The cost of apital: costs of financing capital expenditure for water and sanitation

Le coût du capital: le coût du financement des investissements en eau et en assainissement

Richard Franceys, Arjen Naafs, C. Pezon () and Catarina Fonseca
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C. Pezon: IRC Burkina-Faso - IRC Burkina-Faso

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Abstract: This briefing note explains how the use of capital has a cost, even when the money comes as a grant or low interest loan. It investigates the cost of financing capital expenditure, usually referred to as the Cost of Capital, and explains why it is one of the key components which make up the total costs for providing water and sanitation services that last. Highly subsidised costs of capital with very long repayment periods may fail to be recognised as a cost, particularly when the time frame falls beyond the scope or years of involvement of most planners and politicians. Conventional water and sanitation, which consists mainly of piped water and sewerage systems, can be described as 'capital intensive', requiring very significant capital investment. Non-networked, often rural, water and sanitation is also capital intensive although to a lesser degree. Over time, systems of non-networked water and sanitation infrastructure are gradually being replaced through development with networked, more complex piped systems with a resulting increase in the requirement for capital. Governments are borrowing money to finance infrastructure. The use of scarce resources, in this case 'capital', also referred to as 'finance', comes with a cost. At present in the rural water and sanitation sector, much of this cost of capital investment is incurred by government or donors... Whoever pays it, the costs exist and will be paid by somebody. Even "soft" loans with low (subsidised) costs and interest rates lower than1% can lead to significant annual financial required expenditures when the overall repayment period and the size of the project are taken into account. Governments and donors would benefit from understanding these costs, and their implications. Consumers, and civil society on behalf of users/consumers, will also benefit from understanding the total costs of services (irrespective of who actually pays what part of that total). This briefing note outlines some of the key issues involved in understanding the cost of capital and its components, and describes how the concepts relate to rural and peri-urban water and sanitation.

Date: 2011-03
Note: View the original document on HAL open archive server: https://cnam.hal.science/hal-02012114
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Published in 2011

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