STEP 1: THE ECONOMIC, POLICY AND INSTITUTIONAL ENVIRONMENT
2.2 Economic environment 23. Promoting cost recovery through user fees as part of a donor supported project requires an understanding of the country economic conditions (Table 2.1), in particular average household wealth. This is most easily noted as Gross Domestic Income (Gross Domestic Product) per person or potentially, where remittances from overseas workers are significant, Gross National Income per person. This level of economic wealth is already recognised in AfDB‘s classification of RMCs and is an important predictor of possible levels of cost recovery. There is clearly an assumption that GNI per person is a fair reflection, or rather an approximation, of average wealth and may not be representative. However it is normally the most accessible approximation where countries may not have more accurate data. 24. To develop a project or programme it is therefore necessary to understand the breakdown of the population of a country between rural and urban and between formal urban and informal, illegal, slum and shanty urban. National statistics services might, in addition, give an indication of average household wealth for each of these groups which gives a first estimate of the scale of each service challenge as well as possible levels of affordability. The Gini coefficient describes the extent to which wealth is equally shared or skewed towards the rich in any country. This coefficient together with the relative proportions of the population in each of the main categories gives an idea as to the potential for cross-subsidies. 25. A third critical indicator is the ‗Taxation to GDI‘ (GDP) ratio. This ratio not only illustrates the potential for supporting water and sanitation services through direct taxation (through budgetary support to the water and sanitation provider) but most importantly the likelihood of the sustainability of this source of finance. Some countries have achieved good water and sanitation services through fiscal support with only limited user fees. However, such successes are unusual, particularly in low-income countries and this approach does not assist in the IWRM goal of appropriate sharing of scarce resources based upon ‗water as an economic good.‘ It is noted that the extent of the informal, untaxed, economy is not captured in the tax to GDI ratio. This is a further indication of the likelihood that sustainable services must depend upon user fees rather than societal contributions through taxation.
10