Albania Public Expenditure and Institutional Review Restructuring Public Expenditure to Sustain Growth Sector related presentations-water Tirana March 15, 2007
Main messages 1. Despite improvements, water sector access and service quality are poor and below required standards 2. Large inefficiencies and low cost recovery are creating an increasing fiscal burden, 3. The current subsidy scheme rewards inefficiencies and does not create incentives to improve performance 4. Substantial savings (about 0.8% of GDP) are possible through tariff reforms, reduction of inefficiencies and improvement in central government subsidy allocations
Topics/Outline 1. Sector spending and financing 2. Sector outcomes 3. Explaining poor outcomes 4. Facing the challenge
1- Water sector spending and financing Increasing spending in the sector reflect rising dependency on budgetary transfers Government spending has increase five fold since 2000 Ratio of operating outlays to capital spending rising to unusually high levels The sector dependency on central government transfer has increased over time 6,000 5,000 4,000 3,000 2,000 1,000 - Financing operating costs through tariffs and GOA subsidy (Lek million) 2000 2001 2002 2003 2004 2005 Repayment of arrears GOA operating subsidy (less arrears) Collected Tariffs Operating cost (incl. depc)
2- Water sector outcomes: Access and service quality remain low Despite improvements, access to adequate water supply remains low The situation is worse in terms of sanitation 100 80 Access to Water and Sanitation Albania and ECA (2004) Low service quality: 13 hrs on average/day compared to 19 hrs in Europe and Central Asia (ECA); Poor water quality compliance 60 40 20 0 Urban Rural Total Urban Rural Total Access to piped water supply Access to sanitation Albania ECA Average
2- Water sector outcomes: Inequities in access persist In both urban and rural areas, the poorest are less likely to have access to services. Percent of Population Served with Running Water Inside Dwelling Percent of population served with running water inside dwelling Albania, 2005 Differences are larger in urban than in rural areas. The Northern Region has the lowest access to water and sanitation. % Served.2.4.6.8 1 0 2 4 6 8 10 deciles of real per capita consumption, in New Lek Source: LSMS 2005 Urban Fitted values Rural Fitted values
3- Explaining poor outcomes: Inefficiencies Non-Revenue Water (NRW) at 69 percent on average is very high compared to 38 % in ECA But variations across utilities: 15 utilities: NRW>70%, 8 utilities: NRW< 30% the rest: NRW between 30 and 70 % 100 90 80 70 60 50 40 30 20 10 0 NRW: Albania and ECA Countries, % Ta jikista n Lithuania Russian Federation Ukraine Estonia Latvia Kazakhstan FYR of Macedonia Moldova SAM Georgia Kyrgyz Republic Croatia Azerbaijan Albania Armenia Romania
3- Explaining poor outcomes: Inefficiencies Technical losses (leaks) account for over 50 percent of NRW with the remainder being commercial losses 1,3 50 Water Produced vs. Water Sold in 15 Urban Utilities 1,2 0 0 1,0 50 900 750 600 450 300 150 0 Pukë WSSE Sarandë WSSE Vau Dejës WE B. Curri WE Kruje WSSE Berat WSSE Lezhe WSSE Pogradec WSSE Korçë WSSE Elber WSSE Shkodër WSSE Permet WE Vlorë WE Durrës WSSE Tiranë WSSE l/c/d Water Production - (lcd) Water Sale - (lcd)
3- Explaining poor outcomes: Inefficiencies Less than 20 % of household connections are metered Under investment in Operations and Maintenance: 0.4 percent of asset values compared to recommended levels of around 3 percent. Overstaffing: 11 staff/1,000 connections compared to an ECA average of 4 staff/1000 connections. Maintenance as a % of Fixed Asset Value Staffs Per 1000 Connections 12 Spending on maintenance as % of asset value 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Recommended level Durres Fier Lezhe Saranda Weighted average of four cities 2002 2003 2004 10 8 6 4 2 0 Georgia Armenia A z erbaijan Kyrgyz Republic azakhstan Tajikistan Ukraine Russian Federation M oldova Albania
