Actor Matt Damon makes it sound like a great idea to give small loans to poor families so they can get access to improved water and sanitation. After all, he is the co-founder of the NGO, promoters of the WaterCredit loan:

“Gary, my partner, pioneered this idea of, you give people loans. So, for instance, in a place like India in a slum, the municipality will be pumping water right through the street … If you could give them a loan to connect directly to the municipality, so you pipe the water directly into their house, a 75 Dollar loan, they use that time that they were wasting waiting in line for water – working, they pay off the loan at rates of like 98 percent, 99 percent. And they’re using that time in a more productive way.”

He makes it sound easy and appealing. And it is appealing. I’m sure Matt Damon, who is known for ardently supporting social causes, sees this as a real solution. The trouble is, his model doesn’t tackle the fundamental problems – like piped water actually being in the slum in the first place, which it normally isn’t. Damon also doesn’t contemplate the fairness of asking the poor to pay for this human right with a loan. Will the poor want to pay? Will they even be able to pay? This idea of microfinance for water and sanitation may make an already unfair state of affairs even unfairer.

Earlier this year, I had the pleasure to present a paper at the University of Pula, which was later picked up by Microfinance Focus in a nice article. Since then, the ideas presented in that paper have mushroomed and matured into a more thorough, comprehensive and analytical (and 158.1% larger) piece, which has now appeared as a Discussion Paper in the MPIfG’s series.

This new paper again asks whether microfinance can really be an effective tool for ensuring poor people get access to water and sanitation. In doing so, it questions whether it should in fact be necessary to make the poor pay for these public goods. After all – weren’t these goods provided in today’s rich countries (from the 19th century onwards) by the state, using progressive taxation and transfer mechanisms? Like the previous one, this paper argues that goods like water and sanitation throw up serious collective action problems in their provision, which make it difficult (or impossible) to ensure that everyone gains access when private/individualist means of financing are used.

If microfinance loans are the means of finance, households must each individually find it in their financial best interest to take on a loan for water and sanitation improvements. This paper explores more deeply the reasons why many households will not find it in their best interest – individually – to take the loan and make the investment. First, it is difficult for many to recognise the benefits of improved water and sanitation, especially given the standard of education and the long-term nature of many of the benefits. Second, many of the benefits are well-spread throughout the community (if I stop going for “number 2” in the vacant lot, all the neighbours benefit), so why should one household want to finance the improvement for all? Third, most of the benefits are non-pecuniary, or at least not directly monetary, so loan repayment (in money form) will be difficult.

The paper also offers a deeper exploration of the pitfalls encountered in practice by projects using microfinance for water and sanitation, building on case studies from India and Vietnam. These problems are related to politics (water is a political resource, too!), the capacity of public providers (which isn’t strengthened by such projects), the values held by households (which don’t conform to rationalist assumptions), and equity (why should the poor pay? why so much?).

Aside from probably being destined for failure as a business model, microfinance for water and sanitation is also unfair – no matter how appealing Matt Damon may make it sound. Given how well many developing countries do succeed at supplying middle- and upper-class areas via public sector enterprises, suggesting in turn that microfinance is the solution for poor areas merely institutionalises a system of “public provision for the rich, self-help for the poor”. Worse yet, the poor would pay an additional premium in the form of interest on their loans; depending on the country’s microfinance sector, around 25 to 130 percent. That seems quite the opposite of a human right.