Models of Successful Water Sector Reform: Identifying the Building Blocks

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1 Models of Successful Water Sector Reform: Identifying the Building Blocks Dr. Allen Eisendrath Senior Infrastructure Finance Specialist Office of Infrastructure & Engineering, USAID/Washington 1

2 Cost Recovery for Water & Sanitation is Very Low! Median tariff Degree of cost recovery US$/m3 Nil Partial O&M Partial capital HIC % 42% 50% UMIC % 22% 39% LMIC % 41% 22% LIC % 9% 3% Global % 30% 30% Source: Foster & Yepes 2

3 WHAT HAPPENS TO INFRASTRUCTURE WHEN COST RECOVERY IS LOW? Defunct wastewater treatment plant, Armenia Broken secondary pipe, Romania Corroded pipes, chlorination station, Armenia Indonesian illegal water connections 3

4 KEY FEATURES OF SUCCESSFUL REFORMS Autonomy and accountability of the water utility Incentives for reform; penalties for failure Progressive performance standards Cost reflective pricing Our cases: Armenia, Australia, Brazil, Bulgaria, Chile, Colombia, Cote d Ivoire, Czech Republic, Egypt, Estonia, France, Germany, Hungary, Indonesia, Jordan, Latvia, Lithuania, Malaysia, Morocco, Netherlands, Poland, Romania, Russia, Senegal, Singapore, South Africa, Spain, Sweden, Thailand, UAE, Uganda, UK, US, Ukraine, Vietnam, Zambia 4

5 OBJECTIVE Autonomy & accountability of the water utility Incentives for reform; penalties for failure Progressive performance standards Cost reflective pricing HOW SUCCESSFUL REFORMERS ACHIEVE THESE OBJECTIVES Complete decentralization Corporatization & corporate governance reform Regionalization An effective regulatory agency Incentive based operating contracts Private sector participation Shift from capital grants to sustainable financing mechanisms 5

6 THREE STRUCTURAL REFORM APPROACHES Local Government Croatia, Czech Republic, Estonia, Germany, Hungary, Lithuania, Netherlands, Poland, Romania, Sweden, U.S. Regional By free will: Czech Republic, Estonia, Germany, Kosovo, Macedonia, Malaysia, Netherlands, Poland, Sweden By law: Armenia, Australia, Chile, Romania, Thailand, UK National Water and Sewerage Corporation Azerbaijan, Egypt, Jordan, Morocco, Cote d Ivoire, Senegal, Tunisia, UAE, Uganda 6

7 DECENTRALIZATION IS THE MOST COMMON REFORM APPROACH. CONDITIONS FOR SUCCESSFUL DECENTRALIZATION INCLUDE: FULL LEGAL TRANSFER OF ASSETS, AUTHORITY & RESPONSIBILITY FOR WATER & SEWERAGE CLEAR, REALISTIC PERFORMANCE STANDARDS & AN EFFECTIVE MEANS OF ENFORCEMENT A MECHANISM FOR FINANCING CAPITAL INVESTMENT CORPORATIZATION OF SERVICE PROVIDERS OPERATING CONTRACTS A MECHANISM FOR SETTING COST-BASED TARIFFS A TRANSITION PLAN 7

8 PLANNING TRANSITION TO COST RECOVERY Rs. per m Year Total Costs, incl. capital Direct Operating Costs Affordability Ceiling Tariff This is a cash subsidy requirement 8

9 CORPORATE GOVERNANCE IS A KEY FACTOR What is Corporate Governance? Corporatization Commercialization Effective board and bylaws Performance framework Best practice examples: Australia, Chile, Senegal, Uganda, United Arab Emirates Ongoing USAID examples: Afghanistan, Armenia, Egypt, India, Jordan, Montenegro 9

