WATER GLOBAL PRACTICE DISCUSSION PAPER Regulation of Water Supply and Sanitation in Bank Client Countries A Fresh Look Discussion Paper of the Water Supply and Sanitation Global Solutions Group, Water Global Practice, World Bank NOVEMBER 2018 Yogita Mumssen, Gustavo Saltiel, Bill Kingdom, Norhan Sadik, and Rui Marques About the Water Global Practice Launched in 2014, the World Bank Group’s Water Global Practice brings together financing, knowledge, and implementation in one platform. By combining the Bank’s global knowledge with country investments, this model generates more firepower for transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org/water or follow us on Twitter at @WorldBankWater. Regulation of Water Supply and Sanitation in Bank Client Countries A Fresh Look Discussion Paper of the Water Supply and Sanitation Global Solutions Group, Water Global Practice, World Bank NOVEMBER 2018 Yogita Mumssen, Gustavo Saltiel, Bill Kingdom, Norhan ­ ­ Sadik, and Rui Marques © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover design: Jean Franz, Franz & Company, Inc. Contents Acknowledgments v Abbreviations vii Executive Summary 1 Objectives of this Discussion Paper 1 Background 1 WSS Regulation in Low- and Middle-Income Countries 1 Regulatory Objectives 2 Regulatory Forms 2 Regulatory Functions 3 Strengthening Regulation: The Way Forward 5 Notes 7 Chapter 1  Introduction 9 Chapter 2 An Overview of Traditional WSS Regulatory Models and Applicability for Low- and Middle-Income Countries 11 Note17 Chapter 3  Regulation in Low- and Middle-Income Countries: View from Key Literature 19 3.1 Regulatory Objectives 19 3.2 Regulatory Forms 22 3.3 Regulatory Functions 26 3.4 Aligning Institutions and Incentives with the Enabling Environment 33 Notes 36 Chapter 4  WSS Regulation in Practice in Low- and Middle-Income Countries 37 4.1 Regulatory Objectives 37 4.2 Regulatory Forms 38 4.3 Regulatory Functions 44 4.4 Aligning Institutions and Incentives with the Enabling Environment 60 Notes 63 Chapter 5 Prioritizing Key Challenges of WSS Regulation in Low- and Middle-Income Countries 65 5.1 Context Matters 65 5.2 Regulatory Objectives 66 5.3 Regulatory Forms 66 Regulation of Water Supply and Sanitation in Bank Client Countries iii 5.4 Regulatory Functions 66 5.5 Regulation Fit for Purpose: What Does it Take? 68 5.6 Strengthening Regulation: The Way Forward 70 Notes 73 Appendix A 75 Appendix B 77 References 95 Boxes 2.1. Approach to Water Sector Regulation in New South Wales 15 3.1. Link between WSS Regulation and WRM 23 ­ 4.1. Effectiveness of Multisector Regulators: Inconclusive Evidence 43 4.2. Regulation of Quality of WSS Services in the State of Ceará, Brazil ­ 52 4.3. Pro-Poor Mechanisms in LMICs ­ 57 Figures 3.1. Schematic Aligning Institutions and Incentives for WSS Services 34 4.1. Regulatory Domains in WSS in South Africa ­ 45 4.2. Senegalese WSS Regulation by Contract ­ 53 ­ 4.3. Interlinkages between Policy, Institutions, and Regulation 60 Tables 1.1. Range of WSS Regulatory Frameworks in Low- and Middle-Income Countries 3 2.1. Traditional Regulatory Models in Selected OECD Countries 13 3.1. Range of WSS Regulatory Frameworks in Low- and Middle-Income Countries 25 4.1. Incidence of Independent WSS Regulators in Low- and Middle-Income Countries ­ 40 4.2. Examples of Regulatory Arrangements in Selected Countries ­ 46 ­ 4.3. Summary of Stakeholder Engagement Practices in Latin America 56 4.4. Summary of Approaches in Regulation of On-Site Sanitation in Select Low- and Middle-Income Countries 59 ­ 4.5. Transparency Practices in the Regulatory Agencies of Latin America ­ 62 5.1. Regulatory Assessment Tools and Guidelines 73 A.1. Performance Management Implemented by Regulators in Latin America 75 A.2. Subsidization Mechanisms in Latin American Countries and the Role of Regulators 76 B.1. Typology of WSS Regulatory Frameworks and Tools in Low- and Middle-Income Countries 77 iv Regulation of Water Supply and Sanitation in Bank Client Countries Acknowledgments T his discussion paper is a product of the World discussion paper were Yogita Mumssen, Gustavo Bank Water Global Practice’s Global Study on Saltiel, Bill Kingdom, Norhan Sadik, and Rui Marques. Policy, Institutions, and Regulatory Incentives This work was carried out under the general direction for Water Supply and Sanitation Service Delivery, and and guidance of Maria Angelica Sotomayor and Bill forms part of the Water Supply and Sanitation Global Kingdom. The team is also grateful for the comments Solutions Group (WSS GSG) agenda. This work was and suggestions from Alexander Bakalian, Chloe Oliver financed by the World Bank’s Global Water Security and Viola, Daniel Camos Daurella, Katharina Gassner, and Sanitation Partnership and the Swiss State Secretariat Oscar Pintos. The team would like to acknowledge the for Economic Affairs (SECO). valuable inputs and support provided by Pascal Saura, Berenice Flores, Clémentine Marie Stip, Ilan Adler, and This discussion paper was prepared by a team led by Pinki Chaudhuri. Yogita Mumssen and Gustavo Saltiel. Authors of the Regulation of Water Supply and Sanitation in Bank Client Countries v Abbreviations AIAS Administration for Water Supply and Sanitation Infrastructure (Administracao De Infra-Estruturas de Agua E Saneamento; Mozambique) AMCOW African Ministers Council on Water ARCE Regulatory Agency of Delegated Public Services of the State of Ceará (Agência Reguladora de Serviços Públicos Delegados do Estado do Ceará, Brazil) ARESEP Regulatory Authority of Public Services (Autoridad Reguladora de los Servicios Públicos, Costa Rica) AySA Argentina Water and Sanitation Utility (Agua y Saneamientos Argentinos, Argentina) ARR annual revenue requirement BSWSC Bauchi State Water Supply Company (Nigeria) CA concession agreements CAPEX capital expenses CBO community-based organization CCG customer challenge group CLTS community-led total sanitation CRA Water Regulatory Council (Conselho de Regulação de Águas; Mozambique) CRA National Water Regulatory Commission (Comisión de Regulación de Agua Potable y Saneamiento Básico, Colombia) CU commercialized utility DCM decision of the council of ministers DMF delegated management framework DPWA Department of Public Works and Highways DTF devolutionary trust fund ENRESP Public Services Regulatory Authority (Ente Regulador de Servicios Publicas; Salta, Argentina) EPI economic policy instrument ERSAR Water and Waste Services Regulation Authority (Entidade Reguladora dos Servicos de Aguas e Residuos; Portugal) ESC Essential Services Commission (Australia) EU European Union Regulation of Water Supply and Sanitation in Bank Client Countries vii EWRA Egypt Water Regulatory Authority EWURA Energy and Water Utilities Regulatory Authority (Tanzania) FCS fragile and conflict affected states FINDETER Financial Development Territorial SA (Financiera del Desarrollo Territorial SA; Colombia) GP global practice IBNET international benchmarking network IBT increasing block tariffs IDT institutional diagnostic tool IEG independent evaluation group IRAR Institute for Regulation of Water and Waste (Instituto Regulador de Águas e Resíduos; Portugal) IPART Independent Pricing and Regulatory Tribunal (Australia) JVA Jordan Valley Authority KPI key performance indicator LG local government LGU local government unit LICs low-income countries LMICs low- and middle-income countries (authors combine LIC, LMIC and MIC) LWUA Local Water Utilities Administration (Philippines) MDG millennium development goal MWSS Metropolitan Waterworks and Sewerage Services (Philippines) NGO non-governmental organization NPG new public governance NRC National Regulatory Council (Australia) NRW non-revenue water NPM new public management NSW New South Wales NWASCO National Water Supply and Sanitation Council (Zambia) NWP national water policy viii Regulation of Water Supply and Sanitation in Bank Client Countries NWRB National Water Regulatory Board (Philippines) O&M operation and maintenance OBA output-based aid ODA official development assistance ODI outcome delivery incentive OECD Organisation for Economic Co-operation and Development Ofwat Water Services Regulation Authority (England and Wales) ONEA National Water and Sanitation Utility (Office National de L’Eau et de L’Assainissement; Burkina Faso) OPDM Public Decentralised Municipal Agency (Organismo Público Descentralizado Municipal; Mexico) OPEX operating expenses PBC performance-based contracting PBF performance-based financing PBGS performance-based grant system PC performance commitment PDAM local government-owned WSS utility (Perusahaan Daerah Air Minum; Indonesia) PENSAAR Strategic Plan for Water Supply and Sanitation Sector (Plano Estratégico para o Setor de Abastecimento de Água e Saneamento de Águas Residuais, Portugal) PIR policies, institutions and regulation PLANSAB National Basic Water and Sanitation Plan (Plano Nacional de Saneamento Básico, Brazil) PPP public-private partnership PPWSA Phnom Penh Water Supply Authority (Cambodia) PSP private sector participation PUC public utility commission PURC Public Utilities Research Center PWA Palestinian Water Authority PWRF Philippines Water Revolving Fund RBF results-based financing RIA regulatory impact analysis Regulation of Water Supply and Sanitation in Bank Client Countries ix RoA return on assets RPI retail price index SABESP The State Water Utility of Sao Paolo (Companhia de Saneamento Básico do Estado de São Paulo, Brazil) SDE Senegalese Water (Senegalaise des Eaux, Senegal) SDG sustainable development goal SECO Swiss State Secretariat for Economic Affairs SIM service incentive mechanism SISS Superintendence of Sanitary Services (Superintendencia de Servicios Sanitarios, Chile) SLG service level agreement SNIS National Information System for WSS (Sistema Nacional de Informacoes Sobre Saneamento, Brazil) SOE state-owned enterprise SONES National Water Company of Senegal (Société Nationale des Eaux du Sénégal) SSPD Superintendence of Public Services (Superintendencia de Servicios Publicos Domiciliarios, Colombia) SUNASS National Water and Sanitation Sector Regulator (Superintendencia Nacional de Servicios de Saneamiento, Peru) SWC Sydney Water Company SWSC Swaziland Water Services Corporation TPA traditional public administration TRASS Administrative Court for Complaints Resolution; Peru TTL task team leader UNICEF United Nations Children’s Fund URSEA Energy and Water Utilities Regulator (Unidad Reguladora de Servicios de Energía y Agua, Uruguay) USO universal service obligations WACC weighted average cost of capital WASH water supply, sanitation, and hygiene WASREB Water Sector Regulatory Board (Kenya) WDR World Development Report WICS Water Industry Commission for Scotland x Regulation of Water Supply and Sanitation in Bank Client Countries WRA Water Regulatory Authority (Albania) WRM water resource management WSRC Water Sector Regulatory Council (Palestine) WSSRC Water Supply and Sanitation Regulatory Commission (Bangladesh) WSS water supply and sanitation WSS GSG Water Supply and Sanitation Global Solutions Group WWGs water watch groups ZINWA Zimbabwe National Water Authority Regulation of Water Supply and Sanitation in Bank Client Countries xi Executive Summary Objectives of this Discussion Paper the competing interests of the various stakeholders. Economic regulation refers to the “setting, monitor- This discussion paper is a supplement to the 2018 ing, enforcement and change in the allowed tariffs World Bank global study Aligning Institutions and and service standards for utilities” (Groom et al., Incentives for Sustainable Water Supply and Sanitation 2006). (WSS) Services, recently published by the World Bank’s Water Global Practice. The Global Study promotes The United Kingdom and Australia both established holistic approaches in shaping WSS sector policies, independent regulators in the 1980s and 1990s as institutions and regulation by considering the wider part of a package of reforms built around privatiza- political economy and governance framework to tion or commercialization. Regulation of private util- incentivize sustainable actions. ities has existed for many decades in the United States, while contract regulation has historically pre- In particular, this paper examines how lower- and dominated in France and Spain. These international middle-income countries (LMICs)1 can successfully ­ reforms of WSS services often inspired similar mod- establish or improve regulation of the WSS sector by els of regulation in LMICs. taking into account political, legal, and institutional realities. Rather than importing “best practice” models Yet, the context for regulation in LMICs was much dif- from OECD (or broadly, upper-income) countries, ferent from where the models originated—in terms of experience has emphasized the importance of devel- access, quality of service, data availability, human oping “best fit” regulatory frameworks that are aligned capacity, governance and institutional context, to with the policy and institutional frameworks of a name a few. Regulatory initiatives in OECD countries LMIC’s WSS sector. This ensures that new regulations were also built on foundations such as trusted institu- are embedded within the country’s broader political tions, well-defined property rights, and a formal sys- economy and governance frameworks. tem of contract and corporate law, creating predictability and stability for investors. In LMICs legal This paper does not seek to offer definitive conclu- and administrative institutions are less developed, sions, rather it provides suggestions on the way for- with weaker enforcement, transparency, and account- ward, along with a phased approach to regulatory ability, and local history, customs, and traditions reform. Importantly, it sheds light on the issues that that can play a significant role in determining reform warrant further investigation to determine the future outcomes. of WSS regulation in LMICs. WSS Regulation in Low- and Background Middle-Income Countries Regulation is a policy intervention that aims to pro- For regulations to be effective, their goals, form, and mote sector goals in the public interest – balancing function must align with the country’s established Regulation of Water Supply and Sanitation in Bank Client Countries 1 institutional framework, and consider the realities of sector already exists, the policy objective may relate its political economy. Otherwise, governments may more to efficient service delivery, environmental merely create the illusion of reform. This is often goals, and accessing commercial finance. In LMICs, described as “isomorphic mimicry,” referring to when the government’s objectives may be similar but pri- governments suggest reform but do not necessarily oritized in a different order, or else be completely implement it, for example by only making changes in unrelated. the external form of policies and/or organization rather For example, some common regulatory objectives for than their actual functions. the WSS sector in LMICs include: Perhaps the biggest challenge to successfully import- ing regulation models from OECD countries to LMICs • Increasing access, especially to peri-urban and rural areas, and to poor and vulnerable groups; derives from significant differences in ownership and legal structures. WSS providers in LMICs are • Improving quality of service delivery; dominated by state-owned enterprises (SOEs) or are • Improving efficiency of service providers; and run by municipal governments, whereas private • Securing access to capital markets for sector operators or ring-fenced corporatized SOEs domi- financing. ­ ountries. The incentive mechanism is nate OECD c quite different between public and private ­ operators: Regulatory Forms Over the past few decades, LMICs have predomi- • Private utilities. The ability of a private operator to nantly imported or designed new WSS regulations in finance itself and provide fair returns to share- the form of a dedicated sector regulatory agency, holders is of critical importance. This provides often with aspirations of independence. But the private utilities with clear incentives to improve most effective regulatory forms in these countries efficiency, deliver on improvements demanded have been varied, and depend on a multitude of fac- by  customers, and expand networks to new tors, including the country’s legal system, sector customers. policies, governance structure, the extent of • SOEs and municipal-run utility services. Financial sus- decentralization, and whether national SOEs already ­ tainability is balanced with stated or unstated social exist. and political objectives and weak accountability. Moreover, LMICs often confront distinct challenges Incentives are less clear and often lead to low levels in terms of limited administrative capacity and bud- of service quality, coverage, efficiency, and financial getary resources. Factors such as poorly trained sustainability. staff; insufficient information; lack of financial resources; inadequate civil service rules; and unreal- Regulatory Objectives istic time constraints can all impact the capacity of A government’s broader policy objectives deter- regulators to effectively implement their mandated mines what role regulation will play in achieving responsibilities. In the absence of institutionalized them, so gaining clarity on sector objectives is a crit- coordination mechanisms, there is an increased risk ical first step. Policy objectives in OECD countries of duplicating roles, and sometimes a lack of clarity may be quite different from those in LMICs. In the regarding institutional mandates and policies (see former case, where universal coverage for the WSS table 1.1). 2 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE 1.1. Range of WSS Regulatory Frameworks in Low- and Middle-Income Countries Regulatory Frameworks Description Sector Specific WSS regulator mandated to oversee private and public service providers. Roles and responsibilities may National or State include issuing licenses, setting and monitoring performance standards, setting tariffs, ensuring consumer Regulator protection, performing audits, evaluating business plans, building capacity, and reporting regularly to ­ government authorities. Sector-specific regulators operate across a vast number of countries including Colombia, ­ Egypt, Mozambique, and Peru. In large federal countries where WSS services and regulation are at the state level, the national regulatory model outlined above can be replicated at the state level. Multi-Sector Regulator Multisector regulation provides scale economies, consistent regulatory processes, and knowledge exchange between different sectors. Although the multisector regulator might avoid regulatory capture by a specific sector; certain sectors may not receive sufficient attention. Ghana has an established multisector regulator responsible for oversight of energy and water sectors. Tanzania, Angola and Cape Verde have similar regulators, with varying degrees of success. In Brazil, 14 states have established multisector public services regulators which include, besides the water sector, also the transportation and energy sectors. Self-Regulation at the This takes many forms but essentially the public entity providing the service (municipal department, agency, Municipal Level corporation) is overseen by the municipal, council, or a designated governing board. In some cases, a municipally owned ring-fenced corporation is responsible for service delivery, and oversight is carried out by the board of directors. The board represents the municipality and has the power to approve tariffs. Managerial authority is delegated to the CEO of the utility, and oversight is undertaken by a municipal governing board. Cambodia offers an example of self- regulation whereby policy making, service delivery, and regulatory functions are implemented by the PPWSA. Government Traditional form of WSS regulation through the same ministry (or Secretary of State) that develops policy and Department operates water systems. Regulation by Contract Performance contracts between the government and a private entity responsible for O&M of the WSS facilities. Monitoring entity performs functions similar to that of a regulator, although with significantly less professional support staff and discretion. Burkina Faso implements a performance contract arrangement between the service supplier and the government. The contract specifies performance targets such as expansion of services to informal areas. Regulatory Functions mobilize finance for improving coverage or quality service. Regulators can help improve this situa- of ­ Regulators can use numerous tools to incentivize WSS tion in several ways: service providers to achieve sector objectives. The effectiveness of these tools, however, primarily uild a solid analytical foundation. This entails plac- a. B depends on the degree to which they are aligned with ing an initial focus on quality regulation until the and responsive to the sector’s policy and institutional required financial data and capacity levels are met framework. Key regulatory functions and their associ- by utilities. In Colombia, the government focused ated tools and approaches found in LMICs include initially on acquiring unit costs and standardizing improving financial sustainability; improving service the accounting norms used by utilities. This enabled provider performance; increasing accountability, it to introduce efficiencies to fully reflect operational transparency, and consumer voice; and pro-poor costs first and then increasingly investments. regulation. b. Financial modeling underpins effective tariff setting. Burkina Faso successfully implemented a financial Improving Financial Sustainability model agreement with a private utility company If a service provider is financially weak then it can- that is stipulated in a performance-based manage- not properly operate and maintain its assets, nor ment contract. Regulation of Water Supply and Sanitation in Bank Client Countries 3 c. A ssess creditworthiness. In Kenya, the regulator requirements, and monitoring and auditing arrange- ­ prepared 43 shadow credit ratings to inform inves- ments. Risks remain in relation to contract enforce- tors of the risk of investing in Kenyan WSS utilities. ment, risk management, and risk sharing. This played a key role in facilitating increased access d. Corporatization. This enables the introduction of to commercial finance for utilities. performance-based remuneration for staff and man- d. Attract private sector investment. Securing private agers and facilitates results-based approaches. sector investment is unlikely without improved Uganda provides an interesting example of using a financial sustainability through regulation. corporate charter with clear KPI targets and incen- Colombia’s tariff reforms were to a large degree effec- tives for public utilities. tive in stimulating private sector participation. e. Client and service provider contracts. Such contracts allow for clearer performance improvement targets Improving Service Provider Performance to be set. For example, in Brazil all state companies Monitoring the performance of WSS service delivery have contracts with municipalities, which are the by utilities can help improve performance when linked owners of the assets. In Argentina, the state-run to some form of reward or penalty, even if it is simply utility Agua y Saneamientos (AySA) and most other ­ shining the light on good or poor performers, known as utility companies have contracts with provinces sunshine regulation. LMICs use a multitude of perfor- that are the owners of the WSS facilities. mance management tools with varying degrees of ­success, including: Increasing Accountability, Transparency, and a. Benchmarking. This creates the potential for incen- Consumer Voice tives to improve performance through associated Regulators play an instrumental role in establishing rewards and penalties. A prerequisite for bench- consumer protection and engagement practices that marking is the establishment of a reliable data col- support improved accountability and transparency in lection system. In Peru, weighted performance service provision. A variety of successful mechanisms indicators are calculated to a single performance are used across LMICs, ranging from Water Watch score. In Chile, performance results are reflected in Groups (WWGs) comprised of local volunteers in procedure for setting tariffs. Zambia to public hearing and consultation processes that are used widely across Latin America. icensing. This allows regulators to monitor agreed b. L upon service standards. In Albania, the Water Pro-Poor Regulation Regulatory Authority is responsible for ensuring ser- ­ Instruments that can i ncentivize expanded access vice providers meet stipulated service standards. include: Performance- and results-based contracts. Key per- c. a. Universal service standards. This involves setting formance indicators (KPIs) can be used in clear access targets with enforceable penalties public-public or public-private contracts to improve ­ should targets be unmet. performance. In Burkina Faso, the government implemented three-year contract plans with twenty b. Provision of output-based aid (OBA): Regulation (by to thirty KPIs for technical, financial, and commer- contract, agency, or other) could allow for cial performance. Performance contracts are most performance-based instruments such as OBA to ­ effective when they include simple agreements, subsidize, for example, the costs of installing ­ clear responsibilities, realistic targets, reporting ­ ractice used water  connections for the poor, a p 4 Regulation of Water Supply and Sanitation in Bank Client Countries in  many countries including Colombia, Kenya, institutional and administrative capacities, and its Morocco, the Philippines, and Uganda. This supports legal and regulatory frameworks. incentive  policies while insuring—through appro- c. Understand the political economy of the country and priate ­ sustainability of the financial modeling—the ­ sector. This requires identifying how the public interventions. sector has developed over time, including cultural c. Differentiated service standards and alternative ser- influences and attitudes toward WSS services. vice providers. For example, in 2003, Zambia estab- d. Design interventions that are fit for purpose. This lished the Devolutionary Trust Fund (DTF) to ensures that interventions are not overly complex improve WSS coverage in peri-urban and low-­income for the given context and capacities. areas, administered by a regulatory agency called e. Provide sufficient capacity support. This ensures that the  National Water Supply and Sanitation Council reform objectives are realized. Capacity building targets low-cost, high-impact (NWASCO). The DTF ­ should be informed by realities on the ground. projects such as water kiosks, water meters, and f. Ensure there is sufficient financial capacity. Doing so improvements on pipelines and sewerage pipes. will sustain results and guarantee the human d. Social tariffs. In cases where low-income households resources required to implement the desired already have access to services, regulators might interventions. implement social tariff schemes to secure affordabil- ity of services for the poor. One common example is Though literature on WSS sector regulation in LMICs the “life line scheme,” implemented with varying holds off on providing a template for reform, it often success. Regulators could also provide targeted recommends a set of principles for effective regulation ­ subsidies through direct transfers. that are commonly followed by better-performing ­regulatory frameworks: Strengthening Regulation: The Way Forward • Regulatory Autonomy. A degree of insulation from political influence is needed to ensure that regula- Any regulatory model must be fit for purpose and custom tion is enforced. However, there are also successful designed for a specific country’s institutional context experiences where political entities who are bound and political economy. This requires regulators and ser- by a strong legal framework have successfully imple- vice providers to learn, adapt, and improve over time. mented regulation. Developing the appropriate regulatory framework will • Cost-effectiveness. The cost of regulation should not require the following broader institutional reform exceed its benefits or become burdensome for the considerations: regulatory agency or for the service providers being a. Identify key reform drivers. These are the main moti- regulated (Shugart, 2009). vating factors and objectives for reform and • Predictability. Regulatory mandates, rules, and oper- improvements of the WSS sector. They stem from ational standards should be adequately clarified and endogenous factors (politicians and/or government reliably enforced without arbitrary and frequent officials) or exogenous factors (donors and develop- changes. ment agencies). • Accountability. Building confidence in the regula- b. Understand the existing institutional environment tory framework requires stakeholder engagement of the sector. This requires identifying the sector’s to achieve consensus among sector actors and to key actors, leaders, national policies and strategies, deliver necessary improvements. Regulation of Water Supply and Sanitation in Bank Client Countries 5 • Transparency. Allowing for performance data to be contract, decentralized department, or utility, data made public supports the building of institutional is key. During the incipient stages of regulation, trust within the system and improved stakeholder before a more formalized regulatory arrangement engagement. is developed, creating a ring-fenced unit within • Fairness. Regulatory rules and decisions balance the a ministry or department might be the best or interests of key stakeholders, ensuring the sustain- only option. Resources and data capacity build- ability of water services (Shugart, 2009). ing should be provided so that the tasked unit can establish a system to monitor and evaluate service At the same time, regardless of what regulatory model providers and service delivery, and can be the ini- a LMIC chooses to apply to its WSS sector, there are tial foundations for a more substantive regulatory two fundamental requirements that must be met if a arrangement. regulatory regime has any chance of successfully • As institutions continue to build their capacity, regula- responding to existing and changing realities on the tors should focus on improving utility performance ground: through monitoring, benchmarking, and appropri- • Data. Quality data is a foundational requirement for ate performance incentives. any regulatory model, whether it seeks to attract • As institutional capacity and utility performance and