noTE no. 52 ­ MAR. 2010 GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Improving water services in a postconflict situation 56743 The case of the management contract in Kosovo Philippe Marin, Josses Mugabi, and Manuel Mariño C ountries emerging from a devastating meters had been broken or stolen. Although most conflict need to rapidly restore access households had access to the water network, half to basic water and sanitation services of these were not registered as customers, and for their population. While donors usually most of those receiving water bills failed to pay stand ready with generous reconstruction them. With revenues too low to cover operating packages, the conflict may have left local costs, the situation had become unsustainable. institutions ill equipped to make good use of those resources. The traditional solution, involving technical assistance delivered by Why a management contract? international consultants, has often proved disappointing. An alternative is to bring in a For donors and other relief agencies, the tradi- professional operator for a few years through a tional route in postconflict reconstruction has management contract. In postwar Kosovo the been to provide large amounts of money to help sizable improvements achieved under a three- restore basic services through emergency repairs. year management contract for water services This is often combined with technical assistance in the Gjakovë-Rahovec area suggest that it from foreign experts. Such an approach has several can be a promising approach for postconflict pitfalls. Responsibility for civil works rests with situations. local teams often ill equipped to carry out an investment program. Even when outside experts The conflict of the late 1990s between ethnic are there to help, coordination problems tend to Serbs and ethnic Albanians left municipal arise because these outside experts focus on super- water services in Kosovo in a critical situation. vising civil works and delivering specific outputs Among the most severely damaged areas was that (such as reports or training) and have no stake in containing the towns of Gjakovë and Rahovec the program's ultimate success or failure. and 56 surrounding villages, with a combined population of about 200,000. Before the conflict The United Nations Interim Administration this area had had satisfactory water services: Mission in Kosovo (UNMIK) recognized that customers received continuous service, they were this approach might not work in the challenging all billed on the basis of metered consumption, context of Kosovo. The issue was not just the and water losses were estimated at about 25 urgent need to rehabilitate the physical infra- percent. But the devastation of the infrastructure structure. A whole new water utility had to be during the war, followed by the exodus of many capable employees and a lack of maintenance, took a heavy toll. Philippe Marin is a senior water and sanitation specialist in the World Bank's Middle East and North Africa Region. By the end of 2000 supply interruptions were Josses Mugabi is a young professional at the World Bank. frequent and water quality had deteriorated. Manuel Mariño is a lead water and sanitation specialist in Water losses had more than doubled, and most the World Bank's Europe and Central Asia Region. Helping to eliminate poverty and achieve sustainable development P U B L I C - P R I VAT E I N F R A S T R U C T U R E A D V I S O RY FA C I L I T Y through public-private partnerships in infrastructure 2 put in place, from establishing the customer data- water and wastewater enterprises, controlled base to organizing the staff and implementing the HSR, while the municipalities retained owner- right operating procedures. Operational perfor- ship of the infrastructure. mance would have to be significantly improved to make the investment sustainable--which meant, Under the proposed management contract, the among other things, increasing the revenue stream private operator would take full control of opera- through better billing and collection procedures tions, maintenance, and billing and collection in and reducing water losses. the area. It would also be in charge of an emer- gency repairs investment fund established through A management contract with a competent foreign a World Bank grant, with responsibilities that operator could combine all these objectives in would include identifying, selecting, contracting one package. In addition, the weak governance for, and supervising the civil works to be carried and uncertain political environment in postwar out. The contract had two main objectives: Kosovo made bringing in a professional operator improve services for the customers, and estab- for an interim period to help in managing the lish a viable public utility capable of operating services an attractive option. UNMIK therefore on its own by the end of the contract. A super- decided in 2001 to go forward with this option. visory board was created, with representatives But two questions remained: Would a compe- from KTA and the two municipalities. It had the tent private operator be willing to take the risks authority to adjust customer tariffs and monitor involved in signing a performance-based contract the management contract (with the support of in such an uncertain environment? And would it an international consultant). A number of tech- be able to attract qualified managers to live and nical deliverables were specified as outputs in the work in Kosovo? contract, representing the systems needing to be in place to establish a working water utility.1 The contract design The management contract was performance based, with a fixed fee plus a performance bonus As part of a broad reform conducted under a based on the achievement of selected performance UN-mandated recovery program, seven