Managing change in urban water utilities in developing countries
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1 Managing change in urban water utilities in developing countries Presented By: Michael Funcke-Bartz, GIZ Date: 2011/05/16 1
2 About Michael Funcke-Bartz Born in 1955, Germany Studies of Geography / Spanish, graduated in 1980, University of Düsseldorf/Germany research on urban development in Latin America Since 1985 specialist for advanced professional training programs and dialog in international development cooperation aiming at professionals and decision-makers from public and private sector Since 2010, Head of Division Sustainable Technologies, Industrial and Urban Development Deutsche Gesellschaft für f Internationale Entwicklung (GIZ) 2
3 Structure of German development cooperation Federal Ministry of Economic Cooperation and Development (BMZ) Technical Cooperation Financial Cooperation 3
4 About GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit in in a nut shell non-profit company owned by the german federal government product of merger between DED, GTZ and InWEnt on international cooperation enhancing capacities of decision makers and professionals from public and private sector, promoting networking and dialogue headquarters in Bonn and Eschborn, Germany around staff members worldwide estimated turnover of EUR 1.9 billion as at December
5 GIZ TOCICO Intern. Conference 2007 Using TOC to solve Water Supply Problems in Shanty Towns and fullfill the UN Millenium Goal No. 7 Adolfo Held, Germany 2010 "The Theory of Constraints as applied to Solid Waste Management in four cities in Africa - A Case Study" Antoine van Gelder, Barry Urban, South Africa 5
6 Reality of water utilities / Andean Region unsustainable unsustainableurban urbanwater services services poor financial basis poor operation & management inappropriate qualification of personnel low recovery of operating costs wrong priorities for measures & investments rigid standards lack of maintenance insufficient transfer from gov. for societal resp. high fluctuation limited attractiveness of public sector poor service limited ability / willingness to pay low enforcement political interference 6
7 Peru Some facts about Peruvian water utilities 49 public utilities, 1 concession 13 large utilities > connections, 22 medium > average provision of water 15h/day unaccounted-for water (technically/commercially): approx. 45% in 2009, out of 50 utilities 23 were making economic losses 34 of them could not make any investments, neither in 2008 nor
8 InWEnt/GIZ capacity building strategy in Peru Scaling-up TOC in inpublic water services Phase 1: TOC-groundwork in utilities ( ) Phase 2: Throughput thinking in sector project ( ; 2010) Phase 3: TOC in regulatory framework ( ) 8
9 Phase 1: TOC-groundwork in utilities Strengthening management capacities in in Peruvian water utilities Initiation of process of continuous improvements Joint development of utility strategy Identification of constraints of the water utility Exploitation of constraints with available resources as far as possible Application of throughput thinking to generate funds for major activities change management workshops 6 Continuation of exploiting constraints with available resources 9
10 Phase 1: TOC-groundwork in utilities Process of of change management workshops with internal consultants using one utility as as real case for application capacity building programme with 2 x 5 utilities x 5 internal change agents introduction of teamwork across hierarchy for joint development of corporate philosophy and implementation of 5S process development of systemic understanding of the utilities reality and analysis of constraints identification of self-financing measures that generate cash flow that later can be utilized for smaller investments development of unconventional solutions exploiting available 10 resources as much as possible
11 Phase 1: TOC-groundwork in utilities Investment strategy with no noinicial liquidity Surplus Operating expenses Project Investments
12 Phase 1: TOC-groundwork in utilities Outcome 1: 1: Change of ofmindset clarification of goals & corporate identity teamwork & cross hierarchy cooperation sense of responsibility for the whole & identification with utility awareness of importance to keep utility clean and tidy speeding-up of internal processes & questioning of regulations customer orientation 12
13 Team of change agents, utility Huaraz, Peru 13
14 Phase 1: TOC-groundwork in utilities Booklets explaining corporate identity & 14 promoting continuous improvements