10 Who replaces assets when they wear out? Who has the funds to replace assets as they wear out? What are the pressures for capital investment efficiency? What happens to revenues collected for depreciation? THE CAPITAL ASSET PROBLEM: THE STATE BUILDS & OWNS; THE UTILITY OPERATES AND MAINTAINS Surface Water Supply Pumps Groundwater & stream bed supply Storage Pumps Water Treatment Individual Groundwater Wells Distribution Network Elevated service reservoirs W A T E R U S E R S Septic Tanks Sewerage Drains Water Resource Management Bulk Water Supply Distribution Services Sanitation Services 10

11 HOW DO SUCCESSFUL REFORMERS DEAL WITH CAPITAL ASSETS? TWO OPTIONS: Assets become part of a corporatized service provider, and are treated as part of the business Assets are owned by the local government entity responsible for service, and operating contracts are let to use the assets Checking the meters ARE THERE OTHER OPTIONS WHAT WORK WELL? Assets are owned by the local government, and operated by a department of government. As far as I know, nothing else is successful. Assets must be part of the business. 11

12 GOOD EXAMPLES OF THE DECENTRALIZED MODEL Netherlands Decentralize assets & responsibility Form public companies Agglomerate to regional utilities Czech Republic Decentralize assets & responsibility Encourage 2 models: mixed utility or operating utility Establish national standards Agglomerate to regional utilities Introduce Water Extraction Law, charging tax of 2 CZK per m3 extracted Hungary Partially decentralize assets & responsibility Form public companies Establish national standards Agglomerate to regional utilities Serious problems related to asset ownership and financing issues Lithuania Decentralize assets & responsibility Form public companies Create national regulator Establish national standards Agglomerate to regional utilities 12

13 Other regulators, inspectors LAWS, REGULATIONS City Administration (Client) Other regulators, inspectors PERFORMANCE CONTRACTS Example - Corporatised Eastern European water utility with performance based contract with City Bank & audit services Sources of Finance Environmental Responsibilities Domestic Charter & Performance Based Contract OWNERS (multiple shareholders) Board of Directors Corporate Governance Plan OJSC VODOKANAL Management Team Staff VK Business Plan Water & wastewater services Payments Customers Budget Organisations Suppliers Contractors Social & Public Responsibilities Commercial & Industrial 13

14 THE OPERATING AGREEMENT MODEL IN AFGHANISTAN Ministry of Urban Development & Housing Afghan Urban Water Supply and Sanitation Services Company USAID Afghanistan assistance for operating contract designs & implementation in up to 6 SBUs Board of Directors Performance Agreements -Targets - Capex - Operating support - Bonuses Other SBUs Mazar-e-Sharif SBU Heart SBU Kabul SBU Kandahar SBU 14

15 FORMING A REGIONAL OPERATING SERVICES COMPANY: ORISSA, INDIA USAID India assistance for corportization plan, business plan & operating contract designs Orissa State Government owns Board of Directors Orissa Water & Sanitation Services Corporation BACKGROUNDERS PHEO loses $.1 per m3 Revenues don t even cover electricity bills Japan is providing wastewater facilities NRW is between 50% & 75% Operating contract Operating contract Operating contract Operating contract Bhubaneshwar Kathak Puri Other Towns 15

16 ALTERNATIVE SUCCESSFUL MODELS Armenia: Mixed Corporatization & PSP Form two national water corporations & two town corporations Management contracts, followed by a lease for Yerevan Establish national standards & enforcement mechanisms Establish national regulatory agency Australia: Regionalization & Commercialization Establish policy for water reform: National Competition Policy & CoAG Water Strategy Form state water companies Allow regional government to make their own decisions on ownership, regulation and operation Establish national standards & enforcement mechanisms Each state establishes own regulatory agencies & method UK: Regionalization, Corporatization & Divestiture Form regional companies Sell public ownership Establish national standards & enforcement mechanisms Establish national regulatory agency & method Chile: Regionalization, Corporatization & Divestiture Form eight regional companies Sell public ownership Establish national standards & enforcement mechanisms Establish national regulatory agency & method Establish water market Thailand: Regionalization & Corporatization Form two corporatized regional companies Establish management & staff incentive systems 16