oversee public-private partnerships (PPP) or to improve, regulators can take on additional responsi- improve the performance of public sector entities. bilities such as accounting for their regulatory base; From the start, regulation should focus on data col- gradually installing protocols for covering capital lection, validation, analysis, and dissemination. expenditures once all operating costs are covered by • Human Capacity. Regulatory functions must be tai- tariffs; and introducing the development of rigorous lored to existing human capacity. Regulatory designs business planning, information management, and should accommodate weak initial capacity and customer engagement practices. respond to its improvement over time. • After utilities begin to achieve performance objectives and service standards set out by regulators, norms and For LMICs, the role of regulation will and should evolve methods to monitor creditworthiness can be estab- over time. Thus, establishing a successful regulatory lished to raise capital through available markets. regime is best accomplished by taking a phased, or step-by-step approach. For example: • Finally, regulators can work with multiple stakehold- ers and may often provide important input into policy • For countries without a WSS regulator and/or that are discussions. This includes interfacing with minis- considering one, a simplified regulatory impact anal- tries— including the Ministry of Finance in case the ysis can clarify the objectives, costs, and benefits of transfer of funding and subsidies is needed—as well regulation and reveal opportunities for incentiviz- as with development partners. However, most reg- ing utility performance. In turn, clarification of reg- ulatory objectives and functions imply that regula- ulatory objectives and functions enable the tors must engage with all sector stakeholders at development of legal and other frameworks that arm’s length, including utilities, consumers, and support regulation in the sector, aligning it with the the government. Through the implementation of existing political economy and sector policies. citizen engagement mechanisms and the oversight • Building data capacity is an essential first step for of utility performance,  regulators are well posi- regulation. Whether the chosen form of regula- tioned to contribute e ­ vidence-based recommenda- tion is through an independent regulatory entity, tions to policy makers. Accordingly, regulators may 6 Regulation of Water Supply and Sanitation in Bank Client Countries sometimes play a role in resolving policy-related decision makers develop appropriate strategies to issues; at the very least they can provide expert reinstate regulatory systems or to improve the effec- advice and data, without compromising their regu- tiveness of regulation.3 latory decision-making process. This discussion paper is intended to explore the salient For further guidance, the World Bank’s global study, issues for regulating the WSS sector in LMICs, learning Aligning Institutions and Incentives for Sustainable WSS from the experience of the past two decades. As such it Services, offers analysis and practical insights on the should be seen as complementary to the many docu- dynamics of reform and underpinnings of how the ments on the more detailed technical aspects of regu- political economy influences WSS sector policies, insti- lation. The paper also alludes to areas of future work, tutions, and regulation and, in turn, how they can including deep dive reviews that explore regulation in deliver sustainable outcomes. The study provides specific countries or on specific topics. These provide actionable guidance that would benefit the design additional lessons and ideas for sector officials who ­ process of reforms. intend to operationalize the next generation of regula- tory reforms in their country, and who seek the best fit In addition, practitioners interested in exploring and for their respective context. The topics highlighted understanding the current policy, institutional, and include working with informal service providers, regu- regulatory situation in a specific client country may lation and sanitation (non-network services), SOEs start by employing the Institutional Diagnostic Tool and PPPs. (IDT), developed by the World Bank’s Water, Poverty, and Economics Global Solutions Group. IDT may serve as a first step toward understanding the WSS sector of Notes a specific country, including its greater institutional 1. For ease of review, the authors use “LMIC” to refer to all non-OECD countries (or broadly speaking, non-upper-income countries). LMIC and political context. Other tools and  guidelines to in this case captures lower, lower-middle, and middle-income coun- consider can be found in the Body of Knowledge on tries to represent the Bank’s client countries, unless otherwise stated. Infrastructure Regulation, an online database of 2. The Body of Knowledge on Infrastructure Regulation can be accessed research and best practices for infrastructure policy here: http://regulationbodyofknowledge.org (Mumssen, Saltiel, and Kingdom 2018). For example, 2 3. The self-assessment tool can be accessed here: http://­ regulation​ assessment tool designed to assist it offers a self-­ ­ odyofknowledge.org/self-assessment-tool/#/home b Regulation of Water Supply and Sanitation in Bank Client Countries 7 Chapter 1:  Introduction A chieving universal access and sustainabil- Services, recently published by the World Bank’s ity in water supply and sanitation (WSS). The Water Global Practice (Mumssen, Saltiel, and Kingdom Millennium Development Goals (MDGs) 2018), responds to this mandate by promoting holistic resulted in impressive gains in overall access to potable approaches in shaping WSS sector policies, institu- water and to a lesser extent to sanitation facilities glob- tions and regulation by considering the wider politi- ally. An important question arises from this achieve- cal economy and governance framework to incentivize ment: how can these achievements be sustained and sustainable actions. This discussion paper is a supple- scaled-up? Building on the achievements delivered ment to the global study and provides a deeper dive under the MDGs, the Sustainable Development Goals into one of the important instruments for aligning (SDGs) agenda addresses key challenges of WSS ser- institutions and incentives: regulation. vice delivery, going beyond improved access to place a major new emphasis on sustainability. Thus, the Good regulatory practices can determine the prospects transition from the MDGs to SDGs calls for renewed for policy success or failure. Studies show strong cor- approaches for development of water sector policies, relations between regulatory quality and economic institutional strengthening, and regulation that can growth, better governance quality and higher incomes deliver universal and sustainable WSS service delivery per capita. (World Bank 2015) outcomes through increased efficiency and improved Regulation is defined in this paper, as in the aforemen- sector financial performance. Key stakeholders, tioned global study, as “the sustained and focused control namely service providers, need to be incentivized to exercised typically by a public agency over activities that deliver improved services over the long term. This are valued by a community” (Selznick 1985, p. 383) and involves, among other things, (a) supporting service involves the setting of rules and ensuring that those rules providers in their efforts to be technically and econom- are enforced. Economic regulation usually refers to the ically efficient, and (b) strengthening the institutional “setting, monitoring, enforcement and change in the framework within which the service provider operates allowed tariffs and service standards for utilities” accounting for broader political economy factors and (Groom, Halpern, and Ehrhardt 2006, p. 1). In the con- aligning incentives for sustainable service delivery. text of low- and middle-income countries (LMICs), this This discussion paper focuses mainly on the latter definition has often been broadened to encompass social issue, while separate work undertaken by the World or development goals of access and equity. In this vein, Bank’s Water Global Practice (GP) focuses on utility although there is extensive discussion on aspects of eco- turnaround (World Bank, forthcoming). nomic regulation in the report, this deep dive attempts a Background. There has been increasing attention broader application, given that regulation in LMICs can given to the issues of institutions and the broader have wider objectives and implications. For one, if an enabling environment when it comes to sustainable effective regulator exists, it can be at the forefront of sec- service delivery in the infrastructure sectors: the tor technical knowledge and may result in playing a World Development Report (WDR) 2017 specifically broader role than anticipated. Further, ­ regulation in focuses on this issue. The 2018 World Bank global LMICs can take many forms, such as through indepen- study Aligning Institutions and Incentives for dent agencies, contracts, or self-­ regulation including Sustainable Water Supply and Sanitation (WSS) by  municipalities or the community. Rather than Regulation of Water Supply and Sanitation in Bank Client Countries 9 importing “best practice” models from upper-income • HOW are WSS regulators performing their man- countries, experience has emphasized the importance of dated functions, e.g., the instruments and meth- developing “best fit” regulatory frameworks that are ods they are using; coordination with other sector aligned with the policy and institutional frameworks of a institutions; the experience they have had so far; LMIC’s WSS sector. The report concludes that, although and how these functions can impact sustainability there are commonly understood criteria that are usually improvements? necessary for effective regulation, the final shape and form of regulation in any context will be different: there • WHERE does the WSS community go from here, including understanding the necessary precondi- is not one ladder that is being climbed, nor one ideal reg- tions to develop appropriate interventions for effec- ulatory and institutional design at the top of the ladder. tive regulation? The objective of this paper is to provide an overview of the aspects of regulation listed below in order to To answer these questions, the report begins with a ­clarify the relevant background and contextual factors brief overview in chapter 2 on the rationale for regula- to support practitioners as they consider their own reg- tion and elaborates on some of the traditional regula- ulatory reform options. This paper does not seek to tory models implemented in OECD (i.e. upper-income) offer definitive conclusions, rather it provides sugges- countries and limitations for their applicability in tions on the way forward, along with a phased approach LMICs. Chapter 3 provides a review of key literature on to regulatory reform. Importantly, it sheds light on the regulation of WSS services, including the objectives of issues that warrant further investigation to determine regulation, the different regulatory forms and struc- the future of WSS regulation in LMICs. tures, and the varying tools available to regulators to fulfill the desired objectives. Chapter 4 describes the • WHY is regulation important for the water sector, regulatory arrangements and tools implemented in i.e., what are the objectives? practice in LMICs. Chapter 5 concludes the report, ana- • WHAT types of WSS regulatory structures and arrange- lyzing the options for effective regulation in LMICs ments are being used in LMICs? going forward. 10 Regulation of Water Supply and Sanitation in Bank Client Countries Chapter 2: An Overview of Traditional WSS Regulatory Models and Applicability for Low- and Middle-Income Countries T he United Kingdom and Australia established Economic regulation specifically refers to the “setting, independent authorities for economic regulation monitoring, enforcement and change in the allowed in the 1980s and 1990s given the wide-scale pri- tariffs and service standards for utilities” (Groom, vatizations or restructurings that were taking place, while Halpern, and Ehrhardt 2006, p. 1). In the context of France and Spain have regulated their private utilities LMICs, this definition has sometimes been broadened through contractual arrangements. In  this time, many to encompass social or development goals of access income) countries also strengthened OECD (i.e. upper-­ and equity. In this vein, although there is extensive regulation” when services are pro- some form of “self-­ discussion on aspects of economic regulation in the vided by public entities and municipalities themselves, report, this deep dive attempts a broader application. for example in the United States, Germany, and the Regulation is necessary because WSS service provid- Netherlands. Subsequently, in the 1990s and 2000s, there ers, especially in urban and peri-urban areas and was a wave of “importation” of these models in LMICs, increasingly even in rural contexts, are natural monop- most notably those models used to regulate private sector olies, with no competition in the ­ market. As a result, providers: it was estimated that close to 200 new infra- there is little pressure on service providers to maintain structure regulators (i.e., not just for WSS) were created in service quality, operate efficiently to keep prices down, the period of 1996–2006 (Brown, Stern, and Tennenbaum and serve marginal and less profitable areas. Natural 2006). By 2008, over 130 WSS regulators had been estab- monopolies can be described as cases when the com- lished (Marques 2010). Yet, the context in LMICs was and petitive running of wires and pipes above or below the is quite different than their rich world counterparts where ground in duplicate, triplicate, or more would be so the models were originally developed, for example in obviously inefficient and costly that we “naturally” terms of access levels, quality of service, data availability, permit monopolistic supply of such goods with human capacity, and governance. This chapter explores decreasing average costs. In such cases, the lack of the objectives of regulation more generally and reflects market competition cannot prevent monopolistic on the applicability of the traditional models and their markup pricing and, thus, regulation becomes neces- evolution in the LMIC context. Although the discussion sary (Reagan 1987). In addition to the WSS sector, is specific to the WSS sector, some parallels can be drawn the  power, telecommunications, and railway sectors ­ ectors (including between WSS and other infrastructure s are all in whole or in part examples of natural the power and transport sectors) that offer useful insights monopolies. and lessons regarding regulation, and vice versa. Due to the extremely high social and public good value of Definition and rationale for infrastructure regulation. their outputs, coupled with their natural monopoly char- Regulation for the purposes of this report is defined as acteristics, infrastructure sectors including WSS have “the sustained and focused control usually exercised long been regulated by governments to protect the by a public agency over activities that are valued by a ­public interest. The formal regulation of WSS services community” (Selznick 1985, p. 383) and involves set- became a topic of international interest in the late ting rules and ensuring that those rules are enforced. 1980s when the rising cost of infrastructure required to Regulation of Water Supply and Sanitation in Bank Client Countries 11 serve expanding populations and to protect the envi- being used in several countries, including some LMICs ronment led policy makers to seek private investment. such as Colombia or Brazil. The British government In the United States, “rate of return regulation” had established a separate independent economic regula- been implemented well before then. Today, rate of tor of WSS services at the time of privatization reforms, return regulation is widely implemented and is used known as the Water Services Regulation Authority, or in  countries including Canada, Japan, and several Ofwat, which sets a price cap that companies may European countries. charge. The primary motive of introducing price cap regulation was to provide incentives to improve pro- In the United States, although most utilities are munic- ductive efficiency. This form of regulation sets a cap or ipally owned, privately owned utilities also serve many specifies formulas that determine the price that a util- communities. Most privately-owned utilities are regu- ity can charge. This forces the monopolist to set a price lated by state public utility commissions (PUC), which below the profit maximizing price, thus limiting abu- oversee rates and returns, and also enforce measures sive pricing m ­ ethods. The cap is set according to a to achieve financial sustainability and sometimes number of economic factors such as expected capital ­ service-quality standards (Beecher 2016). Under this and operational efficiency and price inflation. In the regulatory regime, the system accounts for operating United Kingdom, the conceptual RPI-X formula is costs and allows firms to fully recover these costs in widely implemented in which RPI (retail price index) addition to a set rate of return on capital invested that is  the rate of inflation and X is a set figure of the is in line with what would have been earned in a com- regulator believes expected efficiency gains the ­ petitive market. However, some drawbacks of rate of would  exist in competitive market conditions. If the return regulation that are often cited include: (i) weak utility exceeds efficiency assumptions incorporated incentives to improve efficiency (productivity), as the calculation of the price cap, it is able to retain into the ­ rate of return is not revised often, and (ii) over-­ the additional profits as a reward until the next tariff investment from utilities gold-plating and inflating review. In addition to price caps, revenue caps can also their costs to increase prices and attain additional be imposed on revenues. For example, the Scottish profits. Regulators are unlikely to have perfect knowl- ­ WSS regulator, The Water Industry Commission for edge of cost information, although new assets are Scotland (WICS), implements revenue cap regulation required to be “used and useful” if they are to be to set the prices of Scottish Water, the national SOE included in the rate base. for WSS. By contrast, state economic regulation is not applica- Some critiques of the price cap system include the ble to most publicly owned systems in the United extensive data required as well as the incentives for States. In fact, only a small number of states regulate investment (that wane) at the end of a given cycle. public systems. Water pricing and financing of public Further, in the case of the UK, there has been criticism utilities are approved through local government. on whether Ofwat and the price cap mechanism have However, in some states, such as Wisconsin, regula- kept private sector profits actually in check while tory oversight is extended to municipal utilities encouraging sufficient efficiencies, or whether regula- whereby municipal governing boards self-regulate tion has been too lenient (e.g., allowing too high a water systems (Beecher 2016). weighted average cost of capital) (Ford and Plimmer An alternative regulatory model is performance-based 2018). An additional feature of the Ofwat regulatory regulation such as “price cap regulation,” first intro- model is the use of “yardstick competition” whereby duced in England and Wales, and which is currently the performance of a private utility operating in one 12 Regulation of Water Supply and Sanitation in Bank Client Countries area is compared with the performance of others, set- and nonrenewal (Mumssen and Triche 2017), along ting benchmarks and expectations, as part of the tariff with the clauses that allow for the renegotiation and setting process. This structure has incentivized the pri- restoring the economic and financial equilibrium of vatized utilities to improve service quality, operational the contract. Table 2.1 summarizes the regulatory mod- efficiency, and capital efficiency over time (Mumssen els described herein. and Triche 2017). Independent economic regulation proved to play a The French regulatory model provides an alternative determining role within the broader reform package whereby services are regulated by contract between implemented in 1994 to revolutionize Australia’s urban the local government and the entity responsible for WSS sector. States or territories established indepen- service delivery. Service delivery responsibilities are dent regulators to depoliticize price setting mecha- often delegated to private companies through man- nisms and enforce organizational incentive structures agement contracts, affermage or lease contracts, or critical to improve sustainable WSS services. Contrary concessions that are subject to European Union (EU) to the experiences of the United Kingdom and regulations and French law. France implements civil United States, regulation in Australia was introduced law and accordingly much of the regulatory details are to oversee corporatized public utilities as opposed to embedded in national laws and regulations; therefore, private businesses. Box  2.1 showcases the regulatory contracts are not as detailed. Contrastingly, in coun- model implemented in New South Wales: the first state tries that implement common law, contracts must to establish independent economic regulation, preced- include a greater amount of detail in order to serve as a ­ erformance-based ing the national reforms. Although p basis for effective regulation by contract. Contracts mechanisms are now used to regulate state-owned may specify the tariff levels, tariff structure, formulas enterprises (SOEs), it is important to note that origi- for periodic adjustment of tariffs, and performance tar- nally, rate of return regulation was used, until it was gets and service quality that are monitored and felt stronger performance incentives were appropriate enforced by local government. The main enforcement to further incentivize efficiency gains (Salisbury, Head, mechanisms of regulation by contract are termination and Groom 2017). TABLE 2.1. Traditional Regulatory Models in Selected OECD Countries Elements of regulatory United States United Kingdom France model Regulator Multisector, state- Non-ministerial government department: Ofwat No national and regional regulators level PUC regulates majority of privately owned utilities. Total number of commission- regulated water utilities is approximately 7,700. This includes about 3,300 private utilities and 1,800 municipal utilities. The majority of public utilities implement self-regulation. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 13 TABLE 2.1. continued Elements of regulatory United States United Kingdom France model Utility Only investor-owned 18 regional privatized utilities Public authority is the owner and ownership utilities (serving regulation by contract is widely approximately 23% of implemented between local the total population) are government and a private company or regulated. Majority of the concessionaire. Enactment of the Sapin remaining government- Law led to imposition of a maximum owned utilities do not fall duration for concession contracts. This under a formal economic influenced the decline in the number regulator. of concessions and increased use of affermage contracts. As of 2016, 60% of the French population received services from private operators. Financing Services funded entirely Services funded entirely by customers through Local government is responsible for policy by customers and private tariffs and private investors. investments either directly or through investors for investor contract. owned utilities. Tariff Rate of return regulation: Price cap regulation: Maximum prices are set Full cost recovery of operations and setting Generally, tariffs reflect by Ofwat based on estimates of efficient total investments. full costs of service expenditure, and risk and return assumptions. Costs delivery and ensure long- of financing are calculated to estimate the returns term financial viability of required by investors (“building block approach”). utilities. Estimations of Estimation of the WACC is key to determining returns. WACC are critical to the Interestingly, Ofwat is the first U.K. regulator to process of rate-making. adopt a negative real risk-free rate to estimate capital costs for the 2019 price review (PR19). Licensing Yes Yes No Performance PUCs ensure safe, Ofwat measures KPIs across four areas: customer Services are subject to EU water quality setting and adequate, and reasonable experience; service reliability and availability; regulations and French laws regarding monitoring services and evaluate environmental impact; and financial. Companies procurement, technical standards, and utility performance. must submit annual performance reports. water abstraction and effluents. The EU and national entities enforce these rules. Incentivizing efficiency savings: utilities keep difference between Ofwat’s price limit and actual costs. Ofwat sets efficiency targets on the basis of expenditures, giving companies more responsibility to manage costs and risks. Benchmarking to compare relative efficiency of utilities. The PR19 methodology requires companies to agree on PCs and ODI with their customers. Ofwat has stipulated that companies must require financial ODIs by default. table continues next page 14 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE 2.1. continued Elements of regulatory United States United Kingdom France model Competition Control market entry and Water Act of 2014 extends retail competition Competition exists for the market exit; approval of mergers to all non-household customers, and provides when PPPs are periodically tendered/ and acquisitions. for possible future competition in wholesale retendered. Market competition markets. The regulatory regime uses “yardstick” increased after introduction of the Sapin (comparative) competition when assessing utility Law as a result of decreased contract performance. durations. Consumer PUCs are responsible for As part of the 2014 price review, water companies Water mediator was established in 2009 protection responding to consumer were required to establish independent CCGs to by the Association of French Mayors, complaints and provide review quality and effectiveness of consumer the Assembly of Communities in France, utility-related information engagement and how companies reflected this in and water companies with the primary to consumers. Rate setting business plans. CCGs comprise customers and their responsibility of improving services process for private utilities representatives, local authorities, businesses, and offered to consumers and mediating is quasi-judicial and is environmental groups. CCGs provide independent disputes. The Audit Office (Cour des participatory in that it reports to Ofwat regarding consumer engagement Comptes) has also an important role of allows for consumers performance. Additionally, the SIM compares watchdog. and other stakeholders company performance in customer satisfaction. to weigh in during the Companies receive rewards/penalties accordingly. proceedings. Note: CCG = customer challenge group; EU = European Union; KPI = key performance indicator; ODI = outcome delivery incentive; PC = performance commitment; PPP = public-private partnership; PUC = public utility commission; SIM = service incentive mechanism; WACC = weighted average cost of capital. BOX 2.1. Approach to Water Sector Regulation in New South Wales The Independent Pricing and Regulatory Tribunal (IPART) was established in New South Wales under its own government businesses, which act: the IPART Act of 1992. IPART’s focus was on the regulation of prices of ­ contrasts with the regulatory environment overseas at that time. The New South Wales government did not privatization. Rather, it sought to remove the abuse of monopoly power link independent price setting to ­ and provide incentives for price reform and efficiency. Note that in the Australian states and territories, by Competition Policy all the monopolies industries must be regulated by independent regulatory its National ­ authorities. The IPART Act sets out a number of objectives that the tribunal must consider in determining prices. IPART’s role in the economic regulation of water is largely constrained to the r ­ egulation of prices. While IPART conditions, it does not set drinking water standards, monitors license compliance and advises on license ­ environmental standards, social tariffs, or handle consumer complaints. Consistent with efficient pricing principles, IPART uses a two-part tariff (fixed and usage charges) to charge for water. IPART sets maximum prices consistent with the determined annual revenue requirement based on the long-run marginal cost of supply for each of the metropolitan water agencies it regulates. Once the regulated revenues are determined, prices are set in accordance with the designated approach so that, for the forecast box continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 15 BOX 2.1. continued customer numbers and volumes of water and wastewater, expected revenues equal the annual revenue requirement (ARR).a In addition to usage charges, all properties pay a quarterly service charge, which is levied to recover the agency’s remaining revenue requirement. Periodic charges reflect the average cost of supply and are uniform throughout each agency’s area of operation. This is known as postage stamp pricing. The use of postage stamp pricing for periodic water services results in prices that do not signal the diversity in costs of providing these services to different locations. Over time, water prices have become more cost reflective to provide better signals to consumers and a better basis for funding services. Consumption charging is now the rule for urban water. Cross-subsidies between different types of users have largely been eliminated, and the prices of water and related services now better reflect the costs of those services. Source: Salisbury, Head, and Groom 2017. a. Annual revenue requirement (ARR) = operating expenses (OPEX) + depreciation + return on assets (ROA) WSS reforms implemented in LMICs have in the past However, many water utilities in LMICs did not have the often been influenced by public sector reform trends capacity to respond to the complexity of such regulatory in