15 Phase 1: TOC-groundwork in utilities Results of continuous improvement process 15
16 Phase 1: TOC-groundwork in utilities Outcome 2: 2: Cash-flow increase (average %) recategorization of users (private vs. commercial) official connection of clandestine users revised strategy to deal with tardiness facilitation of mechanisms for payment of water bill selling new connections where easily feasible insourcing & contracting of temporary workers if necessary for throughput questioning of planned investments & search for alternative solutions 16
17 Unconventional solutions (1) Increasing throughput of of Chimbote purification plant & extension of of network Team of change agents 17
18 Unconventional solutions (1) Initial objective: Provide 4,500 households with drinking water Proposal made by consultants (sanitation experts): Construction of 2 new presedimentation ponds of 70,000 m³ / each. Construction of a new treatment plant with a capacity of 120 ltrs. / sec. $ 1,000,000 $ 770,000 Construction of a new distribution network $ 860,000 Total investment $ 2,630, Government financing
19 Unconventional solutions (1) Consultants Construction of 2 new presedimentation ponds of 70,000 m³ / each. Construction of a new treatment plant Network expansion and connections $ 1,000,000 $ 770,000 $ 35,000 Total investment $ 1,805,000 SEDACHIMBOTE - Team Cleaning of pond Nr. 1 $ 40,000 Additional pipelines and height increase of flocking channels Network expansion and connections $ 3,000 $ 35,000 Total investment $ 78,000 Difference: $ 1,727,000 Social benefit: water service expansion to 1,500 houses Throughput: 1,500 houses = approx. $65,000 / year 19
20 Unconventional solutions (2) Water provision in in informal settlements 20
21 Unconventional solutions (2) Strategic buffer Strategic buffer SUPPLY + PRODUCTION Buffer to protect the capacity constrained resource DISTRIBUTION NETWORK = SYSTEM CONSTRAINT Buffers to protect the points of consumption 21
22 Unconventional solutions (2) House water tanks 22
23 Unconventional solutions (2) Savings in investments SUPPLY + PRODUCTION Production 16,667 m³ / day Production 10,667 m³ / day Savings in production 6,000 m³ = 36% DISTRIBUTION NETWORK Supply 20 h / day Final distribution 10,000 m³ / day Supply 2 h / day Final distribution 10,000 m³ / day Losses 667 m³ = 4 % 23 Small constraint 10 sectors 10,000 households Consumption per household 1 m³ / day Consumption 10,000 m³ / day Consumption 10,000 m³ / day
24 Phase 2: Throughput thinking in sector project Programme of ofrapidly impacting measures (Programa de demedidas de derápido impacto, Perú) A B C D Training of consultants working for sector ministry Identification of constraints of the water provision system Application of throughput thinking for priority projects that elevate constraints Project prioritization and bundeling with a previously defined maximal budget Process of workshops with ministry, utilities and external consultants 24
25 Phase 2: Throughput thinking in sector project Step 1: 1: Understanding the system UDE UDE UDE RC RC RC RC RC UDE 25 = undesirable effect RC = root cause RC
26 Throughput thinking in project prioritization Project 2 Contribution $ 100,000 $ 200,000 1 $ 50,000 3 CF CF Step 2: 2: Investment strategy with limited liquidity CF CF CF 26
27 Throughput thinking in project prioritization Effects of of prioritization of of measures and investments based on on TOC identification of measures that do not require investments elimination of projects from the wish list that do not make sense prioritization of projects that elevate/eliminate main constraints and have the strongest positive economic impact Sequenzing of priority projects according to cash flow 27
28 Throughput thinking in project prioritization Working against the mainstream... consultants like big and perfect solutions that increase their fee mayors like to implement big projects that increase their visibility bankers prefer larger projects to reduce their transaction costs donors prefer investments in infrastructure 28
29 Phase 3: TOC in regulatory framework Scaling-up: Capacity building programme with Peruvian regulator for the water sector I Training of internal experts assessing performance / planning of water utilities II TOC-based revision of system of performance indicators III Application of throughput thinking for investment planning in utilities D New standards for investment prioritization and fixing of tariffs 29
30 Tell me how you measure me... Measuring performance in inwater services International Water Association (IWA) 140 indicators International Organization for Standardization ISO World Bank International Benchmarking Network for Water and Sanitation Utilities 42 main indicators and 37 sub-indicators Peruvian regulator SUNASS 38 main indicators concerning service provision and management 30