regional targets. The fixed fee portion of the contract, water companies were established in Kosovo--one which also formed the basis for international of them, Hidrodrini Radoniqi (HSR), to cover the competitive bidding, was $1 million. The perfor- area around Gjakovë and Rahovec. The Kosovo mance bonus was initially capped at $0.6 million. Two main Trust Agency (KTA), established by UNMIK to The international tender launched by KTA proved assist in the administration of publicly owned successful: the contract was awarded in December objectives: improve services TAble 1 and Targets and actual performance under the Kosovo management contract establish First year Second year Third year a viable First Second Third Fourth Fifth Sixth public Indicator baseline semester semester semester semester semester semester utility Customers metered (%) 10 25 (47.6) 40a (51.53) 60 (65.72) 80a (80) 90 (85.5) 90a (90) Customers in cadastre (%) 50 80 (n.p.) 90 (n.p.) 95 (100) 95 (98) 98 (100) 98 (100) Collection ratio (%) n.d. 30a (64.4) 60a (61.27) 70a (76.93) 80a (90.33) 90a (78.4) 90 (81.29) Operating ratio n.d. n.a. 0.7 (1.07) a 1.2 (1.18) a 1.5 (1.06) a 1.06 (1.1) a 1.06a (1.2) Nonrevenue water (%) n.d. 50 (70) 50 (65.44) 40 (57.75) 35 (59.14) 59 (59.6) 59 (61.9) Supply chlorinated (%) 80 100 (100) 100 (100) 100 (100) 100 (100) 100 (100) 100 (100) Source: Project files. Note: Figures in parentheses are actual performance levels. a. Performance target with incentive payment. n.a. = not applicable; n.d. = no data; n.p. = no progress. Improving water services in a postconflict situation 3 2001 to a German utility company, Gelsenwasser nated in U.S. dollars. The sharp devaluation of AG. The contract was initially for two years but the U.S. dollar during the contract meant a signif- was later extended for a third year, with the total icant reduction in the amount available in euros. cost reaching $2.1 million. Some of the rehabilitation work on the network had to be scaled down or discontinued because of lack of funds. Sizable gains despite scaled-down investment The foreign operator left in January 2005, once the contract was completed. Plans to expand The During the three years of the management this successful public-private partnership experi- improvements contract the private operator achieved sizable ence to other regional utilities in Kosovo failed improvements in the operational and financial to materialize. The political situation in Kosovo were sizable-- performance of HSR (table 1). Full chlorination has prevented the adoption of a clear, long-term and were of the water distributed was achieved in the first strategy for the sector, and many urban water months, and a continuous supply of potable water systems are in a critical situation. sustained was gradually reestablished in both towns thanks even three to the emergency rehabilitation works identi- Since the end of the contract, HSR has been oper- fied and carried out by the private operator. All ated as a purely public utility, remaining under years after contractual outputs were delivered on time. A crit- ical element was the updating of the customer the supervision of KTA until 2008, when the the end of the Kosovo government took over. HSR is one of the cadastre, which had become obsolete because of best regional utilities in Kosovo and has sustained management population movements. Half the actual customers were not registered initially, but an updated GIS- most of the improvements achieved by the private operator under the management contract. In 2008 contract based cadastre was in place by the end of the the share of customers billed stood at 99 percent second year. Much progress was also made in and the metering ratio at 94 percent, higher than metering coverage, which increased from about 10 the levels achieved by the end of the manage- percent to 90 percent by the end of the contract. ment contract and well above the averages for the seven regional utilities (92 percent and 80 The municipalities remained responsible for percent, respectively). The utility has maintained disconnecting nonpaying customers reported by full continuity of service, though it has made no the private operator.2 While this arrangement further progress in reducing the level of nonrev- worked well in Rahovec, the municipality in enue water. HSR is the only regional water utility Gjakovë usually failed to diligently prosecute the in Kosovo to achieve a potability compliance rate illegal connections and payment defaulters iden- of more than 99 percent. It has sufficient reve- tified by HSR. This prevented the operator from nues through tariffs to fully recover its operating meeting the collection target in the third year. costs, and has the highest coverage in Kosovo (95 Even so, the collection ratio increased from 64 percent). And while the bill collection ratio fell to percent in 2001 to 81 percent by the end of the 71 percent in 2008, HSR still had the second-best contract, with the average time taken to collect performance among regional utilities, above the payments dropping from 13 months to just 4. All national average (65 percent). this led to a dramatic turnaround in the finan- cial situation of HSR. The utility went from an operating loss of about 250,000 in 2001 to an lessons learned operating profit of more than 100,000 in 2004, even with no increase in tariffs during the contract The Kosovo experience shows that introducing a period. professional outside operator through a manage- ment contract--to operate the system while at Progress in reducing nonrevenue water fell short the same time implementing urgent repairs--can of expectations, however. Only 10 percent of be a viable and attractive option for a postcon- customers were metered when the operator took flict situation. over, and the initial baseline for nonrevenue water