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Digital Payments Matter More for Public Services: 3 Reasons Why

This Friday, 22 March, is World Water Day. Surely that’s worth celebrating: Why don’t you raise a glass? It shouldn’t take too long; if you walk less than half an hour for clean water, you’re still closer than about 800 million people. If your water is piped to your tap (as all of ours should be), you’re safer than 3.1 billion people worldwide. And if your water doesn't contain human waste, consider yourself lucky.

A water spigot in rural Tanzania. Photo: Alessandra Argenti, World Bank
A water spigot in rural Tanzania. Photo: Alessandra Argenti, World Bank

The world is running behind in its goal to achieve universal access to clean water and sanitation by 2030, under the Sustainable Development Goals. One of the biggest challenges in achieving universal, sustainable access to clean water is how to make water and sanitation utilities financially viable, especially in developing countries. Worldwide, many utilities struggle to provide high-quality service, are prohibited from charging cost-reflective tariffs and fail to collect what they are owed. In 2017 in Nigeria, it cost the 33 water utilities that reported data an average of 39 cents to sell a cubic meter of water. In return, they were paid an average of just 16 cents — less than half the cost of providing water.

A 2019 report from CGAP and GSMA, “Testing the Waters: Digital Payments for Water and Sanitation,” documents water and sanitation providers’ experience with digital payments, specifically mobile money. While some of the benefits and challenges it describes are specific to the water and sanitation sectors, others are relevant for public providers of all types. According to GSMA's Akanksha Sharma: "The growing involvement of mobile operators in payments for public services is a positive development. Digitising utilities and other service providers gives mobile operators the opportunity to drive mobile money adoption at scale."

In many contexts, water and sanitation are public services, similar to transportation, health care and education. Providers of those services — whether government entities or private firms granted a limited monopoly — are vested with a public trust and are responsible for serving rich and poor alike. They need to provide uninterrupted service to nearly everyone, keep prices affordable while remaining financially sustainable and be accountable to taxpayers who fund their operations. Balancing these priorities is often an overwhelming task, which is why digital payments are particularly valuable for public service providers: They facilitate end-user subsidies, create much-needed cost savings and enable accountability.

  1. End-user subsidies. Peter Abelson literally wrote the book on Public Economics, but he admits that service pricing often comes down to politicians and agencies choosing “prices that reflect what the public may bear politically that have no obvious economic explanation.” On one hand, this is good. Politicians are responding to demands for equity, and no one should go bankrupt paying for public services (although, sadly, many do). On the other hand, fixed, universal prices for public services can be regressive and damaging: regressive because rich citizens end up spending a lower percentage of their income on the service and damaging because the service provider is likely to run deficits that will be paid for through increased taxes or service cuts.

    Subsidizing poorer end-users makes setting higher (cost-recovering) prices easier, but only if administering that subsidy is cheap and frictionless. Digital payments, combined with national IDs, make this possible. Take a look at the Bogota transit system. Using a newly installed smartcard payment system and Colombia’s national poverty index, the city government offered cheaper fares to 160,000 poor residents. This led to a 20 percent increase in informal workers’ hourly income. Such a widespread, seamless system cannot function without digital payments.
     
  2. Cost savings. Cost savings are of utmost importance to water and sanitation providers. Lori Gonnu of 1001 Fontaines told us, “Providers are not going to increase the prices, so the only way to be sustainable is to sell more or reduce costs.” Ghana Water Company Limited spends three cents to collect every dollar of revenue, primarily on staff, paper and transport and printers. Sanitation providers report even higher levels. Loowatt in Madagascar estimated that cash collection costs made up 15 percent of its unit economics and offered corresponding 15 percent discounts to any customer who pays with mobile money. Collection costs are low-hanging fruit for public providers because they add no value to the service and can actually detract from the customer experience. Digitizing collections is an important step toward financial sustainability.
     
  3. Transparency. Fraud, corruption, overcharging: These are the banes of public service providers. Demand for some goods is inelastic. When you need water, you really need it. And the people providing these goods, particularly in rural or informal areas, are often underpaid. The combination of temptation and opportunity can lead to fraud. Anyone who takes advantage of customers or providers by overcharging for or under-providing a public service erodes trust in public institutions.

    Digital payments, combined with digital billing or automated water dispensers, allow providers to separate the service from the payment. One small water enterprise reported that, in sites where it had not adopted digital payments and automated service, 22 percent of its water was pumped but never paid for. The ability to monitor and audit transactions gives public providers much more powerful oversight, which can help to catch misappropriation and incentivize good management.

When public entities lapse financially, important services go under-provided, and the public suffers. Digital payments can help public entities provide better managed, more efficient services, but they are just a tool. Without a focus on end-user value and financial sustainability, without management dedicated to optimizing efficiency and adapting to new innovations, that tool is useless. Combined with effective governance and the right model, however, digital payments can be transformative. Many organizations need digital payments, but public organizations need them more.

Resources

Publication

A growing number of water providers are experimenting with digital payments to reduce operational expenses and streamline service delivery. This paper extracts lessons learned from 25 water providers across Africa, Asia, and Latin America.

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