As governments realise the impossibility of being able to construct underground sewerage systems for smaller towns, the importance of faecal sludge management (FSM) has assumed salience. It's a welcome development, though its operationalisation poses several challenges.
Given the dominant narrative on the role of private sector and Public Private Partnerships (PPPs), it is likely that governments and aid agencies will end up designing PPP-based FSM models. This is likely to be a bad idea.
Let's consider the risks. There are three major challenges that need to be addressed.
1. The sludge treatment facility. The PPP mindset will be to call tenders and bid out the construction and maintenance of treatment facility to private providers.
This is unlikely to work. The sludge treatment facility faces at least two uncertainties. The first is about reliable supply, and the second is about the fee it can charge. Both are dependent on factors beyond the control of any private operator, which also run into political economy and state capacity constraints.
In the circumstances, it will be necessary for the government to assume the upfront risk and costs and construct and operate the treatment facility for some period till it is able to stabilise supply and demonstrate a model for commercial viability. As a starting point thumb rule, the treatment fee can be priced to ensure full cost recovery on all operating expenses. The government will have to subsidise the capital expenditure.
2. The sludge removal provider. The PPP mindset will be to let this service be provided by the market as a pure commercial service. But this too is unlikely to materialise. The provider faces the uncertainty of being able to get assured demand from households, and also commercially viable enough removal fee from the household and disposal price at the treatment facility.
Therefore, the provider will have to be de-risked with some combination of concessional loan (to buy the sludge removal vehicles), viable enough treatment fee, and assurance on household supply (active enforcement by public health staff).
It may be tempting to try out structures like advance market commitment to incentivise the suppliers. But I don't think it is likely to work without addressing the problems at the household level, especially in the early stages of the market development.
3. The households. Currently they dispose off their sludge informally into rivers or swamps at a very low cost. A full cost-recovery pricing by the sludge removal providers is most certain to limit the market development.
A simple public subsidy on removal, perhaps restricted to categories of households based on property tax or water charges, and transferred directly to the service provider may be an appropriate strategy.
In this arrangement, the government will have to bear the upfront cost of building treatment facilities, concessional loans to providers, a recurring subsidy to some categories of households. The first two will certainly have to come from state or central governments and the third can perhaps be shared with the local government.
Overtime, as successful models are demonstrated and markets mature, all these subsidies can and will need to be be pruned down. The commercial market supply of treatment facility and sludge removal as services are likely to materialise in due course. But removing the subsidy on households will be politically fraught.
In addition, governments will have to play an active role in overcoming the co-ordination failures involving assured supply for the treatment facility and the sludge removal provider and compliance by households with this formalised sludge removal system. There is role for an aggregator, offered either as a private service or preferably as a standardised public platform, to help bridge these co-ordination failures.
A typical town may have 3-5 sludge providers with 2-3 machines each. An aggregator platform can integrate the work-flows involving provider matching, vehicle dispatch, household sludge removal scheduling and payment, treatment facility fee payment etc.
Any attempt to gloss over these challenges and search for free lunches by shifting risks and costs to private businesses or households is certain to backfire and deter the development of markets in FSM.
But realistically, the evolution of this market will be a messy and iterative process, with its share of failed models, failed businesses, and wasteful subsidies which become difficult to phase out. The best that can be done is to keep the aforementioned points in mind and design prudent (as against ideologically influenced) models.
The public policy objective should be to demonstrate private participation based models in some small cities and towns and thereby de-risk and mainstream them.
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