upper-income countries. During the 1960s and incentive mechanisms. For example, application of the 1970s public policy regarding infrastructure sectors Ofwat model failed due to constraints including lim- largely focused on building up technical capacity. ited institutional capacity, lack of scale, poor baseline This transitioned in the 1990s to articulating “best data, and a history of inability or unwillingness of cus- practices” amid the Washington consensus embrace tomers to pay the full cost of WSS services. Moreover, of open markets. There was a tendency to believe incentive-based mechanisms assumed a level of cost that regulatory models such as the Ofwat model or information that was not available in LMICs. Despite the French model of regulation by contract could be this, it should be noted that the U.K. regulatory transported to other contexts. Some countries even model  contributed to highlighting the relevance of coined the term “hybrid regulation models” whereby regulation  as an instrument to promote sustainable ­ they established a general regulatory framework at WSS services and to mitigate the shortcomings of con- the same time as specific concession contracts for tracts when they exist. some utilities creating, in some cases, overlaps and contradicting rules.1 Thus, many LMICs set up sector For regulation to be effective in LMICs, any imported regulators—in collaboration with donors—and there model must be adapted to the local institutional and polit- was an initial reliance on cost plus methods followed ical context, otherwise governments may merely create by a rush to institute price or revenue cap mecha- the illusion of reform rather than implementing change nisms as the trend toward incentive based regulation de facto. This is often described as isomorphic mimicry, had swept the OECD water markets where the objec- referring to when governments suggest reform but do tive was to improve capital and operational effi- not necessarily implement it, for example, by changing ciency and to improve service quality, having already what policies or organizations look like rather than their achieved universal access. actual functions. Regulatory models grew organically in 16 Regulation of Water Supply and Sanitation in Bank Client Countries OECD countries and represented a social contracting and political pluralism, LMICs often do not; thus, in process—such as the utility consensus of the United many cases routes of accountability between the state States—that involved a bargaining process (through leg- and its citizens are weak (Barron 2005). Only if citizens islation, lobbying, etc.) allowing for all affected parties are empowered to voice their concerns would there be to weigh in directly or indirectly. Furthermore, regula- any pressure for improved performance. tion was introduced given required preconditions for Due to distinguishing policy and institutional factors, reg- successful implementation including solid institutional ulatory models in LMICs tend to be geared toward achiev- capacity; institutional trust; availability of quality data; ing different objectives than their wealthier counterparts. and effective law or incentive enforcement, among Whereas upper-income countries are focused on other necessary policy and institutional factors. Formal enhancing productive efficiency of service providers institutions, such as well-defined property rights and a and ensuring that efficiency gains are attained as a system of contract and corporate law, created formal ­ means of sustaining affordability and quality of service predictability and stability for investors (Barron 2005). (see Table 2.1), the needs and objectives of WSS in most Consequentially, the extent of private sector participa- LMICs are quite different. In the WSS sector in LMICs, tion (PSP) and ­public-private partnerships (PPPs), share- SOEs, municipally or community run services are the holder pressure, public access to performance data, and norm; the needs and objectives of the sector are more the enforcement of regulatory mechanisms, including focused on access and equity; the starting point is more penalties, all strengthen responsiveness to regulatory challenging, with substandard or inappropriate physi- pressures when compared to those that might exist cal infrastructure and limited focus on operations and in public sector utilities. maintenance (O&M); technical capacity of key stake- By contrast, in LMICs the motivation was often restructur- holders to undertake effective regulation is relatively ing of the sector with a view to future PPPs and weak; financial needs are high yet resources are implementing regulatory functions with the purpose of ­ extremely limited; customer and citizen voice is some- regulating the private operator. Regulatory models were times muted; and the political economy including the transported without adequately articulating the institu- institutional context is problematic. Effective regula- tional and political economy preconditions necessary tion in a LMIC context should be structured in form and for effective regulation within the given country con- content to meet these realities, and expectations and text. In LMICs, legal and administrative institutions are achievements must be tempered to fit this reality. less developed, with weak enforcement, transparency, and accountability, and where local history, customs, and traditions can play a significant role in determining Note reform outcomes. Heavy contrasts can be drawn 1. An example of this situation is the concession of WSS services in Buenos Aires in which conflicting requirements between the regula- between the legal and political systems of upper-­ tory framework and the concession contract generated a series of income countries and LMICs. Whereas upper-income controversies between the government and the concessionaire that ­ countries benefit from principles that support social contributed to undermining the reputation of the reforms. Regulation of Water Supply and Sanitation in Bank Client Countries 17 Chapter 3: Regulation in Low- and Middle-Income Countries: View from Key Literature T he literature on WSS regulation in LMICs has 3.1 Regulatory Objectives grown rapidly in the past few decades. It spans While regulation in upper-income countries focuses roughly four categories. First, there is a body of mostly (but not exclusively) on the incentives and literature on what is regulation in LMICs, i.e., the objec- value for money provided by regulation of WSS service tives. Second, there is a relatively small amount of work providers, regulation in LMICs has a broader set of describing how WSS regulation is organized in LMICs.1 objectives, which include social and related objectives. Third—and this is where the bulk of the work is so far— While efficiency and cost minimization are in the main there is a range of assessments of regulatory functions, line of sight of regulators in upper-income countries, such as tariff setting, standardization of quality of ser- access and equity are at the forefront, in the context of vices, consumer engagement, and so forth. Finally, the tremendous need, while operating in more constrained literature touches on the different political economy financial, technical, human capacity, and political and institutional factors that impact effectiveness of economy environments. But it is important to note here regulatory frameworks and underscores the importance that regulation will only help define the mechanisms to of designing regulatory frameworks within broader incentivize service providers, users, and other key stake- institutional contexts. The second and third categories holders in the sector; it is the role of sector policy to contain both positive (“what is”) assessments as well determine what the objectives are and shape what type as normative (“what should be”) recommendations for of regulation will ultimately be needed. purpose of this chapter is WSS regulation. Although the ­ to provide an overview of literature specific to the WSS Yet, despite obvious differences between upper-­ sector, many of the regulatory themes discussed here income countries and LMIC WSS sector contexts, some reveal themselves in other infrastructure sectors, albeit high-level objectives are fairly consistent with regards in ways unique to the defining features of the sector in to the desirable features for effective infrastructure question. Perhaps most important is the discussion on regulation: the design of “best fit” regulatory interventions, which is a common challenge that features across all sectors. It is • Cost-effectiveness: the cost of regulation should not exceed its benefits or be burdensome on the regula- noted that the knowledge base is limited, and there exists tory agency or on the service providers regulated no quantitative assessment of WSS regulators and regu- (Shugart and Alexander 2009). latory arrangements by country with sufficient detail on regulatory outcomes and effectiveness.2 • Transparency: allowing for regulatory decisions to be made public supports the building of institu- Developing economies are often described as “econo- tional trust within the system, enhanced stake- mies with missing markets.” In the contractual world holder engagement and accountability (Mumssen of regulation, missing markets translate in to incom- and Triche 2017). Berg (2013a) also underscores the plete contracts. Contracts are incomplete because of importance of transparency. His extensive review of players’ bounded rationality, as in any economy—but regulation of SOEs finds that well-performing insti- also because of institutional weaknesses. (Laffont tutions make information available and that access 2005, p. 245) to benchmarking information creates foundations Regulation of Water Supply and Sanitation in Bank Client Countries 19 for improved governance, performance evaluation, political economy realities (Mumssen, Saltiel, and and the creation of effective incentives. According Kingdom 2018). to a survey conducted by the Organization for • Consultation and inclusion: to build confidence in the Economic Cooperation and Development (OECD) in regulatory framework and ensure its effectiveness, 2015, by promoting transparency, regulators are also regulators should regularly consult with stakehold- expected to share regulatory expertise with the pub- ers (Mumssen and Triche 2017). Stakeholder partici- lic sector, thus highlighting policy coherence and pation can support the exchange of ideas necessary coordination, continuity, predictability, and credi- to identify win-win solutions and achieve consen- bility of decision making (OECD 2015). sus among sector actors (Berg 2013a). • Predictability: rules and operational standards are The literature finds that operational divergences adequately clarified and are reliably enforced with- between different ownership structures (i.e., public out arbitrary and frequent changes made to them and private utilities) necessitate different regulatory without prior consultation among relevant stake- initiatives in order to achieve the said objectives. holders (Mumssen and Triche 2017). Related to USAID3 (2012) highlights the key factor that differenti- predictability, some degree of consistency is also ates private utilities from publicly owned utilities: important, yet while noting that different contexts and situations require some flexibility. Balancing When a regulator regulates a privately-owned utility, consistency and flexibility may be a challenge for [the] main concern of the shareholders is their return effective regulation. on equity, their free cash flow and their dividends. • Fairness: regulatory rules and decisions balance the Under rate of return regulation ..., the regulator has a interests of the consumers, the service providers, benchmark ... [return on equity] that they will build and remaining stakeholders, ensuring the sustain- into the revenue requirement and tariff order. Under ability of the water services (Shugart and Alexander incentive-based regulation, ... the regulator also sets a 2009). framework for allowed equity return. In either case, • Independence, or “decisional autonomy”: some the shareholders are very interested in their equity returns. (USAID 2012) degree of insulation of regulator decisions from political influence motivated by short-term gains or With respect to privately owned utilities, importance other special interests helps to ensure that regula- is given to the role of capital markets in incentivizing tion is enforced in favor of achieving priorities artic- performance improvements. Shareholders appoint a ulated in sector policies. Independence of regulators board responsible for oversight, and the board has depends on the country context. It is also important authority to provide financial incentives through to note that there are successful experiences of regu- bonuses for improved performance; determine sala- lation implemented by political entities that are well ries; and to appoint and fire management. Investors bound by a strong legal framework (Berg 2013a). are crucial to the profitability and sustainability of pri- • Designing regulatory incentives aligned with the polit- vate utilities and monitor managerial decisions as well ical economy: the political economy has a significant as the regulatory climate. They care for earning an ade- impact on the success or otherwise of regulatory quate return on investment. Thus, utilities are incen- reform efforts. There are no one-size-fits-all solu- tivized to improve efficiency of operations through tions, and to produce positive and sustainable ser- cost containment, delivering demanded quality vice delivery outcomes, regulatory incentives must improvements and network expansions (Berg 2013b). be tailored to local circumstances and must consider The most recent proposals by Ofwat for its price 20 Regulation of Water Supply and Sanitation in Bank Client Countries reviews demonstrate the increased emphasis placed profits (Berg 2013a). These challenges are even greater on return on equity as a lever to incentivize improved when services are provided (and often regulated by) performance. Specifically, Ofwat is revisiting its esti- municipalities themselves. mated weighted average cost of capital (WACC) for the PPPs allow governments to provide public services utilities: there has been criticism that Ofwat in the past using the resources and expertise of the private sector has allowed too high a WACC given the prevailing mar- but come with a different set of considerations for reg- ket rates, therefore placing insufficient pressure on the ulation. Typically, PPPs entail enforcement of a long- companies for significant performance improvements term contract between a private entity and the (Ford and Plimmer 2018). government for the provision of WSS services. The pri- Typically, private utilities are regulated to control the vate entity is responsible for asset management and monopoly nature of the enterprise. But most WSS service delivery and can be compensated directly ­ service providers in [LMICs] are government owned. through tariffs, or other payments, based on perfor- Many ask “why regulate what you own?” Governments mance.4 A World Bank study on PPPs for urban water can regulate utilities that are ministries or depart- utilities (Marin 2009) notes that out of the 65 LMICs ments through governance mechanisms such as a that implemented PPPs since the 90s, at least 41 still board or more arm’s-length through an independent had private water operators functioning by the end of regulator/body who set and monitor tariffs and service 2007, and 84 percent of awarded contracts were still standards. Though the overall global experience has active (Marin 2009). However, 24 countries had been varied and not fully recorded and analyzed, it is reverted to public management of service provision reasonable to say that on balance the arm’s-length and several contracts were terminated. Failures in con- regulation of public service providers yields better sec- tractual arrangements can be attributed to some of the tor performance than left to the devices of the line following institutional weaknesses: government’s fis- ministry to achieve solely through the fiat of owner- cal inefficiency or the ability to collect revenue when ship. (Berg 2013a) there are direct subsidies in place; accountability of key actors for meeting their obligations (related to informa- For SOEs, especially if not corporatized, return on tion flow or management between actors leading to equity, dividends, and bonuses are not a priority nor underperformance); credibility or political will of the are they feasible in many cases. Financial sustainabil- government to enforce contractual commitments; and ity is balanced with stated social and unstated political technical and legal capacity of state actors to supervise objectives (Berg 2013a; Eisendrath 2012). Berg (2013a) performance and actions of service providers (Estache argues that utility management should develop realis- and Wren-Lewis 2010). One study notes that between tic business plans and implement actions with trans- 1990 and 2010, over 90 percent of water PPP contracts parency in order to measure targets and benchmark were renegotiated, mostly to hedge against the institu- performance. In addition, incentive mechanisms must tional risks that were discovered after the contract was be tailored to SOEs. As Berg explains, a study imple- entered into (Camos and Estache 2017). mented on electricity distribution firms in Ukraine finds that private and public utilities respond very dif- The objectives and nature of infrastructure regulation ferently to the same incentives. Where cost-plus regu- are not only shaped by the institutional and ownership lation was adopted, private utilities inflated their costs arrangements but also by the significant financial, of service but also significantly reduced losses com- technical, and political economy constraints common pared to SOEs, which were more concerned with the to LMIC contexts. Berg (2013b) elaborates on the impli- political costs of reducing losses than increasing cations of LMIC and upper-income country settings on Regulation of Water Supply and Sanitation in Bank Client Countries 21 the challenges for regulating WSS services. He explains Finally, within the context of integrated water that in the case of regulating private companies in resources management, the literature notes that objec- upper-income countries, the main challenge is avail- tives specific to WSS regulation can also support ability of reliable cost information with which to set broader water-related objectives associated with water performance, efficiency, and tariff targets, among resources management (WRM) as outlined in Box 3.1. ­ others. However, the challenge of regulating public WSS service providers in LMICs is much greater. As often, the roles of the sector players are not clarified in 3.2 Regulatory Forms governing laws and rules, or they are overlapping in The literature agrees that regulatory forms and some cases. Even if roles are clear, restricted auton- governance structures are crucial determinants of ­ omy reduces incentives for compliance by service pro- performance (Berg 2013a). Different approaches of viders (Berg 2013a). Add to that, modest regulatory implementing regulatory interventions are described capacity in many countries has resulted in an overall throughout various studies and reports. The most limited expression of the regulatory potential. commonly discussed regulatory approaches are: Similarly, the OECD (2016b) identifies a number of (a)  regulation by agency, in which different gover- water-related governance gaps that place additional nance structures of agencies exist; and (b) regulation constraints on effective regulation in LMICs: by contract. • Policy gap: overlapping, unclear allocation of roles Regulation by Agency and responsibilities. Regulation by agency is an approach in which a regula- • Administrative gap: mismatch between hydrological tory body is given discretionary powers by government and administrative boundaries, with implications to control tariffs and service standards, subject to the for long-term sustainability of service providers. existing laws and the regulatory body’s mandate. • Information gap: asymmetries of information between “Independence” is often one objective sought through central and subnational governments, and between regulation by agency, although it is by no means a service providers and governments, and consumers. guarantee of independence. A sample of 123 LMICs The most significant information gap is in terms of finds that around 45 percent have adopted this regula- costs, which results from a failure to implement cost tory approach in the water sector (Bertomeu-Sanchez accounting measures (Camos and Estache 2017). et al. 2017), while 28 percent of 100 LMICs sampled in • Capacity gap: lack of technical capacity, staff, time, 2015 had an independent regulatory agency in the knowledge, and infrastructure. power sector (Foster et al. 2017). • Funding gap: unpredictable or insufficient revenues However, although a regulator may be “independent” to effectively implement water services policies, de jure, in many LMICs, independence may not trans- and to invest and operate infrastructure. late de facto into the ability to make many critical deci- • Objective gap: competition, and lack of coordina- sions, for example, with regard to tariff levels. Political tion, between different ministries. interference can induce suboptimal performance due • Accountability gap: lack of awareness about water to features that commonly characterize governments, service policy, plus low involvement of water users’ which include policy inconsistencies; information organizations, in which lack of data and participa- asymmetries; politicization of decisions; unclear prior- tion limit ability of affected groups to raise concerns ities; and a lack of participatory approaches and trans- in public forums. parency in decision making. 22 Regulation of Water Supply and Sanitation in Bank Client Countries BOX 3.1. Link between WSS Regulation and WRM WRM aims to secure the sustainability and quality of water resources and manage water shortages. Thus, the linkages between WSS regulation and WRM are clear. Effective WSS regulation incentivizes efficient water consumption and therefore protects water resources. Tariffs and other funding sources that reflect the true costs of collecting, treating, and disposing of wastewater make it possible for service providers to meet effluent standards and safeguard water quality. Whereas WSS regulation is often concerned with safeguarding public interests against monopolistic behavior, WRM is mostly concerned with externalities: indirect costs imposed on users by overuse of resources or environmental damage. Correcting for externalities requires the use of different regulatory tools, and this makes WRM regulation distinct from WSS regulation. In addition, WRM applies to all users of water resources, including agriculture, industry, navigation, hydroelectricity, and recreation—in addition to WSS. Developing a deeper understanding of the linkages between WSS regulation and WRM is an important area for further work, particularly for water scarce regions where countries are caught between improving access and service delivery at affordable levels and rapidly dwindling water resources that are becoming ever more costly to access. Source: Mumssen and Triche 2017. One of the particular benefits of independent regula- the long run; and allowing for better, simpler, and tors as described in the literature is minimizing politi- more transparent contracts (Marques, forthcoming). cal interferences that can prioritize equity objectives at However, the mandate of these institutions should be the cost of efficiency and performance objectives. Yet, governed by the contract and should be altered only by as Berg (2013a) and Mumssen, Saltiel, and Kingdom agreement of both parties. Further, a country need not (2018) caution, this does not negate the fact that the be limited to choosing either the French (contract) or broader institutional and political economy factors the Anglo-American (agency) model of regulation, that constitute the enabling environment within which hybrid regulatory arrangements have also been used regulators operate are part and parcel to the success of (Brown, Stern, and Tenenbaum 2006). implementing regulatory incentives. Self-Regulation Regulation by Contract An additional regulatory regime, which is unfortu- Regulation by contract is the approach whereby a pub- nately not discussed as often in the literature and is lic entity and a service provider agree on contractual possibly one of the most prevalent forms in LMICs, is clauses that determine how tariffs and service stan- “self-regulation.” In some cases, this may mean the dards are controlled. Under regulation by contract, an publicly owned utility—which could be the same as the oversight institution may be responsible for monitor- municipality (or the community)—that provides WSS ing performance and making regulatory decisions. The services and performs all regulatory activities, includ- role of these entities can encompass, among others, ing setting tariffs and performance standards and car- addressing conflict management conveniently; pro- rying out performance monitoring. This form of tecting and handling the complaints of customers and regulatory regime also exists in upper-income coun- users; protecting the public interest in the unavoidable tries, but often, in the absence of a regulator, there is renegotiations; defending fair play and the contract in usually a level of reporting and customer awareness Regulation of Water Supply and Sanitation in Bank Client Countries 23 that places pressure on the utility to perform. In the which separate bodies exist that have regulatory func- United States, the utility is held accountable to a third tions. In other cases, the WSS utility is separated from the party such as the board of directors, the financial mar- municipality (e.g., a corporatized or nonmunicipal water kets, or a city council. In France, which has a degree of company), and there may be a contract or statutes self-regulation when services are municipally run, between the municipal company and the municipalities sunshine regulation has recently been introduced in which the duties and rights are established. The whereby a national agency has been tasked to collect municipality supervises and checks the contract and the performance data for monitoring and evaluation pur- performance of the company and can approve the tariffs, poses, placing a de facto “check” on service perfor- the budget, and accounts report. And there may be cases mance (Salvetti 2014). Another case of self-regulation where there is no real arm’s-length separation between is in the Netherlands in which Vewin, the association the municipality and the service provider, which can be of water utilities that defines rules and standards for all even more problematic in terms of even basic oversight. Dutch water utilities, is responsible for the excellent level of performance of the water sector; a system of Regardless of the exact structure of municipal regula- naming and shaming and competition across the utili- tion (or oversight), as noted by Berg (2013a), there are ties often ensues to help improve performance. common challenges with local regulatory frameworks Unfortunately, in LMICs, self-regulation often means that include the lack of expertise to address informa- minimal or no regulation, if anything, because of lim- tion asymmetries between the regulatory agency and ited resources and capacity. There are some examples, the service providers, and the level of transparency such as in the Philippines and local government utility required to adequately promote citizen engagement service providers. Examples of self-regulation in initiatives. This challenge is particularly exacerbated LMICs are provided in further detail in chapter 4. when it comes to carrying out performance compari- sons because national data collection is required, yet the fragmented nature of municipal regulation means Municipal Regulation that it is often not available (see French example men- Municipal “regulation,” or oversight, when there is some tioned previously). Further, in the absence of complete degree of ring-fencing between local WSS service provi- transparency and accountability mechanisms, inter- sion and the municipality, is an alternative model of reg- governmental regulatory mechanisms may prove to be ulation by agency and offers a different set of benefits in counterintuitive in the context of utility operations terms of improved sector coordination and planning (Berg 2013a). Groom, Halpern, and Ehrhardt (2006) activities of utilities. Because local government is respon- further elaborate on the problematic implications of sible for zoning, density of development, and rights of these political factors on service delivery, which could way, which all affect utility costs, Berg (2013a) explains be exacerbated at the municipal level: that it may be more appropriate to allow for municipal governments to regulate utilities. Municipal regulation • Selective representation of customer needs in which poorer, rural areas are marginalized may also allow for jurisdictional consistency, whereby that which bears legal responsibility for service provision • Promotion of short-term political objectives (e.g., (i.e., the municipal government) is also in charge of regu- below-cost recovery tariffs) lating it and enforcing compliance with the rules. There • Capture of WSS service providers for personal and are a variety of ways this regulation, or oversight, is often political gains whereby service provider managers undertaken. In certain cases, such as in Brazil and act in the interest of powerful stakeholders other Ecuador, there are municipal regulatory agencies in than their customers 24 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE 3.1. Range of WSS Regulatory Frameworks in Low- and Middle-Income Countries Regulatory Description frameworks Sector-specific national WSS regulator mandated to oversee private and public service providers. Roles and responsibilities may or state regulator include issuing licenses, setting and monitoring performance standards, setting tariffs, consumer protection, performing audits and evaluating business plans, capacity building, and regular reporting to government authorities. Sector-specific regulators operate across a vast number of countries, including Colombia, Egypt, Mozambique, and Peru. In large federal countries where WSS services and regulation are at the state level, the national regulatory model