proved to be grossly underestimated. Rather than Despite the inherent difficulties of the postcon- the 50 percent initially estimated, nonrevenue flict environment in Kosovo, the management water actually exceeded 70 percent. But the private contract broadly achieved its original objectives. operator was unable to reduce this by more than Both the quality of services and revenue collec- about 8 percentage points over the three years of tion improved substantially, though some other the contract. This was in part because of prob- areas of efficiency improvements fell short of lems in executing the investment program, which original expectations. By the end of the contract was financed by a World Bank grant denomi- HSR had reached a much better financial and 4 operational situation--with no increase in tariffs · Establishing the baseline from which to measure for customers. Local staff had received extensive progress is always a problem for public-private training, and all systems and procedures neces- partnerships. But it is particularly so in a post- sary to run a modern water utility were in place. conflict situation, where operational data are Given the difficult context, it is unlikely that the usually nonexistent and most meters have same level of improvements would have been been destroyed. That the baseline for nonrev- achieved under a more traditional technical assis- enue water proved to be grossly underestimated tance approach. The total cost of the manage- suggests that it would have been better to wait ment contract was equivalent to about $3.50 until after the first year of operation to deter- per inhabitant a year, in line with what a more mine the true level, under the oversight of an traditional service contract would have cost. independent technical auditor. Most important, the improvements proved to be sustainable, even three years after the private · The frequent rotation of staff from the foreign operator had left. operator was a recurrent concern for the public counterparts. There is no simple solution to this The Kosovo management contract offers lessons problem, because it is hard to find competent for consideration by policy makers interested in professionals willing to live in a postconflict area replicating it elsewhere. Some are linked to the for more than a few months. Yet a management contractual design, others to the special challenges contract was probably the "least inefficient" solu- posed by postconflict areas. tion in this context, since the foreign operator had much more at stake than it would have had · Transferring to the private operator, through under a simple technical assistance contract-- an emergency work fund, the responsibility for forcing it to ensure that suitable personnel were making decisions on repairs and implementing always in place to manage the systems. the corresponding civil works proved to be a good idea. It allowed more flexibility and speed Notes in carrying out the investment program and 1. These deliverables included manuals on standard operating ensured that investment choices were driven by procedures; financial management and procurement systems; operational needs. But with the budget for the customer information systems, including a GIS-based cadastre and work fund established in U.S. dollars and the computerized billing system; a staff training plan; and water quality control systems. costs essentially in euros, the devaluation of the U.S. dollar limited the ability of the operator 2. Only nonpaying customers not qualifying under a social pro- gram of subsidized tariffs targeted to the poor were proposed for to achieve the targeted improvements in oper- disconnection. ational efficiency. References · Realism should prevail when setting targets Marin, Philippe. 2009. Public-Private Partnerships for Urban Water under short-term management contracts, Utilities: A Review of Experiences in Developing Countries. Trends and particularly in a postconflict situation. Dealing Policy Options Series, no. 8. Washington, DC: PPIAF. with high levels of physical losses can be diffi- Marin, Philippe, Jean Pierre Mas, and Ian Palmer. 2009. "The cult, as repairing leaks in a highly deterio- Johannesburg Management Contract." Water Sector Board Working Note 20, World Bank, Washington, DC. rated network usually takes many years. It is Mariño, Manuel, Jack Stein, and Francisco Wulff. 1998. better to focus on "low-hanging fruit" where an "Management Contracts and Water Utilities: The Case of Monagas impact can be made in a relatively short time, State in Venezuela." Public Policy for the Private Sector Note 166, such as improving bill collection. And in the World Bank, Washington, DC. GRIDLINES Kosovo case there was no point in setting a high target for bill collection, since PPIAF and World Bank. 2006. Approaches to Private Participation in Water Services: A Toolkit. Washington, DC: World Bank. Gridlines share emerging knowledge on the responsibility for prosecuting Ringskog, Klas, M. Hammond, and A. Locussol. 2006. "Using public-private partnership and give an over- nonpaying customers rested with Management and Lease-Affermage Contracts for Water Supply: view of a wide selection of projects from How Effective Are They in Improving Service Delivery?" Gridlines the partner municipalities. various regions of the world. Past notes can be series, no. 12, PPIAF, Washington, DC. found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involve- ment in infrastructure. The views are those of the c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA authors and do not necessarily reflect the views or Phone (+1) 202 458 5588 FAx (+1) 202 522 7466 the policy of PPIAF, the World Bank, or any other P U B L I C - P R I VAT E INFRASTRUCTURE ADVISORY FACILITY GeneRAl eMAIl ppiaf@ppiaf.org Web www.ppiaf.org affiliated organization.