31 Tell me how you measure me... Benchmarking among Peruvian water utilities 13 indicators, only 1 related to 31 economic criteria (tardiness)
32 Interaction regulator utility / Peru Utility develops master plan for investments Regulator assesses performance and level of achievement of projects defined in the master plan Regulator validates master plan and determines tariff increase Utility implements projects defined in the master32 plan
33 Current interaction regulator utility / Peru Partial achievement leads to subsequent rejection of original tariff increase Regulator assesses performance and level of achievement of projects Not all scheduled investments are implemented as planned Utility develops master plan for investments Increase of endebtedness limiting financial scope Utility implements projects defined in the master33 plan Unclear priorities and lack of reliable data bring forward questionable projects Regulator validates master plan and determines tariff increase Scheduled investments exceed available resources
34 Current interaction regulator utility / Peru Partial achievement leads to subsequent rejection of original tariff increase Regulator assesses performance and level of achievement of projects Not all scheduled investments are implemented as planned Utility develops master plan for investments Increase of endebtedness limiting financial scope Utility implements projects defined in the master34 plan Unclear priorities and lack of reliable data bring forward questionable projects Regulator validates master plan and determines tariff increase Scheduled investments exceed available resources
35 Working process GIZ - SUNASS Leverage point: Project prioritization Unclear priorities and lack of reliable data bring forward questionable projects Scheduled investments exceed available resources Paradigm shift: Prioritization of projects according to positive economic impact & available resources Joint analysis of reality of two utilities Joint development of CRT blueprint as basis for analysis and data gathering Testing of CRT blueprint and guidelines 35 Institutionalization
36 Desired paradigm shift Ultimate objectives Improvement of living conditions Environmental protection Necessary condition ECONOMIC SUSTAINABILITY Project A Project B Project C E F G K J M R O Q H I L 36 N S T
37 Conflicting interest & priorities 2 national./ intern. standards environmental protection social responsibility political / societal pressure 1 risk prevention economic viability donors 3 4 regulator 37
38 Current challenges Principles for fixing tariffs economic efficiency financial viability social equity simplicity transparency no discrimination Behaviour of project evaluators to be on the safe side, they stick to environmental and social goals they inflate obligatory projects refering to specific regulations / standards they polished financially not viable projects offsetting potential social benefits 38
39 Current challenges Secure environmental and social standards Pressure to Approve projects without cost recovery Pressure to Subsidize basic infrastructure services Secure social peace Be a good project evaluator Symtomatic conflict Utilities are running on deficit basis Systemic conflict Be a responsible political leader Secure utilities economic viability Pressure to Focus on selffinancing projects Pressure to Not to subsidize basic infra. services Secure longterm financial stability 39
40 Lessons learnt The access to drinkable water is a fundamental public good; nevertheless, these services have to be economically viable in order to be sustainable (or have to be subsidized) Public water utilities have a lot of potentials that must be exploited properly before injecting fresh money Continuous improvement processes are important for strengthening management and increasing the absorptive capacities for subsequent investments Indicators applied by regulators / banks can be a main constraint if not applied in a differentiated and throughput oriented manner TOC can help to make more out of the available scarce resources 40
41 Outlook 1. We are still far away from being mainstream in infrastructure management 2. Scaling-up needs trickling down to SME level 3. More TOC practitioners with public sector thinking are key for scaling-up 4. Capacity building is crucial and requires strengthening of multiplier institutions that serve as hubs 41
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