outlined above can be replicated at the state level. Multisector regulator Multisector regulation provides scale economies, consistent regulatory processes, and knowledge exchange between different sectors. Although the multisector regulator might avoid regulatory capture by a specific sector; certain sectors may not receive sufficient attention. Ghana has an established multisector regulator responsible for oversight of energy and water sectors. Tanzania, Angola and Cape Verde have similar regulators, with varying degrees of success. In Brazil, 14 states have established multisector public services regulators which include, besides the water sector, also the transportation and energy sectors. Self-regulation at the This takes many forms but essentially the public entity providing the service (municipal department, agency, municipal level corporation) is overseen by the municipal, council, or a designated governing board. In some cases, a municipally owned ring-fenced corporation is responsible for service delivery, and oversight is carried out by the board of directors. The board represents the municipality and has the power to approve tariffs. Managerial authority is delegated to the CEO of the utility, and oversight is undertaken by a municipal governing board. Cambodia offers an example of self- regulation whereby policy making, service delivery, and regulatory functions are implemented by the PPWSA. Department of Traditional form of WSS regulation through the same ministry (or Secretary of State) that develops policy and government operates water systems. Regulation by contract Performance contracts between the government and a private entity responsible for O&M of the WSS facilities. Monitoring entity performs functions similar to that of a regulator, although with significantly less professional support staff and discretion. Burkina Faso implements a performance contract arrangement between the service provider and the government. The contract specifies performance targets such as expansion of services to informal areas. Note: EWURA = Energy and Water Utilities Regulatory Authority; O&M = operations and maintenance; PPWSA = Phnom Penh Water Supply Authority; WSS = water supply and sanitation. Table 3.1 provides a summary of the range of WSS regu- described; (b) type of governing body and whether it is latory arrangements discussed in the literature (Berg separate from political and business interests; (c) level 2013a). It is understood that this list is not exhaustive, of autonomy of regulatory agency; (d) enforcement and that there may be some hybrid models that cap- powers of the regulatory agency (e.g., authority to col- ture more than one element in the table. lect data, enforcement of standard accounting procedures for utilities, enforcement of fines and ­ Berg (2013a) cites several predominant elements of sanctions); (e)  appointment and compensation importance regarding the different ­ regulatory frame- ­ process of staff; (f)  level of financial autonomy; and work options. These include how information is made decision-making processes (Mustafa 2002). (g) ­ available; how incentives are implemented effec- tively; and performance evaluation. The literature The literature supports the implementation of evi- also identifies a number of factors to aid evaluation of dence-based approaches in regulatory decisions to a regulatory agency including (a) how the regulatory deliver successful outcomes that would contribute to authority or responsibilities are mandated or the sustainability of services. One particular method Regulation of Water Supply and Sanitation in Bank Client Countries 25 by which regulatory performance can be assessed is regulator is a key determinant of resources available for through regulatory impact analysis (RIA). The OECD recruitment, capacity building, and staff retention. defines RIA as the “systematic approach to critically Depending on the law, regulators could obtain funds assessing the impact of proposed and existing regula- from a surcharge on utility bills; however, the central tions.” A wide range of methods and tools to imple- government may have the authority to allocate money ment RIA and measure regulatory impact of newly from the public budget. Cases in which the regulator introduced regulatory interventions are available relies on public funding could compromise the regula- (OECD 2005; Rodrigo 2005). The OECD and Public tors independent authority (Berg 2013a). Utility Research Center (PURC) provide valuable sources to guide implementation of RIA as well as best 3.3 Regulatory Functions practices from LMICs. ­ The OECD report on The Governance of Water In addition, regulators may look to improve their per- Regulators (2015) surveys 34 different entities respon- formance by seeking external audits and using inter- sible for regulation of WSS services and has developed national standards for guidance. An example of a comprehensive typology of regulatory functions that external audits is the ISO 9001 audit for quality man- comprise 19 different functions, the majority of which agement systems, which assesses a range of gover- are  also applicable in other infrastructure sectors. nance elements of management systems, including These are broadly categorized as the following: but not limited to human capacity, customer commu- nication (including complaint handling mechanisms • Tariff setting, an important task of the WSS regulator and feedback), internal audit process, process evalua- whether in a private or public operator setting tion, resources, and organizational knowledge. Upon • Monitoring service and performance standards, an successful completion of the assessment, the regula- important objective that impacts both service deliv- tor could attain the ISO 9001 certification as an ery as well as long-term sustainability internationally recognized standard of quality man- ­ agement. Currently, there is little literature and expe- • Enhancing governance of the sector, including trans- parency and accountability of key stakeholders (in rience available in the use of external audits to particular the service provider) and promoting cus- improve performance of regulators in LMICs. tomer voice, which are additional important func- Regulatory forms should be aligned with available or tions for any regulatory framework realistically attainable human resources capacity in the • Increasing access and equity through pro-poor country. Berg (2013a) discusses a number of important regulation human resources policies and requirements that should • The fit of regulation within the broader enabling envi- be made available to regulators to deliver results. For ronment, including legal and institutional framework instance, recruitment and staff training could be part of regular managerial responsibilities. In addition, com- In addition, regulation can entail WRM, environmental pensation policy needs to be flexible enough to recruit matters and related drinking water quality standards able staff and retain the expertise developed. Also, (see Box 3.2). We do not discuss these areas in detail attention needs to be given to encourage professional- but do point to their importance and interrelatedness. ization and promote sustainability including nomina- And as explained previously in terms of regulatory tion procedures and measures to avoid political form, the relevant functions and content will ulti- appointments. Capacity building is crucial for the long- mately be completely dependent on the available or term sustainability of the agency. The funding of the realistically attainable capacity. 26 Regulation of Water Supply and Sanitation in Bank Client Countries Improving Financial Sustainability have  been achieved using the specified procedures If adequately equipped, regulators could play a major (Berg 2013b). Forms of regulatory regimes, such as rate role in availing the financial resources necessary to of return and price cap, all aim to create financial achieve the policy goals set by the sector as well as incentives by providing opportunities for service pro- ­ verifying that those goals have been achieved effec- viders to cover costs. Additionally, yardstick regula- tively. Tariff setting (including tariff structures and tion offers incentives to cut costs by rewarding good ­ levels) could be a potentially powerful tool in success- performance and penalizing poor performance. fully achieving various policies and objectives. Relative success or failure is dependent on, among Regulators may be authorized to apply a particular other things, actual information asymmetries between methodology to set tariffs, or they may be given discre- the service providers and regulator (Mumssen, Saltiel, tion in determining them. Ideally, tariff levels are and Kingdom 2018). determined based on the revenues required to achieve WSS regulators in LMICs have typically used the cost- financial sustainability assuming some level of opera- plus (also known as rate of return) method, but some tional efficiency, investment program, and financing of them switched to price cap or incentive-based arrangements. The tariff structure refers to the design methods in the 1990s, only to revert back to simpler of the rates to allow for cost recovery of prudently cost- plus approaches to setting WSS tariffs (Camos incurred costs, incentivize efficient water consump- and Estache 2017; UNCTAD 2010). Some hybrid meth- tion, and promote equity. Different approaches to rate ods have also been tried in which some costs (uncon- setting and designing tariff structures are used to trollable) are automatically passed through while achieve financial sustainability while also promoting a others are subject to review because the utility is multitude of sector policies, including demand man- expected to control such costs (Camos and Estache agement, universal access, and pro-poor approaches. 2017). Broadly put, the higher the risk or perception of To the extent possible, the following discussion institutional risk, the more attractive a cost-plus separates the discussion between rate setting, which ­ regime appears (Estache and Wren-Lewis 2008). Tariff focuses on overall cost recovery and financial sustain- methodology is also determined by the gaps in the ability, from tariff structures (e.g. increasing blocks, cost information that is available to regulators who lifelines), which can have redistributive or other policy must have both the data and the ability to use regula- implications, with the latter discussed in more tory accounting practices (including valuing the regu- detail  in the subsection discussing pro-poor and latory asset base) needed to compute tariffs and rates non-network services regulation. of return needed under various scenarios (basic oper- Incentive regulation uses rewards and penalties to ations, investments, social concerns, among others). motivate behavior that improves service provider per- Thus, some practitioners argue for a phased approach. formance and ultimately sustainable management of The simplest solution is to allow authorities to buy services. Mechanisms include price setting regimes time to put all the regulatory tools in place (e.g., with built-in incentives; efficiency reviews that evalu- accounting system, asset valuation, cost of capital ate controllable costs; benchmarking performance; assessment, and efficiency measurement methodolo- and the setting of performance targets. Additionally, gies and matching databases). These are needed to command and control regulation can be used, whereby compute a fair average price or subsidy, which can be the regulator incentivizes service providers to imple- done with a reasonably modest amount of basic cost ment specific actions through monitoring compliance accounting data. The approach also reduces the risk of with the set performance goals and ensuring they possible artificial cost inflation to justify higher prices Regulation of Water Supply and Sanitation in Bank Client Countries 27 and profit sharing between authorities and operators adding to the financial burden and increasing levels (Camos and Estache 2017). The key is for regulators to of debt. This implies a key role for regulators in pre- keep an eye on credit worthiness and the ability of venting underpricing of services, which in turn utilities to access commercial finance in some form or would attract private sector investments and appro- in some degree. It is clear that meeting the SDG target priate financing arrangements. of universal access will be achieved only if utilities can B. Underpricing of WSS services: In many LMICs, tariffs gradually begin to  supplement current financing are politically sensitive, and tariff setting based on (through transfers, tariffs and taxes) with some level a proper valuation of the utility’s asset base would ­ orrowing and decrease reliance on of commercial b entail tariff increases among users, which is often public resources over time (Goksu et al. 2017). politically inconvenient. Thus, a key challenge for tariff setting for public sector utilities is inclusion The literature discusses a number of common chal- of the asset base and capital investments. Often, lenges related to achieving financial sustainability and the cost of replacing old assets and cost of pro- the regulatory tools available to address them. Weak viding a return on the investment tied up in the institutions marked by low credibility, capacity, and assets (return on capital) are not calculated and inefficiency, compounded by lack of data on costs, are therefore not included in the tariffs. Hence, regu- at the forefront of getting to cost recovery. Other chal- lators could undertake a thorough valuation of the lenges by and large revolve around the p ­ roblem of regulatory asset base and develop scenario-based underinvestment and inefficient investment in the WSS investment plans (depending on coverage targets) provides a number of possible sector. The literature ­ to demonstrate what it will take to provide univer- explanations for this: (a) public sector fiscal constraints, sal coverage. Consumer ability and willingness to (b)  underpricing of WSS services, including through pay are a ­ dditional factors that considerably influ- low asset valuation, and (c) multiple institutional man- ence ­ underpricing of services. Utilities often can- dates and lack of coordination among institutions not charge full cost recovery tariffs unless subsidy responsible for sector investments. Consequentially, mechanisms are established, nor can they charge this also results in low levels of private sector invest- full costs if service quality is poor. ment given low credibility and high risk resulting from lack of predictability and consistency. C. Multiple institutional mandates and lack of coordina- tion among institutions responsible for investment: A. Public sector fiscal constraints: Regulatory decisions Vertical and horizontal coordination mechanisms have internalized the fact that the WSS sector has between different intergovernmental levels and typically financed its investments from public debt organizations within the sector must be adminis- as opposed to tariff revenues. This has resulted in tered to remedy coordination challenges that hinder accumulation of unsustainable levels of govern- potential to attract sector investments. Issues of ver- ment debt to finance investments. Moreover, under- tical coordination are becoming more important as pricing reduces the sector’s ability to finance “multilevel governance” becomes a common chal- investments and operations. In addition, the method lenge for governments. Even in a centralized institu- by which investment projects are packaged to attract tional context, subnational levels of government private investors sometimes leads to private opera- exercise some level of autonomy, which requires a tors selecting only the best investment opportuni- desirable level of coherence among decision makers ties. Thus, high-cost, low-revenue activities (such as across the different levels of government. Portugal, network expansion) are left for the public sector, for example, set out a Strategic Plan for Water Supply 28 Regulation of Water Supply and Sanitation in Bank Client Countries and Sanitation Sector (PENSAAR), which allows all creating incentives for operators to share cost data. those involved in the WSS sector to have a clear idea Under conditions in which service obligations and low about the government’s objectives and priorities, tariffs are enforced, service providers are incentivized and for greater coordination among the various to adjust production within the limits of the regulatory institutions (Mumssen, Saltiel, and Kingdom 2018). boundaries. Carvalho, Marques, and Berg (2012) find Note that the policy (plan) is not a responsibility of over 250 studies that explore efficiency drivers of WSS the regulator. The regulator supervises and approves service provision that have underscored a number of the WSS investment plans, taking into account the insights on the impact of regulation on prices, cost, and national objectives for the WSS sector. quality of service: (a) lasting cost inefficiencies exist despite regulatory reforms; (b) service provider perfor- Regulatory challenges in resolving inefficient invest- mance may be better assessed on a case by case basis to ment levels are of a political nature. Tremolet and account for wide-ranging variables including market Halpern (2006) discuss the political sensitivities of the size, ability, and willingness to pay; (c) some cost drivers regulators’ task to deliver fair access but also fair rates are predictable; and (d) overall institutional governance of return to service providers and to minimize subsidy matters to the impact of regulation. payment burdens on taxpayers. In the absence of a strong regulator, service providers have the incentive Improving Service Provider Performance to maximize returns at the expense of service quality and coverage levels. An empirical study shows that the Setting performance standards, for example, using private operator of the Malian water utility delivered KPIs, is a way that regulators can analyze, evaluate, investment levels that were well below the contractual and possibly incentivize service providers’ perfor- commitments, which is expected as long as the pro- mance. Submission of annual audited financial reports vider can get away with it. Moreover, despite achieving is considered standard practice, and they should be cost savings, very little of the savings were passed made available to customers and other stakeholders. on  to consumers. Eventually the services were rena- The performance report would have to meet the infor- tionalized. Similar experiences are documented across mational requirements of a transparent set of evalua- a number of Latin American countries, including tion criteria and standards designed to ensure the Argentina and Bolivia (Camos and Estache 2017). sustainability of operational and capital costs and technical and service quality. Setting performance Nonetheless, regulation can be strengthened to help standards for services can include setting standards address the monumental challenge of financial sustain- for service continuity and water pressure; meter instal- ability. An important start is to improve the capacity of lation or service repair schedules; or addressing con- regulators and enhance data availability to shine the sumer complaints. Performance reports could also light on performance for service providers, the regula- cover social information such as coverage, access for tor, and potential investors. This could entail financial the poor, water resources sustainability, and environ- modeling instruments to monitor the financial sustain- mental impacts of inadequate mechanisms for sanita- ability of operations through quantitative indicators tion. However, set performance standards will have and targets that can be monitored. For example, credit implications for the cost of services as improved qual- enhancement indexes that help prepare service provid- ity and reliability necessitates increased resources. ers for commercial finance by highlighting where they need to improve performance to attract investment. Moreover, benchmarking could be a part of tariff However, the literature on efficiency implies that regu- reviews and choosing an appropriate tariff methodol- lators have not been as effective as they should be in ogy (Berg 2013a). Berg (2013a) elaborates on some KPIs Regulation of Water Supply and Sanitation in Bank Client Countries 29 that are an essential feature for benchmarking perfor- • Lack of capacity to collect and analyze data. In many mance and establishing realistic targets, these fall countries, this is the result of a wrong skill mix or under the following broad categories: level among the staff of the agencies and the minis- tries. It can also often be due to a lack of financial • Service quality: measurements of service quality resources to outsource or acquire technical assis- include continuity, safety, and average times to tance or put in place an information collection sys- undertake repair works. Service providers face tem that could be used to measure performance, trade-offs between improving service quality and forecast needs, and assess the real financing and expanding networks. This creates issues because technological options at the city, regional, or citizen satisfaction is determined by perceptions of national level. One outcome of this is that the regu- service quality, access, and tariffs. lators are less likely to be able to observe costs and • Efficiency: indicators of operational efficiency distinguish between the extent to which high costs include the number of employees per 1,000 connec- are linked to the service provider’s technological tions and the level of non-revenue water (NRW). constraints, inefficiencies of information, or efforts • Financial: measurements of financial performance to make the most of the technology available (Berg include bill collection rates, cost recovery levels, 2013b; Camos and Estache 2017). and available funds for capital investments. In addition to annual performance reports, other • Customer Service: indicators include the number of instruments that facilitate informative interactions customer complaints received, addressed, and between sector stakeholders include audited state- resolved; the duration of time between receipt and ments that the service provider has complied with all resolution of complaint; and customer satisfaction its relevant statutory, license, and regulatory obliga- of services. tions. Regulators often have the responsibility to issue and monitor operational licenses to service providers, Benchmarking performance across different service another tool available to incentivize improved perfor- providers is done to a certain extent in LMICs (see mance. Licenses specify standards by which the ser- examples in next chapter). However, the literature vice providers must be operated. In the case required points out some common challenges regulators face in standards are unmet, regulators have authority to implementation and enforcement of benchmarking: revoke licenses; however, this authority is often not practiced as it will likely adversely impact consumers. • Weak performance incentives for public service pro- Other financial penalties can be implemented; how- viders. Regulators can benchmark performance of ever, this will lead to reductions in spending on main- service providers in meeting specified standards; tenance. In the case of a concession, the regulator however, the greater issue is what incentives and oversees the contract, ensuring that both parties disincentives are available to the regulator in cases usually the state and a private entity or PPP) adhere (­ in which performance standards are not met. For to the contract. example, bonus pools from public funds can also be allocated to service providers based on their rel- ative performance, thus providing incentives to Increasing Accountability, Transparency and improve service quality and contain costs. An alter- Consumer Voice native would be to use the performance criteria in Enabling enforcement of accountability and transpar- allocating investment funds, which would incen- ency measures ultimately requires adequate amounts tivize better performance (Berg 2013a). and quality of data and information, as well as 30 Regulation of Water Supply and Sanitation in Bank Client Countries involving citizen voice into the regulatory process. and increase the sense that regulatory interactions are Brown, Stern, and Tenenbaum (2006) have developed subject to checks and balances. Perceived lower a list of 10 governance principles that apply to the accountability increases risks that translate in to higher broader institutional framework, including the regula- prices and rent as well as lower output and quality tor. The list emphasizes the importance of account- (Estache and Wren-Lewis 2009; Soreide et al. 2014). ability and transparency, among other principles. Camos and Estache (2017) suggest that if the main Transparency is essential to effectively benchmark underlying issue contributing to the lack of account- performance and emulate competition in open ability is the lack of data either due to the absence of ­ markets. Data and information regarding performance, data collection tools (e.g., household consumption business plans, and internal incentives should be surveys), or if regulators do not have the technical ­ collected and publicly disclosed through a number of capacity to process available information, it may be avenues, including public hearings, the Internet, and reasonable to implement a regulatory system that lim- newspapers. Stakeholder views can be heard through its the use of information or required skills. This may regulatory public hearings and workshops. Information be achieved by setting price caps informed by available on trends and relative performance allows for effective international cost information. An alternative inter- design and implementation of policy and mobilization vention is to strengthen the technical expertise and of public opinion (Berg 2013a). transparency of regulatory processes as well as the Additionally, through the regulatory tools that allow conflict resolution mechanisms. Furthermore, enhanc- for collection and publication of performance data, ing the role of stakeholders in performance evaluation regulators play a key role in increasing accountability and conflict resolution could allow for strengthened of service providers to government and citizenry. accountability mechanisms by increasing public Consistent availability of reliable and up-to-date infor- awareness of the role played by various stakeholders. mation on performance indicators serves to inform Achieving transparency and accountability entails a and guide policy makers, implementers, and service range of actions that regulatory processes should providers and holds them accountable for outcomes of comprise. For instance, stakeholder consultations and their decisions. An additional mechanism by which effective communication and information dissemina- utility managers are held accountable is through tech- tion methods are crucial to increase consumer voice nical evaluations of business plans (Berg 2013a). and engagement within the regulatory process Further, service providers can be required to display (OECD 2010). relevant performance information on websites, in pamphlets (with bills) to customers, etc. Pro-Poor and Non-Network Services Regulation However, in many LMICs, reporting is weak, even if de There is a need for specific pro-poor approaches to reg- jure the requirements are well spelt out. Berg (2013a) ulation in LMICs in relation to WSS services. Significant states that the introduction of cost and regulatory segments of the population are not connected to the accounting processes would be largely justified by the water and particularly to sewerage networks of major difficult access to decent cost related data, as revealed public service companies because they live below the by empirical research on efficiency measurement for poverty line and cannot finance a connection, it is instance. Furthermore, elections, discussions in par- legally prohibited to make connections to informal set- liament, and so on can hold regulators and the politi- tlements, or they live too far from the networks. cians that appointed them to account. This can help Regulation may help to ensure universal access to reduce the likelihood of arbitrary or corrupt decisions water and sanitation by promoting expansion of Regulation of Water Supply and Sanitation in Bank Client Countries 31 services, redistributing benefits and protecting con- network, and it is a complex task for which there have sumers from possible abuses (Franceys and Gerlach been historically limited capacities or models. The 2008; Trémolet and Hunt 2006). inclusion of social or pro-poor dimensions to the scope of economic regulation is not supported by all. Groom, Recent research on the role of regulators in addressing Halpern, and Ehrhardt (2006) argue that economic reg- equity concerns attempts to better understand the fac- ulation should be clearly defined. While there is over- tors contributing to the poor performance in this area lap with other functions (e.g., consumer dispute (Camos and Estache 2017). Limited fiscal capacity to resolution and social policy), the domain of economic implement pro-poor subsidy schemes is an often-cited regulation should be kept narrow, clearly specified, and explanation for failing to adequately address equity distinguished from the policy and governance func- matters of the sector. However, the literature also dis- tions. Yet, many concession contracts have included a cusses a number of underlying factors for these poor mandate to extend to poor areas, such as through out- outcomes. First, regulation does not yet have the capa- put-based aid approaches, and there are cases in which bility to rely on solid, reliable baseline data for low-­ regulatory regimes specifically distinguish between income consumers or their service providers (Camos economic tariffs and social tariffs, as is being proposed and Estache 2017). Second, the state of addressing the in Egypt (see discussion in the next chapter). needs of the poor reflects accountability mechanisms. The weak performance of regulators in specifying ser- Different tariff and subsidy schemes can be adopted to vice obligations, the absence of regulation of alterna- better serve the poor. Tariff structures have been tive suppliers, and the weak capacity to negotiate with designed to try and remove disincentives to serving the potential investors regarding the inclusion of high-cost poor, and better targeting of subsidies to reach the consumers may all be related to the lack of transpar- unconnected poor, including possible focus on connec- ency or accountability of authorities to these stake- tion subsidies and direct transfers to consumers holders (Gerlach and Franceys 2010). (Franceys and Gerlache 2008; Trémolet 2002). For example, the increasing block tariff (IBT) structures Gerlach and Franceys (2010) and Whittington et  al. entail different prices charged per unit for different (2015) find that even in cases in which data are avail- consumption blocks. The prices charged increase as able, poor choices of regulatory tools, processes, and consumption increases. However, if the first block is policies fail to address equity challenges of the sector. subsidized, consumers on higher tariff blocks will also Camos and Estache (2017) add that research that spans benefit from the subsidy; therefore, the subsidy is inef- over 30  years documents the failure of subsidies ficient because it is captured by those who consume reaching those in need because they target consump- more (under the assumption that low-income house- tion rather than access. However, this conclusion does holds consume less, which may not always be correct). not take into account that the majority of capital Alternatively, tariffs can be structured under a ­volume-​ expenditures in many LMICs are heavily subsidized, differentiated tariff, which charges prices based on the sometimes financed through external grants or very last block of consumption, irrespective of the different low concessional financing. Nevertheless, the choice blocks. Therefore, any household consuming above of tariff structures and imposition of service obliga- the subsidized rate will pay a higher tariff for all of tions have not been relatively more successful in alle- their consumption. This can be a more effective tariff viating the needs of the poor. structure in achieving demand management objec- Regulatory agencies are rarely mandated to protect tives and deliver on efficiency targets as water con- poor consumers, or those who are not connected to the sumption is rationed (Trémolet and Hunt 2006). 