17 Miljakovac 2 SYSTEM TECHNICAL OPTIMIZATION ZONAL MANAGEMENT EXAMPLE OF BELGRADE WATER & SEWERAGE COMPANY There are 35 consumption units in the Belgrade company. 27 are monitored by installed equipment + 8 occasionally monitored by mobile equipment. To reduce losses, systematic water accounting was installed in each division, with a manger for each division 17

18 Water balance at KOTEŽ KMM 3 Water inflow Invoiced water Water loss Measure unit m3/day l/s m3/day l/s m3/day Quantity 3004,21 34, ,20 25,08 837,01 l/s/km /km 4,54 3,28 l/s 9,69 1,26-27,86% in relation to measuring at KMM3 18

19 Pipe break repair 150 mm level 19

20 After repair, consumption reduced by 37 liters/sec 20

21 PHOTOS TAKEN JULY 2004 Non-operational Yerevan WWTP Old, oversized water pump Poorly paid but technically competent staff Extensive corrosion and leakage 21

22 THE NEW ARMENIAN WATER SECTOR BEFORE THE REFORM: Armenia Water Company with many branches; all decapitalizing; most with about 30% to 40% O&M cost recovery. THE REFORM: State Water Committee Public Services Regulatory Comission State Water Committee Armenia Water Company covers 40 towns & 300 villages; now under 4 year management contract; 100% state-owned Armenia Water Company Yerevan Water Company under 10 year lease; 100% state-owned Lori Water Company 51% State / 49% municipality Armavir Water Company 51% State / 49% municipality Shirak Water Company 51% State / 49% municipality 22

23 WHAT IS THE FINANCIAL RECOVERY PLAN? ARMENIA WATER COMPANY TRANSITION TO COST RECOVERY Water Cost, USD per m Total Costs, incl. capital Direct Operating Costs Affordability Ceiling Tariff Year 23

24 WHAT ARE THE RESULTS AFTER 7 YEARS? Progress in O&M Cost Recovery Percent of O&M Cost Recovery in YWC AWC Lori Shirak Nor Akunk Full Economic Cost Company

25 Reform is working, but it is clearly a direct result of the private management contracts that USAID and World Bank supported: RESULTS OF THE YEREVAN MANAGEMENT CONTRACT Change Water Produced 431 mil. m3 354 mil. m3-18% Gravitational Water Supply 183 mil. m3 212mil. m3 16% Energy Supply 240 mil. m3 124 mil. m3-48% Continuity of Service 7.2 hours/day 18.4 hours/day 2.6 times Collection Efficiency 21% 79% 3.8 times Customer Metering 2% 91% 45 times 25

26 and the Armenia Water Company management contract is also succeeding: SUMMARY OF AWC MANAGEMENT CONTRACT Performance Collections ( million AMD) 1,834 2, % Collection efficiency (%) 36% 63% 75.0% Customers making payments 53,000 80, % Hours of service (average per day) % Electricity used (million kwh) % Water disinfected (% supplied) 68% 80% 17.6% Liters of fuel used per vehicle 3,800 2, % Average monthly staff salary 25,000 49, % 2004 consumption 2004 salary 26

27 FINANCIAL CONDITIONS OF AWC IS CLEARLY IMPROVING, BUT STILL WEAK Armenia Water Company Working Ratio (expenses/revenues) Working Ratio Contract Year 27

28 SUMMARY OF SUCCESSFUL REFORMS Reforms are succeeding and widespread! No single model dominates but there are solid building blocks. Success is driven by: better utility governance, establishing an accountable, autonomous & competent management team, setting a framework with progressive targets and incentives sustainable, grant/loan-based financing mechanisms Piecemeal efforts are not worth the effort Key message for donors, shareholders & lenders:»incentivize Reform. Rs. per m PLANNING TRANSITION TO COST RECOVERY Year Total Costs, incl. capital Direct Operating Costs Affordability Ceiling Tariff 28