3- Explaining poor outcomes: Cost Recovery 1. Despite increases in tariffs, water rates still do not cover either O&M costs, much less the full cost of supply 2. Significant cross-subsidization increased consumption and higher production costs Tariff Structure (2004) Lek/m3 Percent of O&M costs Percent of full cost recovery Current average residential tariff 27 52% 36% Current average budget institution tariff 60 115% 81% Current average commercial tariff 80 153% 108% Weighted average tariff 41 79% 56% Operation and maintenance cost recovery tariff (including depreciation) Full cost recovery 74 52
120% 100% 80% 60% 40% 20% 0% 3- Explaining poor outcomes: Cost Recovery Collection ratios are the lowest of measured ECA countries One of the lowest average operating cost coverage ratios in ECA Operating Cost Coverage Ratios Collection Ratios (%) 120 100 80 60 40 20 0 Albania Armenia Ukraine Romania Moldova Lithuania Estonia Latvia Azerbaijan Georgia Kazakhstan Kyrgyz Republic ussian Federation Tajikistan Albania G e o r g ia B u lg a r ia Arm enia Belarus R om ania Latvia Estonia Ukraine Lithuania Kazakhstan Azerbaijan Poland T a jik is ta n Russian Federation M o ld o v a Kyrgyz Rep. Czech Rep.
4- Facing the challenge: Improving access within fiscally constrained resources 1. Achieving the MDG goals requires annual investments of around 0.7 percent of GDP; more than double current levels of investment (at 0.3 percent of GDP) Need to generate sufficient net income to finance some of the needed investments 2. Eliminating the inefficiencies could generate almost 0.8 % of GDP in savings, annually Potential (annual) Savings from Eliminating Hidden Costs Source of potential savings (annual) Lek millions A- Collection failure (increase collections from 72% to 95%) 835 B- Under pricing (raise tariffs to cover O&M from 79% to 100%) 857 C- Excess losses (reduce NRW from 69% to 20%) 5,042 Total Savings 6,734 As share of GDP 0.8%
4- Facing the challenge: Increasing operational efficiency of utilities Increase collection rates from 72 percent of bills to at least 95 percent; Expand coverage: develop electronic customer databases where possible and remove/regularize illegal connections; Introduce universal metering (currently at 20 % of residential customers) along with management and administrative improvements; Develop plans to reduce technical losses based on identified priorities in each utility Rationalize utilities staffing from 11 to 6 staff/1,000 connections; Implement energy efficiency measures such as improvements to pumping regimes
4- Facing the challenge: Raising residential tariffs and establishing a targeted subsidy for the poor Raise residential tariffs to cover O&M cost and depreciation (from the national average of Lek 27/m3 to Lek 52/m3). In the long-term, let tariffs recover the full cost of supply (including the cost of capital); Replace the current universal subsidy by a scheme that targets the poor possible adaptation of Ndihma Ekonomike. Affordability of proposed tariff increases (% of monthly household income) Tariff Lek/m3 Minimum income Low income Medium income High income Current average residential tariff 27 3.2% 2.0% 1.1% 0.7% O&M cash cost recovery tariff (no depreciation) O&M cost recovery tariff (with depreciation) 41 4.8% 3.0% 1.7% 1.0% 52 6.1% 3.9% 2.2% 1.3% Full cost recovery 74 8.7% 5.5% 3.1% 1.9%
4- Facing the challenge: Improving incentives for efficient management Phase-out operational subsidies to utilities in the medium-term; and transfer these savings to investments Allocate investment subsidies from central government based on sector priorities and utility performance Clarify governance and financing arrangements between utilities, local and central governments and then accelerate the asset transfer Expand MoPWTT monitoring and benchmarking efforts to cover all utilities and communes and provide performance data for this purpose
4- Facing the challenge: Strengthening sector planning, budgeting and oversight 1. Strengthen coordination between central and local government in budget planning and execution: Incorporate all foreign financed projects in the planning and budgeting exercise Link investment allocations to the annual and multi-year objectives as spelled out in the sector s strategic planning 2. Develop objective criteria for allocating investments by targeting areas of greatest need and areas of future economic growth, such as tourist areas, in addition to rewarding utility performance