32 Regulation of Water Supply and Sanitation in Bank Client Countries Lifeline rates can be introduced in the case where access of the poorest, and coverage targets tied to low-income consumers already have  access to WSS locations rather than statistics and use of public services. Lifeline rates are targeted subsidies based on information campaigns (Baker and Trémolet 2000b); household consumption levels. This entails the use of Stallard and Ehrhardt 2004). consumption volume as a mechanism to target low-­ • Incorporating alternative service providers: including income consumers. Lifeline rates can be considered as potentially through light-handed regulation that an alteration to block tariffs because only the low-­ replaces price and quality regulation with public income consumption bracket is subsidized, whereas performance data (Trémolet and Browning 2002) or the remainder of the consumption blocks are charged demand minimum requirements such as licensing, at the commercial rate. In addition to serving the poor, drinking water tests and/or maximum prices, relax- lifeline tariffs offer other benefits, including minimal ing exclusivity rights of utilities, assisting providers administrative costs to implement, and offer incen- to obtain legal rights, and addressing land tenure tives for a large consumer base to economize and issues. achieve efficiency objectives (Trémolet and Hunt • Customer and civil society: including the use of par- 2006). Another alternative is to set volumetric tariffs ticipatory and survey techniques to increase cus- based on commercial (marginal cost) rate and to estab- tomer involvement, and accessible and inclusive lish rebates for the poor, for example, by taking into regulatory processes (Brocklehurst 2002; Stallard account the neighborhood or the income. and Ehrhardt 2004). It is important to note that these tariff structure • Service obligations and universal service obligations approaches do rest on a number of assumptions, which (USOs): the use of obligatory service (compulsory in many cases have been proven incorrect in practice. service to all wishing to connect under the current For instance, one assumption is that consumption of tariffs) and USOs, which extend this access through the poor is in the lower blocks; however, poor consum- tariff design or contractual obligations (Franceys ers are not necessarily the small consumers (may serve and Gerlache 2008). large or several families), and so the tariffs may be regressive. Although more complicated regarding Aligning Institutions and Incentives 3.4  administrative issues, some countries use sliding with the Enabling Environment blocks, taking into account the number of people in the households. The tariff structure also assumes that The literature agrees that there are no one-size-fits-all poor households have metered access to water ser- solutions; therefore, effective regulatory frameworks vices, which is often not the case (Trémolet and Binder must be embedded within political economy and gov- 2009). In fact, the percentage of metered connections ernance structures of a given country and aligned with is low in many countries, which means that tariff struc- sector policy and institutional frameworks to achieve tures that embed subsidies benefit only a small portion sustainable outcomes. Surveys conducted on regula- of the population. tion of SOEs in LMICs and other case studies and empirical analyses provide good evidence that sug- Other regulatory mechanisms used to better serve the gests that regulation and institutional frameworks poor (specifically the urban poor) include the must be aligned to be effective (Berg 2013a). following: Mumssen, Saltiel, and Kingdom (2018) promote holis- • Price and service or quality differentiation: meaning tic approaches in shaping WSS sector policies, institu- acceptable relaxation in quality of services to ease tions, and regulation (PIR) that consider the wider Regulation of Water Supply and Sanitation in Bank Client Countries 33 political economy and governance framework to Indonesia provides an example of the damaging con- incentivize sustainable actions. Figure 3.1 demon- sequences of incoherent reform, in which the two strates the role and interlinkages between the enabling main institutional reforms, namely corporatization environment and WSS sector PIR frameworks that cre- and decentralization, were supported by two different ate incentives for sector actors. Specifically, the study legal frameworks. This incentivized local governments explores the interlinkages between two types of to establish Perusahaan Daerah Air Minum (regional incentives: WSS utilities or PDAMs) because they provide a source of revenue for local government, regardless of whether • Incentives that emanate from the enabling environ- that is the most suitable form of service delivery. This ment, which act as drivers for reform and shape PIR has resulted in small PDAMs with only a few thousand frameworks. The enabling environment comprises unviable connections, inefficient operation, and poor the broader political economy and governance service quality. framework within which the sector sits. • Incentives that emanate from WSS sector-level PIR The relationship between the political economy of a interventions. given country and its legal system is characterized by FIGURE 3.1. Schematic Aligning Institutions and Incentives for WSS Services Enabling environment: state of the sector / political economy / governance structures Sector outcomes may lead to some citizens demanding Provides the drivers for speci ic actions reform, removal of binding constraints, determining the policy, institutional, and regulatory reforms chosen De jure versus De facto: enabling environment will in uence the implementation of PIR and attainment of outcomes Aligning institutions and Policy incentives to meet sector Provides the objectives WSS outcomes? incentives for Goal: Sustainable WSS speci ic actions to Services deliver WSS service Institutions Regulation Note: WSS = water supply and sanitation. 34 Regulation of Water Supply and Sanitation in Bank Client Countries dynamic interlinkages. In turn, a country’s legal sys- designed within the context of existing institutional tem has implications on the regulatory objectives, realities and capacity in order to achieve desired out- form, and functions adopted. Accordingly, creating comes. This implies a dynamic regulatory reform pro- “best fit” regulatory interventions entails understand- cess whereby softer incentives may be imposed in ing the legal regime and normative content of the legal weaker institutional environments, and as institu- framework. There are two main legal systems globally: tional capacity strengthens over time, stronger incen- common law (as practiced in the United Kingdom), tives may be introduced. and civil law (as practiced in France). A common law In this regard, Camos and Estache (2017) find that the system is less prescriptive than a civil law system; main lesson learned from 25 years of experience is the hence, it is common to find regulation by contract in necessity of carrying out ex ante institutional diagnos- most francophone, Spanish and Portuguese-speaking tics to design regulatory interventions within the con- countries that adopt civil law. Whereas, regulation by text of institutional constraints and opportunities. The agency is more common in anglophone countries. legal and public administration literature identifies a Laws must be available, enforceable, and accessible if number of factors to be considered, including legal, they are to adequately support PIR frameworks and to bureaucratic, cultural, capacity, political, and other incentivize sustainability of service delivery. In the bottlenecks, or hurdles because they characterize the absence of a solid legal framework, PIR interventions commitment ability (and hence the credibility) and de jure may not be implemented de facto. For exam- the  technical capacity of regulators. Estache and ple, Portugal’s reform of 1993 was supported by a Wren-Lewis (2009) further elaborate on four broad strong legal framework that clearly separated the categories that depict the range of institutional charac- ­ policy making (executive), regulatory, and service teristics that should be considered when developing delivery functions within the sector, and allocated the regulatory interventions to ensure that incentives roles and responsibilities of the institutions. The legal created are effective: ­ framework also provides guidance on the service pro- vision model: direct public management, delegated • Institutional, technical, and legal capacity: the extent public management with or without inter-municipal to which regulators or the ministry have the infor- systems (aggregation of several municipalities to pro- mation, technical tools, skills, financial resources, vide WSS services), or delegation to private sector or the mandate to supervise all aspects of utility operators. The regulatory framework, which includes performance. an independent regulator to perform the economic • Credibility of the officials: the political will of the regulatory functions, was developed to suit the exist- authorities to make and enforce long-term contrac- ing arrangements and to regulate all types of service tual commitments without unjustified renegotia- provider. tions. This is particularly important when long-lived An important factor to consider when creating “best investments require long depreciation periods to be fit” PIR interventions is the institutional capacity of covered by tariffs or subsidies. stakeholders to respond to incentives. In the context of • Accountability: the extent to which sector regulation, the literature highlights that effectiveness ­ stakeholders—whether consumers, service pro- of regulatory interventions depends on the degree to viders, financiers (including donors), regulators, which regulatory objectives, forms, and functions are ministry bureaucrats, or politicians—can be held in tune with the institutional constraints and prefer- responsible for their obligations. This is largely linked ences of a country. Regulatory interventions must be to the information flows between stakeholders, Regulation of Water Supply and Sanitation in Bank Client Countries 35 since it is through misuse or lack of transparency of functions such as tariff setting, standardization, this information that the potential for abuses lead- consumer engagement, and so forth; and (d) the dif- ing to underperformance in costs, quality, or price ferent political economy and institutional factors can take place. that impact effectiveness of regulatory frameworks • Fiscal efficiency: the extent to which governments and underscore the importance of designing regula- are able to collect adequate revenue when they com- tory frameworks within broader institutional con- mit to direct subsidies. These are quite common in texts. The following chapter discusses what has been the sector as a way of ensuring that the limited abil- observed in practice and explores the workings of ity of consumers to pay for services does not lead to the literature review topics in practice in LMICs the exclusion of the poorest, or can be used as a way through case study examples. to reduce the financial risk for service providers when investing in a project. Notes 1. This desk review identifies information in published and draft studies In support of the preceding list, Camos and Estache on WSS regulatory arrangements in 34 countries as follows: (a) the (2017) find that detailed evidence shows that the par- WSS PIR study that this paper arose from covers 10 case study coun- ticularly large number of failures in WSS contractual tries; (b) for this paper the firm PwC studied WSS regulation in five LMICs; (c) a World Bank study of WSS regulators in Middle East and arrangements between public and private players, as North Africa covers five countries and the West Bank and Gaza; (d) an well as across government levels within countries or OECD study of water governance in Latin America and the Caribbean across government agencies and ministries, can be covers regulatory arrangements in 13 countries. However, none of this information includes descriptions of the working of these regulators, correlated with a poor appreciation of at least one of such as number of decisions issued, types of determinations in those these four sources of institutional weaknesses. decisions, number of decisions complied with by utilities, and However, it is also important to recognize that despite recourse actions and options of WSS regulators in the event of noncompliance. weak utility performance, institutional incentives can 2. Although country-specific information is relatively limited, much exist for sustained poor performance. Berg (2013a) knowledge is available regarding specific regulatory forms and cautions that there are groups that benefit from weak functions. The Regulation Body of Knowledge (http://regulationbod​ ­ utility performance. Low-level equilibriums reflect yofknowledge.org/) is an online platform for all topics related to infra- structure regulation, developed by the Public Utility Research Center excessive governmental discretion in price setting, (PURC) at the University of Florida, and the collaborative efforts of the which ultimately leads to political opportunism. University of Toulouse, the  Pontificia Universidad Católica, the World Bank, and a panel of international experts. This site pro- This chapter has provided a broad overview of liter- vides links to more than 500 references, an extensive glossary, and ature available specific to the WSS sector covering self-testing features to facilitate learning.  the following topic areas in theory: (a) what is regu- 3. See the USAID website, http://www.energytoolbox.org/. lation in LMICs, i.e., the objectives; (b) how WSS /public​ 4. See the World Bank website on PPPs: https://ppp.worldbank.org​ regulation is organized in LMICs; (c) regulatory ­ -private-partnership/node/335/. 36 Regulation of Water Supply and Sanitation in Bank Client Countries Chapter 4: WSS Regulation in Practice in Low- and Middle-Income Countries M ost studies and evidence anecdotally analyzed 4.1 Regulatory Objectives demonstrate that regulatory models copied As described in the preceding literature review, there from the United Kingdom, the United States, are some common baseline objectives of regulation of effective. In France, and Australia have not been very ­ LMICs. But even then, the degree to which, for WSS in ­ addition to the fact that the WSS sector in LMICs is example, transparency and predictability, two objec- dominated by SOEs, municipally and community run tives often cited, are actually demanded from regula- providers, regulation is faced with the additional chal- tion will be dependent on the political economy c ­ ontext. lenges of substantial service inefficiencies due in part Nevertheless, what can broadly be stated as needs of to poor investment planning and lack of maintenance; the WSS sector in most LMICs, and therefore the objec- poor financial sustainability due both to the inability tives of effective regulation, are increased access, to charge as well as the inability to pay; weak human improved services, and, related to both, increased resources capacity; poor availability of data; political investments. There will be many other objec- (good) ­ interference; and many other constraints discussed in tives of regulation depending on the specific state of the chapters. Despite these challenges, vari- the previous ­ WSS sector and the political economy ­ context. ­mplemented. ous forms of regulatory models are being i Unfortunately, there is a lack of data on WSS regulatory performance in LMICs to provide a sound evidence base Increasing Access, Including to Peri-Urban Areas, practitioners. The anecdotal and episodic evidence for ­ Rural Areas, and to Poor and Vulnerable ­Groups points to a mixed picture, although with one common- The important role that regulation plays in creating effec- ality: they are all on a learning path, with some experi- tive incentives to achieve universal access to services is encing less challenges than o ­ thers. Importantly, when recognized by many L ­ MICs. For example, in Brazil, the determining “effectiveness,” it is important to avoid using most recent phase of reforms (Water and Sanitation Law, a lens “imported” from elsewhere, just as the regulatory 11.445/07) seeks to achieve universal access through Lei ­ models themselves ­were. For example, although economic the creation and strengthening of regulatory institutions regulation following the Ofwat model may not have been with administrative, financial, and budgetary indepen- achieved as originally intended, regulation in some cases dence, as well as incentivizing transparency and collabo- has organically adapted to local circumstances to achieve government. Additionally, ration across all levels of ­ some, albeit limited, success in improving service deliv- regulation by contract is an alternative whereby increased sustainability. One deduction that can be made ery and ­ ­ access to WSS services can be incentivized. In the based on the regulatory experiences investigated here Philippines, for example, concession agreements (CA) and the literature reviewed in the previous chapter is the with the Metropolitan Waterworks and Sewerage System utmost importance of ensuring regulatory frameworks (MWSS) stipulate the commitments, roles and responsi- are embedded within the broader institutional structures bilities of each party and includes the responsibilities of sector. of the ­ 1 concessionaires to increase access within their service Regulation of Water Supply and Sanitation in Bank Client Countries 37 targets. Similarly, areas in addition to other performance ­ regulation in LMICs should be to bring some level of in Burkina Faso, as part of the performance contract sector. In order to raise financial sustainability to the ­ between the Office National de l’Eau et de l’Assainisse- revenue from users, a tariff system that is perceived to ment (ONEA) and the government, ONEA implemented a be fair, both in terms of price and quality, must be in program to expand services to informal settlements and place, and that system must be sanctioned by the reg- areas. The contract sets targets for technical peri-urban ­ ulatory ­ authorities. Further, to make the WSS sector an performance by ONEA, which includes investment com- attractive destination for private finance, regulation mitments to expand ­ access. must provide the certainty and reliability, if not guar- antee, of an attractive return on the i ­ nvestment. There Improving Quality of Service Delivery and are a variety of ways in which private finance can enter Efficiency of Service Providers the WSS sector, and the regulator can play a critical Regulators globally have a number of tools at their dis- ­ limate. This role in providing an investment-friendly c posal that are designed with the purpose of improving can take the form of preparing the sector or service service provider performance and, ultimately, quality providers for opportunities for blended finance, PPP of service ­delivery. In Zambia, a clear regulatory frame- arrangements, performance- (output)-based contracts, work is implemented by the regulator, the National and ­more. Water Supply and Sanitation Council (NWASCO), As described previously, regulation is also expected to which is responsible for setting minimum service lev- improve coverage through extension of services to els and agreements as well as monitoring and bench- ­ ommunities. From poor, peri-urban, and even rural c marking ­ performance. Utilities are required to sign an investor’s standpoint, however, these goals can be service agreements, which include minimum service contradictory because the increased coverage man- ­ WASCO. There are pen- levels, and are monitored by N date can increase costs that would cut into the return alties if minimum service levels are not met, giving the on investment, especially if this may mean moving incentives for utilities to meet these r ­equirements. into areas that are seen more as public goods (sanita- NWASCO monitors and benchmarks commercial util- tion) or as low i ­ncome. The regulator’s challenge is to ity performance and publishes results, which creates allow the investor to collect timely returns while cov- incentives for utilities to improve performance to ering its costs through a combination of tariffs, sur- move up the rankings in published benchmarking charges, and subsidies as agreed upon, and to try and reports. Also, in Colombia, the Superintendencia de ­ serve the population mandated through ­ policy. The Servicios Publicos Domiciliarios (SSPD) supervises the following sections provide examples of how LMIC gov- performance of all water companies and enforces reg- ernments, through regulation, are attempting to meet standards. Moreover, in ulations related to service ­ this challenge, for example, in Colombia, Albania, Peru, the Superintendencia Nacional de Servicios de Egypt, and ­ elsewhere. ­ Saneamiento (SUNASS) sets and monitors service qual- ity standards for u ­ tilities. Additional examples are 4.2 Regulatory Forms chapter. highlighted further in this ­ Regulation through a Dedicated Regulatory Agency Securing Access to Capital Markets for In a study of 123 LMICs, less than half have chosen to Sector Financing establish a regulatory agency that is separate from the Given immense infrastructure and operational needs, 2017). In Latin line ministry (Camos and Estache ­ households’ limited ability to pay, and constrained America, regulators have played an important role public resources, one of the primary objectives of in  pushing for service improvements, although 38 Regulation of Water Supply and Sanitation in Bank Client Countries ­ the  regulators may not always be i ndependent. challenges related to WSS service delivery, its govern- Colombia provides a successful example of this in ment has embarked on an ambitious regulatory and which the National Water Regulatory Commission institutional reform program that seeks to transfer reg- (CRA) handles tariff regulation and SSPD monitors the ulatory functions from the Palestinian Water Authority performance of utilities and has been able to improve (PWA) to the Water Sector Regulatory Council (WSRC), data collection efforts (Mumssen, Saltiel, and Kingdom established recently in 2014 (Mumssen and Triche ­ 2018). In Peru, SUNASS’s main responsibilities are to 2017). Finally, water sector regulation in Tanzania is ­ conduct and control the tariff system, as well as to carried out by an independent multisector regulator, evaluate utilities’ investment plans (known as opti- the Energy and Water Utilities Regulatory Authority mized master plans), and to set quality service stan- (EWURA). EWURA’s stated objectives are to promote ­ dards for utilities (Lentini ­ 2015). effective competition and economic efficiency; protect consumer interests; ensure financial sustainability; Examples from other countries include Mozambique deliver equitable access; enhance sector knowledge; where two national asset managers own and operate environment. and protect the ­ the water assets and a water regulator that regulates the asset manager and operator (Mumssen, Saltiel, and Table ­4.1 provides an overview of the incidence of Kingdom ­ 2018). The regulator (Water Supply LMICs. Often sought as independent WSS regulators in ­ Regulatory Council) addresses tariff setting, invest- a way to attract private sector investment and improve ments, and quality of service monitoring by supervis- performance, independent regulatory agencies have ing and approving the regulatory agreement and the not been free from political interference, nor have they regulatory framework signed by each utility and been linked to sector improvements (Bertomeu- owner. Also, the the  corresponding national assets ­ al. ­ Sanchez et ­ 2017). Philippines lists 14 types of formal and informal WSS service providers and five types of water regulators, LMICs confront distinct challenges in terms of limited with the National Water Resources Board as the main ­ administrative capacity and budgetary resources. WSS regulatory agency (Mumssen, Saltiel, and Whether regulation is adequately implemented is a Kingdom ­2018). 