ensuring macroeconomic stability. In what ways do states fail to provide this environment?
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Developing economies face extreme budget volatility. In a flush year a government builds infrastructure. In a lean year maintenance is the first thing cut. In the next flush year they rebuild the thing they let fall apart. The money is there and is systematically misallocated toward the visible and away from the essential.
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Tanker operators illegally siphon water from unmetered municipal taps and sell it to households at enormous markups. Utility water costs roughly $1 per 1,000 liters. Tanker water sells for $20 or more. The arbitrage is extraordinary. The profits flow upstream into a network of police and politicians who protect the scarcity that makes the business model work.
When tanker operators siphon water from unmetered taps they physically depressurize the distribution network. Low pressure means more leaks and more contamination from groundwater infiltration. The theft makes the utility fail harder and creates more demand for tankers. As we all know, once a rent seeking equilibrium is established, the parties benefiting from it will actively resist any reform.
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In 1993, the Phnom Penh Water Supply Authority was a catastrophe. The city was emerging from decades of war and genocide. Only 20 percent of the city had connections at all, and water flowed for just 10 hours a day. 72 percent of the water was non revenue water. It was lost to leaks or stolen through illegal connections.
Into this mess walked Ek Son Chan, a young Cambodian engineer appointed as Director General. Over the next two decades he executed an incredible institutional turnaround.
Chan replaced corrupt managers with qualified engineers. He got rid of unmetered taps. Every single connection received a meter and was billed. The old system of manual billing was replaced with a computerized system, which cut down on low level employees giving out free water and receiving kickbacks. Bill collection rates went from 48 percent to 99.9 percent. These changes were intensely unpopular, and Chan faced fierce resistance from rent seekers, from freeloading customers to his own employees. He established an incentive system based on bonuses among the workers, introduced an internal discipline system with a penalty for violators, and set up a discipline commission for all levels of the organization to deal with corruption.
From the article:
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