2 capacity. Factors such as function of the regulators’ ­ poorly trained staff, insufficient information, lack of Additionally, Egypt is one of the few countries in the financial resources, and unrealistic time constraints Middle East and North Africa that has established a can all impact the capacity of regulators to effectively specific water sector regulator dedicated to monitoring responsibilities. Without implement the mandated ­ provision. The Egyptian Water Regulatory service ­ sustainable forms of human and financial resources to Authority (EWRA) undertakes regulation to achieve carry out regulatory functions, gaps between de jure universal and affordable access to WSS services; its evident. and de facto can become ­ mandate includes enforcement of regulatory legisla- tion, investment planning, technical standards and In Egypt, EWRA faces significant challenges in terms of assistance, financial monitoring, tariff review and set- its administrative, technical, and financial capacity ting, licensing, and performance ­monitoring. However, that prevent it from implementing its intended role de the de facto situation is that most of these responsibil- ­facto. However, it has undertaken a proactive approach, ities are unimplemented due to limited capacity with significant support from the donor community, to constraints. An additional example in the Middle East ­ develop its technical ­capacity. In West Bank and Gaza, a and North Africa is that of the West Bank and ­ Gaza. new policy document entitled “Capacity Development Although the West Bank and Gaza faces significant Policy and Strategy of the  Water Sector (2017)” was Regulation of Water Supply and Sanitation in Bank Client Countries 39 TABLE ­4.1. Incidence of Independent WSS Regulators in Low- and Middle-Income Countries Countries with Countries with Countries with Countries with Countries with Countries with both autonomous WSS PPP but autonomous no autonomous autonomous PPP in WSS regulator and no autonomous water regulator water regulator water regulator PPP water regulator but no WSS PPP and no PPP Full sample (177 countries) Number 80 157 69 89 11 8 Share in % ­45.2 ­88.7 39 ­50.3 ­6.2 ­4.5 Low- and Middle-income country sample (123 countries) Number 55 108 48 60 7 8 Share in % ­44.7 ­87.8 39 ­48.8 ­5.7 ­6.5 Source: Camos and Estache ­2017. ­ anitation. Note: PPP = public-private partnership; WSS = water supply and s completed. Also, in Mozambique, institutional recently ­ municipalities that may aggregate the function capacity was significantly weak and thus, private oper- utilities. Regulatory practice through state level ­ ators were required via contractual obligations to pro- at state level varies, with some states establishing vide training and increase administrative, technical, regulatory agencies, and similarly different munic- financial, and management capacity (Mumssen, Saltiel, ipalities have different ­ approaches. Fourteen states 2018). and Kingdom ­ sector public utility regulators, have created multi-­ however, independently of each other and the fed- These challenges are particularly exaggerated in fed- eral ­ government. Several municipalities have also eral political structures such as Brazil, India, and directly implemented their regulatory agencies, and ­ Nigeria. As elaborated in the following cases, in the in some regions, they form consortia to regulate in absence of institutionalized coordination mechanisms, order to create scale (at a regional level) and regulate regulation between national and subnational levels of themselves. Although there are good examples in all ­ government can often lead to suboptimal ­results. There levels of regulation (state, consortia, and municipal), is an increased risk of duplication of roles, sometimes a they compete between themselves and the same lack of clarity regarding the WSS jurisdiction, and often utility can be regulated in a distinct way by different an issue with coordination across national and state regulators, or they can change the regulator if they mandates. Although the benefits of subnational regula- ­ decisions. Starting in 2007, with disagree with their ­ tion include the increased ability to better align and tai- passage of Federal Law 11,445, Brazil implemented a lor regulatory incentives with local needs and coordinated, federal-level WSS policy that all states institutional capacity, as exhibited in India’s case, this and state-level regulators are subject to, and rep- is contingent on the existence of other key policy and resents, the basic foundational framework for WSS institutional factors including sufficient regulatory regulation in B ­ razil. For all types of service provid- 2018). autonomy (Mumssen, Saltiel, and Kingdom ­ ers, there are of course provisions in various national • Nationally set standards may not adequately reflect laws that are regulatory in nature, specifying, for the local needs and capacities of subnational gov- example, drinking water quality standards and ernment, as the case in Brazil d ­emonstrates. WSS ­ tandards. In respect of eco- wastewater discharge s service provision is entirely decentralized to nomic regulation, particularly the crucial element 40 Regulation of Water Supply and Sanitation in Bank Client Countries of tariff setting, this is left to the municipalities, but making have been managed by states through gov- again there are federal laws (such as the Law on Fiscal ernment ­ ministries. In the past 15 years or so, a few Responsibility), which impose implicit cost recovery states have taken steps to separate the policy, ser- providers. requirements on publicly owned service ­ vice provision, and regulatory functions and have attempted to create an enabling environment for • Nigeria’s case highlights the importance of sector private operators to enter the sector by establish- coordination between national and subnational lev- ing, among others, independent WSS regulators els of government. Federally, the Ministry of Water (PRAYAS ­2011).3 However, this has not been with- Resources is responsible for overall policy coordina- out ­ challenges. The Maharashtra Water Resources tion and more directly for water resources and river Regulatory Authority was the first of its kind, estab- basin management while states control WSS sector lished in 2005, and was followed by similar legal pro- ­ policies. A recent study on WSS regulation in Nigeria visions in Arunachal Pradesh (2006), Uttar Pradesh (Goldface 2008) points out the need for coordination (2008), Kashmir (2010), Kerala (2012), and Gujarat in WSS regulation between states and the federal (2012). However, Maharashtra is the only regulatory ­ ­ government. Currently, only the state of Lagos has ­ unctioning. This is primarily body that is currently f ­egulator. Most states do not imple- established a r due to political interference from state-level gov- ment regulatory responsibilities separately from ernment with WSS operations, for example, on the other sector functions, and tariffs are set by the state appointment of officials that may not be either inde- ministries and seldom reflect actual costs of service pendent or the best ­ fit. ­ delivery. The same study suggests that a national water commission be set up as an independent regu- These cases can be contrasted with the national-state lator at the federal, state, and local levels to provide coordination of regulation of the WSS sector in regulatory cohesion in tariff and standard s ­etting. Australia, in which a high degree of legal and institu- A recent AMCOW (African Ministers Council on tional sophistication along with political will have led Water) country status overview (World Bank 2010) to positive results, including broad national coordina- on Nigeria also posits the same regarding establish- tion on strategic objectives but state autonomy to ing WSS regulation separately from the policy and design and implement r ­ egulation. This is described in service delivery ­ functions. What is not clear from chapter 2, Box ­2.1 on New South Wales, Australia these studies and their respective recommendations al. ­ (Salisbury et ­ 2017). is what the structure of the WSS regulatory body Creative solutions for a decentralized regulatory should take, whether at the state level with protocols presence are ­ needed. The decentralized nature of for coordination with other states and the federal service delivery requires decentralized monitoring government, or at the federal level with offices in and enforcement ­ mechanisms. For example, the each state, centralizing the WSS regulatory function national regulator in Mozambique, the Water for greater coordination, cohesion of standards, and Regulation Council (Conselho de Regulação de Água, states. ease of performance benchmarking across ­ CRA), has developed a decentralized approach to And what types of incentives would be needed to be monitoring and problem solving that engages local put in place to motivate states to respond to policy regulatory ­ committees. This approach, which was government. objectives and priorities of the federal ­ designed in collaboration with local authorities, • India’s case presents some of the political chal- minimizes costs of regulation and promotes local ­egulation. lenges of establishing subnational level r engagement and capacity building (Mumssen and Traditionally WSS service delivery and policy Triche ­2017). Regulation of Water Supply and Sanitation in Bank Client Countries 41 WSS Regulation through Multisector Regulation commercialized its ­ o perations. Accordingly, the The key benefit of a multisector regulator is often cited PPWSA has been able to reform its tariff structure as synergies related to the cost reduction achieved from poor. For example, subsidies while also protecting the ­ combining regulation of WSS, telecom, energy, and in between 30 percent and 100 percent of connection some cases ­ transport. By sharing support functions of ­ntroduced. Overall fees, plus social tariffs, have been i information technology (IT), finance, human resources sector efficiency and performance have improved; in (HR), procurement, and housing or estates, consider- fact, the PPWSA is considered to be one of few WSS able savings can be garnered that can be allocated to utilities globally to have consistently increased profits investment in development of tools and expertise in 2015). However, since 1993 (PPP Legal Resource Center ­ performing the regulatory ­ functions. On the negative experiences have differed in other contexts and have side, multisector regulatory bodies can be thin in sector investments. led to lower tariffs and limited ­ expertise and there are risks of regulatory capture by Regulation by Contract sectors. This may be overcome to one of the dominant ­ It is worth noting here that in many cases, private sec- some extent by recruitment of talented industry experts tor providers of WSS services are often negotiated in each sector that understand the distinction between through contract by the ­ parties. The tariff mecha- the underlying technical and market characteristics of nism—whether a performance-based fee in manage- ­ industries. Some examples of multisector regulators ment contract or cost plus or price cap methods in PPP include Unidad Reguladora de Servicios de Energía y contracts—and performance targets are normally cap- Agua (URSEA) in Uruguay or the Autoridad Reguladora tured in the contract, pursuant to which the delegating de los Servicios Públicos (ARESEP) in Costa Rica authority or other pays or “allows” the contracting (Marques, forthcoming), as well as some state or provin- party to be remunerated, or receive a specified return cial regulators in federal countries such as Brazil and investment. There are also cases in which public on its ­ ­Argentina. Box ­4.1 discusses the inconclusive evidence service providers have “contracts” for performance on effectiveness of multisector ­ regulation. that are monitored and, in a sense regulated, as in the Self-Regulation of WSS Services ­ enegal. In Burkina Faso, reg- case of Burkina Faso and S ulatory mechanisms are enforced through a perfor- As demonstrated in Table ­4.1, many countries with mance contract between the utility (ONEA) and the public service providers have not sought establish- ­government. The contrat plan, or performance con- ment of an independent regulatory agency under the tract, is sanction free, and includes 20 to 30 target KPIs assumption that public service providers would be for technical, financial, and commercial performance held accountable to their customers through various ONEA. Despite, the fact that the contract does not of ­ mechanisms. Cambodia offers an inter- accountability ­ provide penalties or rewards, ONEA has largely met its esting example of self-regulation whereby the func- performance requirements (Mumssen, Saltiel, and tions of policy making, regulation and service delivery Kingdom ­2018). are all provided by one national body: the Phnom Penh (PPWSA). The PPWSA is Water Supply Authority ­ Additionally, in Senegal, the urban water supply sector ­ ervices. Some prior- responsible for improvement of s is governed by a system of contractual arrangements ity tasks include the improvement of water metering between the Ministère de l’hydraulique, Société and building the capacity of the w ­ orkforce. Supported des  Eaux (SDE) and Société nationale des Eaux du by the legal framework, the government has also (SONES). For example, SONES, a public asset Sénégal ­ sought to make PPWSA financially efficient and has holding company, signs a sector planning contract 42 Regulation of Water Supply and Sanitation in Bank Client Countries BOX ­4.1. Effectiveness of Multisector Regulators: Inconclusive Evidence The effectiveness of multisector regulators has been a subject of interest to policy makers and ­ e.g., in high-caliber professionals, researchers; namely, whether predicted benefits of economies of scale ( administrative support and services, development, and implementation) outweigh predicted dilution ­ 011). Research shows of technical sector expertise or the possibility of industry capture (World Bank 2 multisector regulators have mixed results in the water sector, and no causal link between effectiveness of nature. the regulator and its single- or multisector ­ New South Wales and Victoria (Australia), Uruguay, and Costa Rica demonstrate mostly positive r ­ esults. IPART in New South Wales is regarded as a technically sound regulator that has contributed to expanding state. The same takes place with the Essential Services Commission (ESC) and improving WSS services in the ­ Victoria. In the case of Uruguay, the United Nation’s (UN’s) special rapporteur on the human in the state of ­ right to water noted in 2012 that URSEA does not have the adequate capacity nor resources to monitor water quality for the population; however, this cannot necessarily be attributed to the multisectoral nature 2012). Despite this, Uruguay has a high coverage of WSS services and of the regulator (United Nations ­ services. In Costa Rica, on the other hand, there is not much reported on the regulator as it safely managed ­ pertains to the water sector, but the country has high levels of WSS coverage and safely managed s ­ ervices. Yet a WSS PSP study in the Salta Province (Argentina) shows that having a multisector regulator (Ente Regulador de Servicios Publicos, ENRESP) has clear positive e ­ ffects. In the first place, it allows for sharing resources among the different services regulated, including human resources and regulatory localities. Second, the regulatory system gains credibility by applying common interventions in remote ­ services. And third, it increases regulatory independence because it limits the criteria across the different ­ power of the concessionaires and politicians to influence ad hoc approaches for one sector, as it would 2003). have effects on other sectors as well (Saltiel ­ Perhaps most telling is the conclusion of a literature review on regulatory agencies with a focus on multisector regulation, which states that the views are “mixed on whether the multi-sector model indeed provides the expected gains, such as increased efficiency, sustainability and fairness, and eventually tangible contribution to infrastructure and economic development in a given country” (Hellerstein n ­ .d., p. 5). The review finds that the use of, implementation, and success of multisector regulation depends on the context: a country’s institutional framework, political realities, and economic and technical capacities (Hellerstein n ­ .d.). (contrat  plan) with the ministry, which outlines its and in some cases with penalties applied if they are not investment obligations, and SDE, traditionally a pri- met. Specifically, the private operator’s remuneration ­ vate company operating through an affermage arrange- is dependent on both leakage reduction (technical effi- ment, signs a performance contract with S ­ ONES. These ciency) and bill collection (collection efficiency) contracts form part of the system of “regulation”: ­targets. Even state- or municipal-owned utilities, remuneration of both SDE and SONES depends on corporatized or not, are more and more regulated by ­ technical and commercial efficiency targets being met, contract, as it is the case of Agua y Saneamientos Regulation of Water Supply and Sanitation in Bank Client Countries 43 S.A. (AySA) in Buenos Aires in Argentina or Argentinos ­ Cambodia provide interesting examples of using the ­ razil. In Europe, it is usual that the state companies in B corporate charter with clear KPI targets and incentives the municipalities sign contracts with the municipal as a different type of regulation by contract for public them. companies even if they own ­ ­utilities. Finally, commercialization provides an in-built regula- Regulation through Corporatization and tory mechanism: markets, for example, through share Commercialization prices (and dividend payouts) or credit ratings, can Corporatization might also provide an avenue for provide a strong regulatory discipline to WSS service achieving regulatory ­ objectives. Although corporati- ­ tates. However, providers, as we see in the United S zation experiences offer mixed results, some studies there are limited cases of this in LMICs, for example, document improvements in efficiency and effective- Philippines. ­ Kenya and the ­ ness of utility performance (van Ginneken and Kingdom ­ 2008). There is near consensus that corpo- 4.3 Regulatory Functions ratization reduces the political pressure on employ- ees and allows them to make decisions based on the WSS regulatory functions can be narrowly or broadly principle of economic efficiency (Mumssen, Saltiel, ­ structured. The review of regulatory regimes across a and Kingdom ­ 2018). In Latin America, ­ corporatized wide array of LMICs highlight that the main regulatory water utilities are an alternative to ­ privatization. functions, as already identified in the literature review, Successful examples in Latin America include relate to enhancing financial sustainability through SABESP, COPASA, or Companhia de Saneamento do appropriate tariff regimes and supporting a climate for Paraná (Sanepar) in ­ Brazil. São Paolo’s mixed capital investment; incentivizing service quality through per- company SABESP opened its capital on the São Paulo formance monitoring and other means; and increasing Stock Exchange in 1994 to achieve ­efficiency improve- access, including for the ­ poor. The success of regula- ments of public service ­ delivery. By 2002, SABESP tion in these areas is completely dependent on broader began listing its shares on the New York Stock government support and political economy, including, Exchange, and today half of SABESP’s shares are for example, credibility of enforcement and punish- owned by the São Paulo government, and the remain- ment, as well as institutional alignment across govern- der is traded publicly (Lentini ­ 2015). ment ­ (e.g., ministries of finance, planning, water health). resources and environment, and ­ ­ Swaziland provides an additional example. The Swaziland Water Services Corporation (SWSC) is a cor- Figure ­4.1 offers a useful way to think about WSS regu- poratized government-owned ­ company. Its corporati- lation in terms of what it entails: a matrix of (a) types zation was embedded in a legal framework that of domains, such as tariff setting, drinking water, or ensured SWSC’s autonomy in the management of the substance clusters, and (b) types of functions, such as tariffs. corporation, including allowing cost-reflective ­ 4 setting the rules, standards, tariffs; monitoring per- ­ The autonomy of SWSC has incentivized it to operate formance, compliance, analyzing and publishing the ­ efficiently. In its drive to achieve efficiency, the man- data; and intervening to enforce compliance includ- agement of the company has introduced its own incen- ing levy of fines or ­ penalties. South Africa’s WSS regu- tive structures, such as bonuses for area managers who lation covers many domains, including tariff setting, achieve their performance targets (Mumssen, Saltiel, drinking water quality, environmental and health, and Kingdom ­ 2018). Furthermore, Uganda and water resources, and social ­ regulation. In contrast 44 Regulation of Water Supply and Sanitation in Bank Client Countries FIGURE ­4.1. Regulatory Domains in WSS in South Africa Regulatory domain Social Drinking water and Environmental Water resources Economic regulation technical regulation health regulation regulation regulation Setting rules or standards, granting approvals Set social policy and Set DWQ De ne standard Set licence conditions; Set pricing rules; allocate subsidies standards approve technologies allocate licences approve tari s Monitor, analyze, publish Social outcomes Drinking water Construction and Compliance with Tari s and pro-poor tari s quality operation; licence conditions performance health practices Enforce or intervene Withdraw Fines; Fines; Fines; Adjust prices; subsidy direct intervention direct intervention withdraw licence direct intervention sanitation. Note: WSS = water supply and ­ to  South Africa, Bangladesh’s Water Supply and information was more readily a ­vailable. Note that Sanitation Regulatory Commission (WSSRC), for Portugal, whilst an OECD country, has been included example, has a narrower mandate covering tariff set- in the table because its regulatory evolution is consid- ting and service standards, for WSS (Government of ered very relevant to LMICs in the context of this South Africa ­ 2008). paper. More detailed information and additional coun- ­ try examples can be found in Table ­B.1 in appendix ­ B. ­ Regulators utilize numerous tools to incentivize utili- ties to implement desired actions and achieve the Improving Financial Sustainability stated sector ­ objectives. For instance, performance Different regulatory regimes are designed to incentiv- management tools include performance benchmark- ize implementation of a multitude of sector policies ing and yardstick competition whereby KPIs or other including financial sustainability, universal access, metrics are monitored and compared across u ­ tilities. policies. These sustainable practices, and pro-poor ­ Licensing is an additional method of enforcing mini- include respective measures related to tariff method- mum service quality and operational standards set by ologies. Regulatory regimes such as rate on return reg- the ­ regulator. Other tools include tariff setting, infor- ulation and price-cap regulation aim to create financial mation and data collection, customer engagement, incentives by providing opportunities for utilities to ­ uilding. Table ­4.2 pro- and the provision of capacity b costs. This also plays a role in remedying cost cover ­ vides examples of regulatory arrangements and information asymmetries between the utilities and breadth of scope in a few countries where the 2018). regulator (Mumssen, Saltiel, and Kingdom ­ Regulation of Water Supply and Sanitation in Bank Client Countries 45 TABLE ­4.2. Examples of Regulatory Arrangements in Selected Countries WSS regulatory form and Country WSS institutional context Summary of regulatory functions arrangements Albania Albania has high access The WRA is directly accountable • Licensing and monitoring performance of WSS rates; however, much of parliament. The decision- to ­ service providers this infrastructure requires NRC. making body is the ­ • Tariff approvals of submissions by utilities ­ maintenance. Introduction of • Monitoring and benchmarking the performance of PSP policies in the 1990s led service providers to creation of an independent regulatory agency: the ­ WRA. • Protect consumer interests, analyze consumer complaints and support complaint resolution • Administer penalties for nonperformance Brazil Highly decentralized, there No national regulator; different • Law of Fiscal Responsibility requires cost-reflective are state-level water and states have different regulatory tariffs sanitation companies, some arrangements both at state or • Standards regulations are varied municipalities and state municipal ­levels. • Higher principles and rules set at the federal level, PSP. companies have ­ being implemented by the states and municipalities • National system of data collection Burkina Faso ONEA is the state-owned WSS Regulation of ONEA is through • Multiyear financial equilibrium model for regulating provider and has performance performance contracts that are tariff adjustments contracts with GoBF and assessed by an external ­ auditor. • ONEA’s contract with Veolia includes performance- performance management based bonus/penalties above a fixed monthly fee contracts with private firms ­(Veolia). Colombia Decentralized ­ WSS. The WSS Water regulator (CRA) • Information and data collection market is geographically established in 1994 promotes • Improving financial sustainability concentrated with 40 largest competition, sets tariffs, and • PSP was stimulated, total of 37 municipalities utilities serving 70% of urban the Superintendence of Public adopted PSP between 1995–98, but did not water users and majority Services monitors WSS utility incentivize PSP in smaller municipalities serving small ­ towns. performance. For private ­ concessionaires, the contract itself stipulates the service methodology. standards and tariff ­ Kenya WASREB created 2003; 47 WASREB’s mandate is derived • Regulatory tools include license, drinking water water development boards from the 2002 Water Act, set up guidelines, service standards, NRW standards, tariff one for each county and as an independent, single-sector guidelines, compliance strategy, and consumer WSPs. currently 91 ­ ­regulator. engagement ­ rules. Key regulatory outputs include (a) WSP Creditworthiness Index and (b) WSP performance benchmarking reports table continues next page 46 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE ­4.2. Continued WSS regulatory form and Country WSS institutional context Summary of regulatory functions arrangements Mozambique Challenges include (a) The Water Supply Regulatory • CRA-Mozambique is responsible for promoting, inadequate infrastructure Council of Mozambique, CRA- monitoring and advising on the design of delegated and access; (b) poor financial Mozambique, reports directly to management contracts sustainability; and (c) weak the Ministry of Public ­ Housing. • Review and approval of tariffs institutional ­ capacity. Urban CRA-Mozambique receives • Consumer protection WSS services devolved in the funding through a regulatory levy largest cities; and rural WSS on gross annual ­ revenues. • Regulation of service quality services are decentralized to • Promote and improve the delegation of water local ­government. supply services to third parties Philippines Service provision is Manila has two concessionaires • MWSS regulates the concessionaires by contract, decentralized to local regulated by the Regulatory LWUA regulates water districts, and NWRB regulates government and supported Office of MWSS and sets rules providers. Regulated entities other licensed service ­ ­ PWH. by D for tariff adjustment; National appear for public hearings for tariff approval Water Resources Board regulates all service providers outside of ­Manila/MWSS. Portugal Portugal’s municipalities are ERSAR, established in 2009, is • Benchmarking of KPIs across three main areas: responsible for WSS service mandated to improve market utility sustainability, interface with consumers, and provision, however multi- consumers. efficiency and protect ­ environmental sustainability municipal systems exist for ERSAR replaced IRAR (Instituto • Monitoring of concession contracts bulk water and wastewater Regulador de Águas e Resíduos) • Tariff regulation of multi-municipal systems treatment ­systems. which had been created in 1997 as an autonomous but not • Supervision of cost recovery principle imposed independent ­regulator. by law Zambia Urban WSS services NWASCO is an independent WSS • Licensing provided by 11 utilities and regulator. It is funded through a ­ • SLGs 6 private ­ schemes. A new 2% levy utility revenues as well scheme. Two institutional • Regulation by incentive ­ National Water Policy was as some government ­ funds. incentives are offered for achieving service-level introduced in 1994, which guarantees. This includes equipment and staff ­ seeks to separate regulatory systems. NWASCO would monitor and incentives ­ and executive functions, audit performance data and grant the incentives on devolution of authority to positive improvements local authorities and private enterprises, achievements of • WSS performance guidelines full cost recovery, and human • Tariff approval and negotiation resources ­development. • Special regulatory supervision of poor performing utilities • Monitoring and regular reporting Note: CRA = Comisión de Regulación de Agua Potable y Saneamiento Básico’; DPWH = Department of Public Works and Highways; ERSAR = E ­ ntidade Reguladora dos Serviços de Águas e Resíduos; IRAR = Instituto Regulador de Águas e Resíduos; KPI = key performance indicator; LWUA = Local Water Utilities Administration; MWSS = Metropolitan Water Supply and Sewerage; NRC = National Regulatory Council; NRW = nonrevenue water; NWASCO = National Water Supply and Sanitation Council; ONEA = Office National de L’Eau et de L’Assainissement; PSP = private sector participation; SLG = service level guarantee; WRA = Water Regulatory Authority; WASREB = Water Sector Regulatory Board; WSP = water service provider; WSS = water supply and ­ sanitation. Regulation of Water Supply and Sanitation in Bank Client Countries 47 a. Building a Solid Analytical Foundation ensure financial sustainability of WSS utility companies, Tariff regulation is complicated, requires data, the appro- customers from monopolistic while also protecting ­ priate political will, and t ­ime. As demonstrated by the ­ ffordability. While tariffs were pre- prices and ensuring a examples herein, one of the problems in LMICs is that viously based on social considerations, WSS utility com- there is a trend, sometimes influenced by consultants panies can now set tariffs based on their real c ­osts. and international institutions, to implement too sophis- Obligatory WRA approval means the WRA has the right ticated (and ambitious) approaches often with black box to scrutinize tariff proposals, including appropriateness techniques, which are not obviously understood and costs. The tariff calculation methodology includes an of ­ therefore not t ­ ransparent. Rather, it can be preferable to ­rovision. investigation of the costs of WSS service p initially design a simple and t ­ransparent approach, This forces the WSS utilities to look at their costs, which usually through a rate of return– (cost of service)–type could lead them to identify inefficiencies that can be ­ regulation. Even the most successful case studies in addressed to reduce costs (Mumssen, Saltiel, and OECD countries, for example, Australia, started with rate Kingdom ­2018). of return regulation and only later did they move to In Mozambique, tariffs were previously set well below performance-based (price cap–based) ­ ­ regulation. cost-recovery levels, which meant that public sector service providers were losing money on every unit of Moreover, in some cases it is recommendable not to water ­ supplied. With the poor financial state of public have tariff regulation at the beginning due to the limita- finances, government could not continue to provide tions of information and c ­ apacity. The focus should be subeconomic WSS services while at the same time on quality of service regulation (standards and levels of ­ ector. Thus, the government intro- investing in the s ­ service). This took place in Portugal, where regulation duced cost-reflective tariffs that also incentivized pri- in the first decade was based only on technical perfor- vate sector participation (PSP) in the sector, although mance and service quality ­ standards. Today, 20 years there is still some way to go to improve performance after the creation of the regulator (1998), implementa- standards and financial sustainability (Mumssen, tion of tariff regulation is under ­ discussion. In the past, 2018). Saltiel, and Kingdom ­ the regulator issued only non-binding opinions regard- ing contract renegotiations and multi-municipal tariffs Another interesting attempt at enhancing financial for bulk water and wastewater treatment ­ companies. sustainability through regulatory processes is taking The same took place with ESC in Victoria State in Egypt. At the time of this writing, a draft law is place in ­ Australia. Only after several years of quality of service ­ being considered in which tariff formulation is split tariffs. regulation did the regulator start to set ­ between economic and social tariffs: economic tariffs would be required for the utility to recover costs, while In Colombia, a phased approach was adopted to tariff the social tariff recognizes that some form of subsidy reform wherein it focused first on acquiring unit costs cases. The regulator is would be required in some ­ and standardizing accounting norms used by utilities, tasked with determining the different tariff levels followed by introducing efficiencies to fully reflect oper- (details are still being ­ developed). ational costs first and then increasingly i ­ nvestments. In Albania, the tariff setting process is initiated by WSS b. Financial Modeling utility companies, which propose tariff levels for approval Financial modeling may serve as a useful, more effec- from the Water Regulatory Authority (WRA) according to tive tool for tariff s ­ etting. ONEA in Burkina Faso has suc- the established ­methodology. The WRA has the responsi- cessfully developed a financial model agreed with a bility to ensure that tariffs appropriately reflect costs to private company and stipulated in a performance-based 48 Regulation of Water Supply and Sanitation in Bank Client Countries contract. The goal was the corporatization management ­ currency, was bought by domestic institutional of ONEA governed by performance contracts between investors. Mexico’s case exemplifies the important role ­ ­ NEA. The actualization of these the government and O of legal and regulatory frameworks in supporting capac- contracts was made possible by engaging a private com- ity of subnational governments to engage in innovative pany, Veolia, whose mandate was to achieve stipulated financing ­practices. commercial improvements as well as coach and mentor services. The ONEA to improve its ability to deliver WSS ­ d. Assessment of Creditworthiness remuneration of Veolia was based on a financial model WSS regulators can prepare utilities to access financ- designed to help ONEA achieve “break even” status ing by doing their job more rigorously, helping to ­ariffs. or  financial equilibrium and was used to set t improve the commercial and performance outlook of The  key regulatory incentive is said to be consensus providers. An interesting tool implemented in service ­ among all parties (government, ONEA, Veolia) regarding a few countries is development of a creditworthiness course. Without the tariffs so all parties stayed the ­ index, which is designed to specifically monitor finan- detailed information, it can be said that two interlock- cial performance of service providers. The creditwor- ing agreements—the performance contract with ONEA thiness index is a proxy rating that provides lenders and the management contract (with the financial with an initial overview credit screening of WSS ser- model) with a private company—should reinforce each vice providers and serves as a regulatory tool to help other because the latter guarantees the success of the attract investment to the sector. former. Thus, all three parties have incentives to make ­ both agreements work because they are l ­inked. Regulation played a key role in facilitating increased However, it is not clear how the financial model was Kenya. In access to commercial finance for utilities in ­ built and what the cost information was or where it 2002, a Water Act was introduced that has created the came from (Mumssen, Saltiel, and Kingdom ­ 2018). viability. enabling environment for improved financial ­ Specifically, the act establishes utilities as autonomous c. Implementing Blended Finance entities, has ring-fenced revenues within the sector, A combination of concessional and commercial sources has created the role of an independent regulator, and needed. “Blended finance” of financing will be ­ has established a framework for utilities to implement (Leigland, Trémolet, and Ikeda 2016) is the use of con- tariffs. Demonstrating creditworthiness cost-reflective ­ cessional finance to mobilize commercial ­finance. Given is an important way to attract commercial finance so as their monopoly in the provision of an essential service, to inform lenders and help them overcome their lack of WSS utilities should be a long-term source of revenue sector. To that end, the Water familiarity with the ­ generation that would be attractive to private ­ financing. Services Regulatory Board (WASREB) developed a The regulator has a role to play in this ­area. For example, mechanism to assess creditworthiness of utilities in in Mexico, institutional and regulatory reforms imple- Kenya. The result was the production of 43 utility ­ mented during the 1990s and 2000s facilitated the shadow credit ratings to help inform investors’ deci- market. With the growth of a subnational securitization ­ sions and their perception of the risk of investing in objective of supporting a local water conservation proj- Kenyan WSS u ­ tilities. Key creditworthiness indicators ect, the Municipality of Tlalnepantla de Baz (Mexico) included in the tool include net profit margin, operat- and its municipal water company Organismo Público ing cost recovery ratio, debtor days (number of days to Descentralizado Municipal (OPDM) issued unsecured collect monies billed), collection efficiency, billing effi- revenue bonds on the local capital market through a ciency, NRW, debt service coverage ratio, cash cover- ­ specially created trust. The bond, issued in local age ratio, and a size versus rating comparison. Regulation of Water Supply and Sanitation in Bank Client Countries 49 The ratings also provide utilities with a diagnostic tool 2011). Nonetheless, in a review of 118 cities World Bank ­ areas. Based on these to help them identify problem ­ served by 77 utilities in Colombia, PPP has been associ- early efforts, WASREB is in the process of developing a ated with higher access, increased coverage, higher creditworthiness index to assess the credit risk of util- utility efficiency, lower NRW, and improved labor pro- ities on an annual basis, with a view to improve trans- ductivity in comparison with the pre-PPP period parency and attract commercial financing into the (Andres, Sislen, and Marin ­ 2010). sector (World Bank ­ 2016a). Colombia’s regulatory framework is complex and is fur- Similarly, in the Philippines, legal and regulatory reforms ther complicated by the decentralized nature of the were implemented to facilitate mobilization of domestic WSS sector, as well as the existence of a wide variety of sources. An executive order was issued in 2004, finance ­ ­ roviders. Nonetheless, it public and private service p which installs modifications for financing policies of appears that Law 142 of 1994 and the issue by CRA of a providers. This led to development of a local WSS service ­ tariff methodology in 1995 was to a large degree effec- system by which WSS service providers are categorized tive in creating an enabling environment for and greatly ­ reditworthiness. Those qualified based on their level of c stimulated PSP in the sector (Andres, Sislen, and Marin as creditworthy were expected to mobilize market-based 2010). In situations in which private service providers ­ ­ financial resources (World Bank 2016a). Regulatory operate under concession contracts with a municipal- reforms are attributed to the success of creating the right ity, the general practice is for the contract to set service enabling environment to attract commercial financing standards and tariffs, which are to be monitored and 2016a). for service providers (World Bank ­ al. ­ enforced by the municipality (Ehrhardt et ­ 2007). However, Colombia implements a centralized method- e. Attracting Private Sector Investment ology for tariff and service standard setting that is Colombia’s experience showcases the successful role of enforced by multiple public bodies across all public PPP. A key element of the cen- regulation in attracting ­ providers. This separation of regu- and private service ­ tral government public utility reform agenda was the latory powers is deliberate, because Colombian admin- promotion of private sector ­ management. Accordingly, istrative tradition requires that a single body should Law 142 of 1994 defines PSP within the sector (Andres, not be responsible for both making and enforcing rules 2010). This includes the principle of Sislen, and Marin ­ (World Bank 2015): the CRA establishes the tariff set- maximizing competitive forces through transparent ting ­ ­ariffs in methodology. Providers set their own t ­ rocesses. It establishes minimum bidding and award p accordance with this methodology (or apply to the requirements for contracts and provides a coherent set CRA to set the tariffs a different way); and ­service stan- of performance indicators that serve as the basis for dards are set by the Ministry of Economic D ­ evelopment. setting. The contract supervision and control and tariff ­ The public services superintendent (SSPD) monitors framework is also intended to provide for consistency the providers to verify that they are following the tariff between the private sector contracts, municipal devel- setting rules and complying with the service ­standards. opment plans, and sector ­ policy. The framework estab- lished for PPPs in WSS is broad enough to permit and support a variety of PPP ­ schemes. Between 1995 and Improving Service Provider Performance 1998 private sector operators emerged in 37 municipal- a. KPIs and Benchmarking ities in a variety of PPP m ­ odels. It tapered off, however, Performance monitoring tools involve establishment and ultimately the uptake of private sector options of metrics by which services are ­ monitored. Examples was less than hoped (Andres, Sislen, and Marin 2010; of indicators include coverage levels, hours of supply, 50 Regulation of Water Supply and Sanitation in Bank Client Countries efficiency. This is one of the staff costs, collection, and ­ performance indicators can highlight poor performing main regulatory functions of regulators in LMICs, as it 2018). Some utilities (Mumssen, Saltiel, and Kingdom ­ is in OECD countries such as the United Kingdom and countries in Latin America have developed informa- Australia. However, challenges related to data avail- ­ tion systems that collect, organize, and (to a greater or ability, financial and technical resources, and monitor- lesser extent) disseminate data from service providers ing and enforcement are undeniably much more severe ­ evel. Among these systems, the perfor- at the national l in ­ LMICs. These are compounded when the political mance indicators and regulatory benchmarking of economy does not provide credible institutional incen- SUNASS (Peru) stand out (Lentini ­ 2015). tives to the key s ­ takeholders. But, there are varying Peru offers an alternative method of performance success. degrees of ­ management whereby SUNASS develops weighted Zambia is an interesting example of a relatively good performance indicators that are calculated in to a sin- alignment of incentives for public sector WSS service ­ ervices. A similar scheme is adopted gle score for WSS s providers. As part of WSS sector reform, Zambia cre- ­ ­ cotland. Additionally, performance results by WICS in S ated an independent water regulator, NWASCO, with a could be reflected in tariff setting procedures to reflect mandate to regulate newly corporatized commercial rewards or penalties; this is implemented in Chile utilities (CUs) that are owned by local authorities and (Marques, ­forthcoming). Table ­A.1 In appendix A, ­ rovision. NWASCO incorporated as utilities for service p developed by Marques (forthcoming), provides a sum- created a performance enhancement and reporting mary of performance management methods imple- mechanism based on selected metrics and used that America. mented by regulators across Latin ­ reporting to both compare utility performance and provide small financial incentives to high ­ performers. A particular advantage of the use of KPIs in performance The performance ranking system based on metrics, regulation. regulation is enforcement of sunshine ­ benchmarks, and weightage points results in a perfor- Sunshine regulation consists of the public disclosure, mance scorecard that is publicly available, and win- comparison, and discussion of a set of performance ners or top-ranking utilities are r ­ewarded. The 2015 ­ PIs. Accordingly, poor perfor- metrics often based on K KPIs included water quality, collection efficiency, mance of service providers is publicly exposed incentiv- metering ratio, hours of supply, operations and main- izing service providers to improve ­ performance. Its tenance (O&M), cost coverage by collection, NRW, staff impact is particularly effective in improving the quality efficiency, water coverage, sanitation coverage; final services. The examples of the State of Ceará in Brazil of ­ ranking based on: [indicator weight] x [score against or of Zambia are noteworthy as well as the case of benchmark] x [CU performance] = final score Australia. Box ­4.2 Portugal or the State of Victoria in ­ (Mumssen, Saltiel, and Kingdom ­ 2018). shows the regulatory model adopted in the State of regulation. Ceará in Brazil for service quality ­ Performance management using benchmarking and monitoring KPIs is widely implemented across Latin In the Philippines, performance management respon- America. A recent study (Marques, forthcoming) on ­ ­ sibility is fragmented across different i nstitutions. WSS regulation in Latin America highlights that Private operators are regulated through concession 13 countries out of 20 have sector-specific regulation agreements with the government, which specify target and all of them in some way use KPIs in their regula- KPIs, and business efficiency measures (BEMs), which tory t ­ asks. Benchmarking generates competition are monitored by the MWSS and the Local Water between service providers and creates the incentive to Administration. Local government units mon- Utilities ­ improve performance, and public disclosure of utility systems. Additionally, in itor performance of public ­ Regulation of Water Supply and Sanitation in Bank Client Countries 51 BOX ­4.2. Regulation of Quality of WSS Services in the State of Ceará, Brazil In the State of Ceará, in Brazil, WSS services are regulated by the Regulatory Agency of Delegated Public Services of the State of Ceará (ARCE, or Agência Reguladora de Serviços Públicos Delegados do Estado do Portuguese). ARCE undertakes numerous functions of economic regulation, including service quality Ceará in ­ regulation. ARCE adopts sunshine regulation as its main regulatory method for service quality regulation, ­ which is based on comparison, disclosure, and public discussion of the performance results of the regulated KPIs. The objective of this regulatory approach is to “name and shame” the entities obtained through a set of ­ service providers that perform poorly so that they will more likely improve their p ­ erformance. To this purpose, sanitation. These KPIs have been structured the regulator defines a set of 16 KPIs for water supply and 11 for ­ into different categories of indicators, such as those related to the service provision, economic and financial sustainability. Moreover, ARCE issues comments regarding the results of each sustainability, and environmental ­ indicator. This assessment is carried out through a scoring system that compares the performance obtained ­ with target values (optimum values that the regulator considers to be reasonable and likely to be reached by the service providers), taking also into account the operational environment in which each service provider ­ serves. ARCE categorizes the performance of each service provider in qualitative terms such as excellent, ­ ystem. good, average, or poor, communicating them to stakeholders by a color s forthcoming. Source: Marques, ­ Albania, the WRA monitors and benchmarks perfor- licensing of WSS service providers that meet licensing mance as part of the license conditions of the ­ utilities. criteria and monitors the performance of licensees to An annual performance report made publicly avail- ensure they meet stipulated conditions (Mumssen, able, includes performance ranking of utilities 2018). Saltiel, and Kingdom ­ (Mumssen, Saltiel, and Kingdom ­ 2018). In Tanzania, EWURA undertakes performance mon-  erformance Management through Regulation c. P itoring responsibilities using a web-based software by Contract that allows ­ utilities to submit performance data Burkina Faso offers a different experience whereby on a monthly ­ basis. EWURA also carries out site performance improvements were achieved through inspection in order to validate the data r ­eceived. implementation of public-to-public performance con- Performance review reports are drafted annually, and tracts (contract plans) between the government and best performing utilities are rewarded for their perfor- the public service p ­ rovider. The contracts have suc- mance ­achievements. cessfully incentivized efficiency and productivity ­ gains. ONEA has traditionally been regulated by three- b. Licensing plans. The main features of the perfor- year contract ­ Licenses are another tool available to regulators, which mance contract include KPI targets for technical, allow them to impose WSS service standards on ser- financial, and commercial performance by ONEA, with vice providers (OECD ­ 2015). Service providers are pro- between 20 and 30 indicators (Mumssen, Saltiel, and vided operational permits (usually for a fee) to provide 2018). From the mid-2000s performance Kingdom ­ services based on agreed standards (OECD 2 ­ 015). For against the indicators has been assessed by an external instance, in Albania, the WRA is responsible for technical auditor and a follow-up review committee 52 Regulation of Water Supply and Sanitation in Bank Client Countries comprising representatives of the government and efficiency) and bill collection (collection efficiency) ONEA as well as representatives of consumer targets. The remuneration formula shares commercial ­ ­organizations. The committee meets three times annu- risks and so generates positive incentives to the differ- ally and submits a report to the board of directors of ent stakeholders to make the system work. ­ ­ ONEA. Despite the fact that the performance contract Remuneration of both the SDE and SONES depends on does not provide for penalties or rewards, ONEA has technical and commercial efficiency targets being met, largely met its performance commitments, and the with penalties applied to the SDE if they are not met contract has been largely successful in facilitating dia- ­ 018). Figure ­4.2 clar- (Mumssen, Saltiel, and Kingdom 2 logue and building alliances between the government ifies the different institutional relationships within the and the service provider (WSP ­ 2009). urban WSS ­ sector. al. (2009) find that the perfor- Moreover, Mehta  et  ­ In Burkina Faso, ONEA entered an innovative five-year, mance contract has been effective in part due to the performance-based management services contract fact that the agreements are short and simple, with with Veolia, pursuant to which Veolia provides man- clear responsibilities, include a relatively realistic set agement support to the commercial and financial of indicators, and specify reporting requirements and departments of ONEA in return for a fee comprising arrangements. However, monitoring and auditing ­ components. The both fixed and performance-based ­ challenges have been faced during contract develop- year. contract was subsequently extended for one ­ ment and enforcement including the bidding process, During the term of the PPP contract, water became risk management and sharing, and regulatory tools available on a continuous 24/7 basis in Ouagadougou, enforcement. available to ensure contract ­ staff productivity improved by 60 percent, and collec- d. Performance Management through PPP Contracts tion of bills from private customers increased by 94.5 ­ 11  percent to ­ percent. ONEA was profitable Senegal also provides an interesting example of perfor- ­ontract. Although throughout the term of the PPP c mance regulation by ­ contract. In Senegal a perfor- NRW increased slightly at the early stages of the con- mance contract is enforced between the Ministère de tract due to increased physical losses, commercial l’hydraulique, the SDE (private utility operator) and losses fell ­ significantly. Average customer tariffs in SONES, the state asset holding company, which is constant terms (excluding value added tax [VAT]) authorized to manage the sector through a 30-year concession contract signed with the state, represented ­ inistry. A 10-year affermage contract govern- by the m FIGURE ­4.2. Senegalese WSS Regulation by Contract ing operation of the system is signed between three parties: the state, represented by the ministry, SONES, ­ DE. The contract plan establishes SONES’s and the S Ministry investment obligations and informs bidders of future Concession contract investments. In such an affermage arrangement, the ­ operator is a surrogate provider for the government, in Affermage contract charge of WSS ­services. The operator is usually paid for Contract plan every cubic meter of water sold and thus is incentiv- leakage. In the case of Senegal, the ized to reduce ­ SDE SONES Performance contract design of the contract integrates incentives through ­ormula. The operator’s remunera- the remuneration f l’hydraulique. SDE = Société Note: The Ministry refers to the Ministère de ­ tion is dependent on both leakage reduction (technical du Sénégal. des Eaux; SONES = Société nationale des Eaux ­ Regulation of Water Supply and Sanitation in Bank Client Countries 53 ­ S$0.71 per decreased by 7 percent; but at around U Cambodia provide interesting examples of using the cubic meter on average, they remained high by the corporate charter with clear KPI targets and incentives ­ l. ­ standards of neighboring countries (Fall et a 2009). It as a different type of regulation by contract for public is important to note that the improvements have been utilities. Uganda’s National Water and Sewerage ­ sustained since the conclusion of the contract Company (NWSC) became a separate corporate entity ­ 018). (Mumssen, Saltiel, and Kingdom 2 from the ministry with a clear mandate to achieve ser- targets. NWSC leadership formed staff in task vice ­ There are many examples of WSS service quality regula- teams with some room to explore solutions and contract. Albania provides an addi- tion through PPP ­ improve performance with minimal strategic oversight tional example whereby a performance-based contract ­ and strong gain sharing i ncentives. Between 1998 was signed for the management of water utilities in and 2010, the NWSC made impressive service improve- ­ aranda. The contract ended Durres, Fier, Lezhe, and S ments including expanding coverage from 48 percent in 2008 and was successful in improving service qual- to 74 percent, reducing NRW from 60  percent to ity, as well as operational and financial ­ performance. 33  percent, improving collection efficiency from All indicators showed improvement in service quality, 65 percent to 98 percent, increasing metered accounts and the gap between tariff revenues and costs was sig- from 65 percent to 100 percent, and a revenue turnover nificantly ­ reduced. However, the private operator fell million. The increase from US$11 million to US$65 ­ short of the improvements in service quality to which NWSC now has an external services consulting unit agreed. Additionally, while the con- it contractually ­ that provides technical assistance to WSS utilities in tract oversaw a persistent rise in tariffs toward a sus- Ghana, Kenya, Zambia, Tanzania, and ­ I ndia. tainable level that would eventually cover costs, the Cambodia’s PPWSA is another example of a prior operator did not fully achieve financial sustainability department being corporatized into an autonomous period. before the end of the contracted ­ dramatically. company and has improved its services ­ An additional example is in China whereby a French- There is a worldwide trend toward contractualization Sino consortium operated water supply services in the even between public entities, between service providers, economy of Macau SAR, China, in 1985 through a and the owners, which tend to be distinct ­ entities. These 25-year concession ­ contract. The sound performance of contracts can be concession contracts, delegated man- the contract, both in operational and financial terms, agement contracts, program contracts, or even stat- led the Chinese government to award a renewal of the utes of the companies in which the rights and duties, contract for an additional 20 years, until ­ 2030. In 2016, including performance standards, are d ­ efined. This Macau SAR, China, water boasted a low level of 1 ­ 0.3 per- happens more and more not only in upper-income cent of NRW and a staff productivity of 1 ­ .1 employees countries but also in ­ LMICs. For example, in Brazil all per 1,000 customers along with an average tariff of state companies, including Companhia de Saneamento ­ US$0.59 per cubic meter (based on a domestic con- S.A (SABESP), COPASA, Básico do Estado de São Paulo ­ sumption of 10 cubic meters per m ­ onth). Other interest- Companhia Catarinense de Águas e Saneamento ing examples are in Guayaquil, Ecuador; Barranquilla, (CASAN), and Companhia Espirito Santense de Colombia; Bucharest, Romania, and Sofia, ­ Bulgaria. Saneamento (CESAN) have program contracts with ­ ervices. In municipalities that are the owners of the s e. Regulation by Corporatization Argentina, AySA and most other companies have con- Regulation by corporatization can be effective in incen- tracts with provinces or municipalities that are the tivizing improved utility p ­ erformance. Uganda and owners of the WSS ­ facilities. 54 Regulation of Water Supply and Sanitation in Bank Client Countries For example, in Portugal municipal companies sign counter to the utility’s functioning and serve as the eyes delegated management contracts (besides the statutes and ears of the regulator on the ground (Mumssen, of the companies) with municipalities that are the Saltiel, and Kingdom 2 ­ 018). An additional example is facilities. These contracts owners of the WSS service ­ that of the WRA of Albania, which publishes annual per- have a duration of five years (after that they need to be formance reports publicly and includes performance updated) and have some standard annexes, which ranking of ­utilities. Performance ranking also serves as a include, at least, performance standards of the com- tool to improve accountability by making consumers pany; strategic objectives of the company; investment aware of how their service providers are performing plans; noncore services provided that need to be billed 2018). (Mumssen, Saltiel, and Kingdom ­ (e.g., storm water); and the tariff system separately ­ Furthermore, regulators in the Latin American region trajectory (fixed for the five-year ­ ­ periods). implement adequate stakeholder engagement mecha- nisms; however, there are cases in which no formal Increasing Accountability, Transparency and consultation procedures are implemented, particu- Consumer Voice Brazil. Table ­4.3, developed by Marques (forth- larly in ­ Regulators can be instrumental in institutionalizing coming), offers a summary of the different stakeholder citizen engagement and consumer protection engagement practices implemented by regulators mechanisms that can enhance accountability, perfor- ­ region. across the ­ mance, consumer responsiveness and awareness, and governance issues in g ­ eneral. Consumers are key in Pro-Poor and Non-Network Services Regulation determining which services they find relevant, conve- Pro-poor and non-network services regulation aims at nient, and ­ affordable. Accordingly, clear and publicly developing regulatory instruments to provide or agreed standards for service delivery are crucial (WSP improve the access of the poorest to WSS services at 2007). Conflict resolution is an additional mandate ­ prices. Implementation of pro-poor and affordable ­ regulators. In Peru, for exam- that can be enforced by ­ non-network services regulation is especially relevant to ple, an Administrative Court for Complaints Resolution LMICs because a majority of citizens in these countries (TRASS) is housed within its national regulator are not connected to the water networks of major public ­ SUNASS. TRASS is responsible for resolving consumer service companies: they live below the poverty line and complaints related to billing, operational, and com- cannot finance a connection, or they live too far from the mercial ­ issues. Uruguay has also established a Protocol networks (this is particularly the case in the peri-urban Conflicts. of Procedures for ­ areas of major cities, small towns, or rural areas) Additionally, Zambia’s NWASCO has designed an inno- 2018). This situation is (Mumssen, Saltiel, and Kingdom ­ vative mechanism for engaging with water ­ users. Water prevalent across the LMIC context and calls for regula- watch groups (WWGs) operate in 12 Zambian towns to tory interventions that are best fit to address the chal- ­ reas. WWGs improve NWASCO’s footprint in service a lenges of providing sustainable services that are unique are made up of volunteers from the community who are to poorer ­communities. In addition to social tariffs, other trained on aspects of WSS service delivery, reporting, areas of pro-poor regulatory interventions include resolution. WWG members help users to and dispute ­ incentivizing differentiated levels of service and regulat- know their rights, file complaints, and verify service ing on-site sanitation and informal service p ­ roviders. ­ rovider. This type information provided by the service p Box ­4.3 provides a summary of pro-poor regulatory of mechanism may not work in some environments, but mechanisms, some of which are elaborated further in if culturally appropriate it can be effective in providing a 2018). this chapter (Mumssen, Saltiel, and Kingdom ­ Regulation of Water Supply and Sanitation in Bank Client Countries 55 TABLE ­4.3. Summary of Stakeholder Engagement Practices in Latin America Regulator Public participation ERAS and others Although public hearings are promoted, there is no register of that on the regulatory ­ activity. There is a board for (Argentina) Usuarios). Existence of formal consultation processes include public hearings and participation users (Sindicatura de ­ responses. Promotes the evaluation of users’ ­ in consultation ­ satisfaction. AAPS (Bolivia) Public hearing is promoted, but there is no register of that on the regulatory ­ activity. Existence of formal responses. consultation processes include public hearings and participation in consultation ­ Brazil (several) hearings. Users are able to complain to the ­ Some regulators promote public ­ regulator. Existence of formal consultation processes including public hearings and participation in consultation ­ responses. SISS (Chile) SISS promotes training days (SISS ­Capacita). Existence of formal consultation processes including public hearings responses. There is an advisory board for civil society (Consejo de la Sociedad and participation in consultation ­ ­Civil). CRA (Colombia) Promotes public participation, through complaints, suggestions, and ­ chat. Existence of formal consultation responses. processes including public hearings and participation in consultation ­ ARESEP (Costa Rica) activity. Existence of formal Although public hearings are promoted, there is no register of that on the regulatory ­ consultation processes including public hearings and participation in consultation ­ responses. ERSAPS (Honduras) Promotes public hearings through the website and local trainings (capacitaciones), on legal and regulatory ­ aspects. responses. Existence of formal consultation processes including public hearings and participation in consultation ­ INAA (Nicaragua) activity. Existence of formal Public hearings are promoted; however, there is no register of that on the regulatory ­ consultation processes including public hearings and participation in consultation ­ responses. ASEP (Panama) Public hearings are promoted, publicizing regulatory activities through public hearings. Existence of formal responses. consultation processes including public hearings and participation in consultation ­ ERSSAN (Paraguay) activity. There are formal Public hearings are promoted, but there is no register of that on the regulatory ­ consultation processes including public hearings and participation in consultation ­ responses. SUNASS (Peru) Regulatory activities are publicized through public hearings. Existence of formal consultation processes including responses. public hearings and participation in consultation ­ URSEA (Uruguay) hearings. Promotes the evaluation of users’ ­ Main practice is through public ­ satisfaction. Existence of formal consultation processes including public hearings and participation in consultation ­ responses. Note: AAPS = Autoridad de Fiscalización y Control Social de Agua Potable y Saneamiento Básico; ARESEP = Autoridad Reguladora de los S­ ervicios Públicos; ASEP = Autoridad Nacional de Servicios Públicos; CRA = National Water Regulatory Commission; ERAS = Ente Regulador de Aguas y Saneamiento; ERSAPS = Ente Regulador de los Servicios de Agua Potable y Saneamiento; ERSSAN = Ente Regulador de Servicios Sanitarios; Nicaragüense de Acueductos y Alcantarillados; SISS = Superintendencia de Servicios Sanitarios; SUNASS = Superintendencia Nacional INAA = Instituto ­ de Servicios de Saneamiento; URSEA = Unidad Reguladora de Servicios de Energía y A­ gua. a. Universal Service Standards constrains ability to achieve ­targets. For this particular Universal service standards could be an efficient and reason, utilizing incentives to foster coverage expan- effective way to benefit the ­ poor. Regulators could uti- ­ olution. Regulation sion may be a more appropriate s lize a number of tools to expand access of WSS ser- (by contract, agency, or other) could allow for vices to the p ­oor. For instance, regulators could performance-based instruments such as output-based provide clear coverage targets for service providers aid (OBA) to subsidize costs of installation of water (with enforceable penalties if targets are ­ unmet). connections for the poor, supporting the incentive However, coverage targets can often be vague due to regimes while ensuring through appropriate financial problems of definition, lack of data, and ambitious ­nterventions. In modeling the sustainability of the i ­ levels. In other cases, the lack of financial resources Manila, OBA is being used to extend access to water 56 Regulation of Water Supply and Sanitation in Bank Client Countries BOX ­4.3. Pro-Poor Mechanisms in LMICs Regulatory mechanisms used to better serve the poor (specifically the urban poor) include the following: • Price and service or quality differentiation: relaxation in quality of services to ease access of the poor- est, coverage targets tied to locations rather than statistics, and use of public information campaigns (Baker and Trémolet 2000a; Stallard and Ehrhardt ­ 2004). • Tariffs and subsidies: tariff reform to remove disincentives to serving the poor, and better targeting of subsidies to reach the unconnected poor, including possible focus on connection subsidies and direct transfers to consumers (Franceys and Gerlach 2008; Trémolet and Browning 2 ­ ­ 002). • Incorporating alternative service providers: through light-handed regulation that replaces price and quality regulation with public performance data (Trémolet and Browning 2002), or demand minimum requirements such as licensing, drinking water tests and/or maximum prices, relaxing exclusivity rights of utilities, assisting providers to obtain legal rights and addressing land tenure i ­ssues. • Customer and civil society: including the use of participatory and survey techniques to increase customer involvement, and accessible and inclusive regulatory processes (Brocklehurst 2002; Stallard and Ehrhardt ­2004). • Service obligations and universal service obligations: the use of obligatory service (compulsory service to all wishing to connect under the current tariffs) and universal service obligations (USOs), which extends this to promotion of socially desirable consumption through tariff control (Franceys and Gerlach 2 ­ 008). A good example of pro-poor regulation incorporating alternative service providers can be found in the Zambia. In 2003, Zambia established the Devolutionary institutional changes for pro-poor financing in ­ Trust Fund (DTF) to improve WSS coverage in peri-urban and low-income areas, administered by NWASCO. The DTF is a basket of three funds: the General Fund for Water, the General Fund for Sanitation, ­ service. DTF’s General Funds target low-cost, and the Performance Enhancement Fund targeting WSS ­ ­ ipes. high-impact projects such as water kiosks, water meters, improvements on pipelines, and sewerage p positive. It has proven itself effective in distributing governmental and Experience with DTF has been very ­ Zambia. external funds to improve the WSS sector in peri-urban ­ 2016b. Source: World Bank ­ households. The project subsidizes services for poor ­ extending coverage through contractual incentives, or water connections for households under the poverty SOEs.5 There is not yet much experience even through ­ ­ line. Connection subsidies are paid directly to the to date of regulatory agencies intervening in OBA-type Manila Water Company (MWC) for every new water approaches—most of the experience documented to ­ perating. Other OBA connection that is installed and o date is regulation by contract—but what is clear is that arrangements have been implemented to increase this is a performance-based tool regulators may con- access to the poor in Morocco, Cameroon, Kenya, sider when targeting subsidies to increase access for Colombia, and Uganda with either private operators the ­poor. Regulation of Water Supply and Sanitation in Bank Client Countries 57 b. Social Tariffs meters is charged U ­ S$0.18. Moreover, Trémolet and As explained in chapter 3, lifeline rates can be introduced Hunt (2006) cite a review of tariff structures in seven when low-income consumers already have access to countries across Africa (Burkina Faso, Kenya, Mali, services. However, it is important to note that sub- WSS ­ Senegal, Tanzania, Uganda, and Zambia), which finds sidy schemes specifically target households that already that all countries except Uganda implement increasing have access to WSS services (albeit unaffordable) and do ­ ariffs. The study finds that the size of the social block t not benefit the poorest and most vulnerable populations block varies between 5 cubic meters in Tanzania to lacking access all t ­ ogether. Relatedly, implementation of 20 cubic meters in Mali or Senegal, where the differ- social tariff schemes is often cited as one of the key ence in tariff level between the first block and the sec- ­ regulatory challenges in Latin America (Marques, ond block is also the sharpest (Trémolet and Hunt forthcoming). Although  cross-subsidized tariffs are ­ 2006). A study by Komives et ­ ­ al. (2005) finds that Asia widely implemented, this is often inadequate to provide implements significantly large social blocks, in which access and deliver services to low-income groups, so the size of the first block averages 13 cubic meters per other tools may be used with the c ­ ross-subsidies. For month, or Latin America, which averages 24 cubic example, in Chile approximately 600,000–800,000 poor 2006). meters per month (Trémolet and Hunt ­ households pay subsidized WSS tariffs on an annual  ifferentiated Service Standards and Alternative c. D basis, accounting for almost ­13.5 percent of total clients in Service Providers 2015—allowing service providers to raise the tariffs as An additional regulatory intervention to expand access needed to ensure the sustainable operation of the utility to the poor is in the form of incentivizing service pro- (Baer ­2017). viders to subcontract smaller operators and to allow Additionally, in Colombia, households are categorized differentiated service levels provided by public net- in six strata, in which strata 1 represents the poorest works as well as smaller, private n ­ etworks. This form of and strata 6, the richest portion of the ­ population. This regulatory intervention is operational in  the conces- categorization allows targeting subsidized rates to the sion contract in ­ Manila. Moreover, regulators play a poorest households, and taxed rates to the wealthy ­rade-offs. crucial role in evaluating equity efficiency t 2007). Table ­A.2 portions of the population (Meléndez ­ Service providers will seek to analyze the benefits of in appendix A, d ­ eveloped by Marques (forthcoming), expanding access in comparison to achieving efficiency outlines some of the different methods by which subsi- services. Regulators could formulate gains of existing ­ dies are implemented in Latin America and the role of recommendations to policy makers to determine the the regulator in doing ­ so. rate of network expansion and identify other transi- 2006). tional service solutions (Trémolet and Hunt ­ It is important to note that these tariff structure approaches rest on a number of assumptions that in d. Regulation of Non-Networked Services many cases have been proven incorrect in p ­ ractice. As A World Bank study showcases the experiences in mentioned, the tariff structure could assume that poor Bangladesh, Indonesia, Peru, and Tanzania, regarding households have metered access to water services, the role of regulation and access to on-site sanitation which is often not the case (Trémolet and Binder as a way to achieve progress towards universal ­ access. ­ 2009). In Kenya, for example, less than 25 percent of There are no one-size-fits-all solutions, and accord- customers are ­ metered. Where no meter is installed, a ingly each country offers a different approach, as sum- monthly flat fee is charged at ­approx. ­US$2.56, whereas marized in Table ­4.4. The functions outlined the first tariff block for consumption up to 10 cubic are  typically envisioned for implementation by 58 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE ­4.4. Summary of Approaches in Regulation of On-Site Sanitation in Select Low- and Middle-Income Countries Function Bangladesh Indonesia Peru Tanzania Policy for on-site ­n.a. Regulations govern Recent statement Water Act of 1966 sanitation PPP for sanitation expresses interest to mentions ­ PPPs. However, ­ nfrastructure. Users i engage private sector no regulations cannot opt-out Regulation of on-site Local communities Standards exist with varied Approaches in Local institutions monitor sanitation emphasize promotion implementation across development for on-site that households have rather than enforcement/ local government solutions for rural and latrines regulation poor households Source: Adapted from Sy, Warner, and Jamieson ­ 2014. Note: ­ partnership. n.a. = not applicable; PPP = private-public ­ regulators. Interestingly, in this case, the independent ­ cholera and to manage the Republic of Yemen’s scarce extent of government intervention is widely varied resources. This area is being explored ­ ­ further. from limited intervention in Bangladesh to more expansive roles in Tanzania and ­ Peru. In Nigeria, communities without access to networked water services rely on informal cart vendors and tanker  egulation of Informal Service Providers in Fragile e. R trucks that are largely u ­ nregulated. There are limited and Conflict Affected States (FCS) examples of formal contract regulation between associ- In some cases, communities have no alternative ations, businesses, and the Bauchi State Water Supply suppliers. In the options but to rely on informal WSS ­ Company (BSWSC) in Nigeria; however, these contracts Republic of Yemen, the collapse of the public sector do not stipulate standards for service delivery, includ- private service providers has led to the rise of informal ­ ing water ­ quality. Furthermore, although there is a for- communities. Specifically, private tanker to serve ­ mal partnership between private operators and BSWSC, trucks have increased their importance in the water the relationship is predominantly governed by infor- delivery supply chain as the availability of municipal mal arrangements as opposed to the c ­ontract. ­ eclined. Although the current institu- water services d Stakeholders interviewed as part of a World Bank diag- tional context in the Republic of Yemen is fragile, a nostic study in Nigeria shed light on the need for very limited degree of oversight is exercised over the strengthened regulation to improve service delivery provision of tanker services, including registration of n.d.). and to monitor pricing of services (OPM ­ tankers, and the development of a database  that includes information such as: (a) contact information, It is clear that although informal service providers play water tank capacity and areas of operation; (b) inspec- a significant role in the WSS market, much of their tion and standards compliance of tankers; (c)  water experiences remain undocumented mainly due to the quality testing; and (d) some level of consumer aware- issue of absence of regulation of these key market ness ­ raising. Much of this oversight is done by the players. As with a few other topics highlighted in ­ National Water Regulatory Agency and the United this  discussion paper, further investigative work is Nations Children’s Fund (UNICEF) through a World necessary to better understand the challenges of Bank-financed program, which is also working in some providing differentiated service levels, regulating ­ ­ tilities. Regulation is limited and cases with the local u non-networked services including on-site sanitation, is currently intended to help mitigate risk of spreading providers. ­ and regulating informal service ­ Regulation of Water Supply and Sanitation in Bank Client Countries 59 4.4  Aligning Institutions and Incentives FIGURE ­4.3. Interlinkages between Policy, with the Enabling Environment Institutions, and Regulation Regulatory frameworks are part of a wider enabling ­ perate. A environment within which service providers o Policy multitude of interconnected institutional factors deter- Policy direction mine whether a regulatory framework is able to suc- Targets, indicators, and cessfully deliver results in line with sector policies and performance Financing objectives. Broadly, these factors refer to the wider eco- ­ nomic and legal foundations, political economy, and cultural influences in a given country that influence reg- ulator priorities and choices, in addition to water sector Institutional Interlinkages arrangements laws, policies, strategies, and the institutional struc- Legal framework Regulation tures and relationships within the sector (Mumssen and Functional separation Decentralisation Economic and Triche 2017; Mumssen, Saltiel, and Kingdom ­ 2018). Aggregation technical regulation Marketization/PPP Types of regulation Additionally, an effective regulatory framework is one Governance that is tailored to institutional capacity, whereby softer Accountability incentives are created for weaker institutions and vice versa. Thus, ensuring stakeholders are equipped to ­ partnership. Note: PPP = public-private ­ ­ reated. Essentially, this implies respond to incentives c that a well-designed regulatory framework is one that is interlinked and embedded within the policy and regulatory functions, was developed to suit the institutional frameworks of the sector as demonstrated existing arrangements and to regulate all types of in Figure ­4.3 and is adaptable to existing institutional providers. The comprehensive WSS sector service ­ capacity to respond to incentives (Mumssen, Saltiel, reform in Portugal has resulted in sustainable and Kingdom 2 ­ 018). improvements in the sector: investment in the WSS sector has increased significantly and can move the Portugal’s case illustrates how well-designed poli- sector to higher levels of access to WSS services cies, institutions, and regulation (PIR) interventions 2018).6 (Mumssen, Saltiel, and Kingdom ­ can create strong incentives to improve the WSS ­ sector. The reforms in 1993 were supported by a Albania offers another example in which interlinkages strong legal framework that clearly separated the between the regulatory and policy and institutional policy-making (executive), regulatory, and service frameworks can be said to have created a stronger delivery functions within the sector, and allocated enabling environment to incentivize improved sector the roles and responsibilities of the ­ institutions. The ­ outcomes. In Albania, the development of the regula- legal framework also provides guidance on the ser- tory framework, including the establishment of the vice provision model: direct public management, independent regulatory agency (WRA), was mostly delegated public management with or without influenced by the EU Directives for Drinking Water, inter-municipal systems (aggregation of several and was linked to international best practice in WSS municipalities to provide WSS services), or delega- reform. This includes regulating water quality sector ­ tion to private sector operators (often through P ­ PPs). and price of services, corporatization of water utilities, The regulatory framework, which currently includes and decentralization of services to local authorities an independent regulator to perform the economic 2011). With the support of enabling (World Bank ­ 60 Regulation of Water Supply and Sanitation in Bank Client Countries legislation for the agency, WRA has the incentives to desirable for an economic regulator to play a role in fulfill its mandate and supervise the sector’s perfor- determining market structure, especially if there is mance through the various c ­ hanges. In the absence of no  other agency, such as a competition authority, an umbrella policy and legal framework specific to the charged with doing so (Berg ­ 2013a). WSS sector, the WRA provides some form of guidance Mumssen and Triche (2017) highlight another import- to the reform process (including decentralization and ant component of context, which is the reality on the corporatization processes) (Mumssen, Saltiel, and ground. This can include factors that are outside ­ Kingdom ­2018). the immediate control of the government, such as the Sector institutional structure plays an important role availability of water resources, the strength of in supporting regulators to promote accountability and the economy, the capacity of public institutions more transparency of service ­ delivery. Institutional separa- broadly, the current physical condition of WSS ser- tion refers to the separation of operational entities vices, and the percentage of the population that is from political and regulatory ­ entities. Separating these cost. In some situations, the best able to pay full ­ functions reduces conflicts of interest and makes the ­strategy—both technically and politically—might be to costs of service delivery and performance of service increase capacity and promote technical improve- stakeholders. providers more transparent to sector ­ ments and efficiency before increasing tariffs A  degree of regulatory autonomy enables regulators significantly. In some cases, for example in FCS or ­ and service providers to make decisions based on tech- very low-income economies, simple regulatory nical and financial criteria and makes it possible to approaches such as the collection and analysis of results. Marques hold both sides accountable for ­ information on service provider performance and (forthcoming) provides examples of regulators in Latin quality of services combined with public awareness America and their role in enhancing transparency in campaigns about the value of water may be more Table ­4.5. Examples of regulators that stand out ­ ucceed. In  others, more appropriate and likely to s because of their good transparency practices within complex regulatory approaches may be appropriate the sector include SISS in Chile, Autoridad Reguladora and ­effective. de los Servicios Públicos (ARESEP) in Costa Rica, and In Indonesia, the WSS regulatory framework is com- Agência Reguladora de Serviços Públicos Delegados do plex and is often not followed as written, implying Brazil. Estado do Ceará (ARCE) in ­ key realities the sector exhibits are not being taken in Market structure is another aspect of institutional ­ ramework. to account in the design of the sector PIR f structure. For example, market integration, either ­ Indonesia mandates PDAMs (local water supply com- horizontally or vertically, may be used to promote ­ panies) to provide piped water supply; PDAMs are economies of scale, especially in small ­ markets. “commercialized or corporatized” and aided techni- Disaggregation may be used to attract investment in cally by the centralized Department of Public Works, production or treatment, or to improve the responsive- for managerial guidance by the Department of Home ness of service providers to customers at the local Affairs, and are owned by the city, municipal, or local level, to make the cost of each activity more transpar- governments. Local bodies set PDAM tariffs and do ­ ent, or to make it possible to introduce competition for not necessarily follow the regulations of the decrees the market or comparative ­ competition. Provision of they were mandated to ­implement. Local Government different services, such as water and wastewater or No. 22 of 1999 mandates that PDAMs generate Law ­ even including urban waste or energy services, can revenues for their owners, and if revenues of local lead to economies of ­scope. For these reasons it may be bodies fall below self-sufficiency they must be Regulation of Water Supply and Sanitation in Bank Client Countries 61 TABLE ­4.5. Transparency Practices in the Regulatory Agencies of Latin America Regulator Transparency ERAS and others Minutes of the board of directors are publicized ­ occasionally. Legislation, sector information, and information on the (Argentina) public. Decision and regulatory opinions, benchmarking and quality of service regulation, and regulated entities are ­ major staff information are available online. AAPS (Bolivia) Management and financial information, legislation and sector information, information on the regulated entities, decision and regulatory opinions, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff information are ­ publicized. Brazil (several) Management and financial information, legislation and sector information, information on the regulated entities, (e.g., ARSESP), supervision and auditing activities are decision and regulatory opinions, economic regulatory activities ­ ­publicized. SISS (Chile) Management and financial information, legislation and sector information, information on the regulated entities, decision and regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities and major staff information are ­ publicized. CRA (Colombia) Management and financial information and minutes of the board of directors are ­ publicized. In addition, legislation, website. Decision and regulatory sector information, and information on the regulated entities are available on ­ opinions, economic regulatory activities, consultations and hearings, supervision and auditing activities, and major public. staff information are ­ ARESEP (Costa Management and financial information, minutes of the board of directors, strategic plan, legislation and sector Rica) information, information on the regulated entities, decision and regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff information are ­ publicized. ERSAPS Information regarding management and financial aspects, legislation and sector, regulated entities, decision and (Honduras) regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff are ­ public. INAA (Nicaragua) Legislation and sector information, information on the regulated entities, decision and regulatory opinions, benchmarking and quality of service regulation (but need to be updated), consultations and hearings, supervision and auditing activities are ­ publicized. ASEP (Panama) Management and financial information and minutes of the board of directors are ­ public. Information regarding strategic plan, legislation and sector, regulated entities, decision and regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing publicized. activities, and major staff are also ­ ERSSAN Management and financial aspects, performance self-evaluation, legislation and sector, regulated entities, decision (Paraguay) and regulatory opinions, benchmarking and quality of service regulation, supervision and auditing activities, and major publicized. staff are ­ SUNASS (Peru) Management and financial information, minutes of the board of directors, strategic plan, legislation and sector information, information on the regulated entities, decision and regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff information are ­ publicized. URSEA (Uruguay) Information regarding management and financial aspects, minutes of the board of directors, legislation and sector, regulated entities, decision and regulatory opinions, economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff are ­ publicized. Note: AAPS = Autoridad de Fiscalización y Control Social de Agua Potable y Saneamiento Básico; ARESEP = Autoridad Reguladora de los Servicios Públicos; ARSESP = Agência Reguladora de Saneamento e Energia do Estado de Sao Paulo; ASEP = Autoridad Nacional de Servicios Públicos; CRA = ­ National Water Regulatory Commission; ERAS = Ente Regulador de Aguas y Saneamiento; ERSAPS = Ente Regulador de los Servicios de Agua Potable y Saneamiento; ERSSAN = Ente Regulador de Servicios Sanitarios; INAA = Instituto Nicaragüense de Acueductos y Alcantarillados; SISS = Superintendencia de Servicios Sanitarios; SUNASS = Superintendencia Nacional de Servicios de Saneamiento; URSEA = Unidad Reguladora de Servicios de Energía y A­ gua. 62 Regulation of Water Supply and Sanitation in Bank Client Countries ­odies. This puts merged with neighboring local b multi-country studies that prove or disprove the general proposi- regulation. Instead, tions about the theory and practice of economic ­ enormous pressure on PDAMs to generate revenues their principal concern is whether specific reforms should or should performance. by any means without regard to utility ­ systems.” This makes the not be applied to their existing regulatory ­ evaluations. case for “best fit,” and context-specific regulation and ­ Between 1998 and 2005, 128 out of 319 PDAMs had 2. The case of Philippines is an important example of fragmentation of foreign debts and, due to the financial crisis, caused the regulatory function: concessions in metro Manila being regu- ­ DAMs. Of these financial distress to the indebted P lated by contract between MWSS and the concessionaires (in which 128 PDAMs, only 22 PDAMs increased their service MWSS allowed pass through of corporate income tax to users through tariff), local government–run utilities by the National Water coverage, nine PDAMs increased installed capacity, Resources Board (NWRB) and local governments and rural systems and 52 PDAMs reduced NRW; 125 PDAMs increased self-regulated. Philippine water practitioners and cooperatives are ­ 2010). Additionally, maintain- their tariffs (Hadipuro ­ 7 have lobbied for an independent regulator covering all service pro- ­ rivate. Senate Bill 1585 (16th Congress) viders both public and p ing existing customers and providing 24/7 service sought a water regulatory commission that would license all provid- enhances consumption and revenues as consumers ers of piped water supply and sewerage services (without exclusivity will pay the higher rate of the block ­tariff. In contrast, pass. ­ in service areas),but did not ­ expanding coverage to new customers—depending 3. The Planning Commission is reviewing a model bill for states to con- sider that addresses the challenges of the current statutes of the on the customer class served—may result in them regulators. states that have passed laws to establish WSS ­ paying the lower or first block of subsidized tariff, http://www.swsc.co.sz/. 4. See the SWSC website: ­ which does not enhance the PDAM’s profit and may loss. result in a net ­ https://www.gpoba.org/. 5. See the GPOBA website, ­ 2017. 6. World Bank ­ Notes 7. Hadipuro (2010) notes that since the 1980s Indonesia’s infrastructure 1. Brown, Stern and Tennenbaum (2006, 2) provide guidance to evalu- policy has largely been shaped by the World Bank; Indonesia received ating country-level regulatory systems, stating that “individuals who ­ illion. Two out- 27 water loans between 1983 and 2003 for over US$2 b make decisions on whether to undertake changes in a country’s comes of the overall policy guidance are (a) PSP in water services, existing regulatory system are typically not interested in and (b) water ­ commoditization. Regulation of Water Supply and Sanitation in Bank Client Countries 63 Chapter 5: Prioritizing Key Challenges of WSS Regulation in Low- and Middle-Income Countries 5.1 Context Matters already achieved near universal coverage with rea- sonable levels of service—not struggling to provide The global study “Aligning Institutions and Incentives even a basic level of service to a portion of their for Sustainable Water Supply and Sanitation Services” ­ service areas. Efficiency and improving service was (Mumssen, Saltiel, and Kingdom 2018) shows that the name of the game—not achieving modest service practitioners must think holistically about a country’s levels and universal access. Finally, the regulatory sector policies, institutions, and regulations, and the models taken from OECD countries typically oversee incentives engendered by each, to see how they must private, or at least corporatized, entities, in which complement each other to achieve the government’s regulatory levers can substantially impact manage- desired sector outcomes (see Figure 3.1 and Figure 4.3). ment behavior. This is compared to LMIC service pro- As such, the design of any regulatory system has to be viders, which are predominantly public-sector considered as part of a package: it is not a simple “add entities and subject to a range of political and gover- on” to whatever sector framework currently exists. nance forces not felt by their regulated brethren in This was, perhaps, one of the weaknesses of past upper-income countries. regulatory interventions in LMICs in which donors, ­ clients, and consultants believed that the creation of a ­ Any regulatory model for an LMIC must be fit for pur- regulator would solve all problems. In fact, it was pose, designed to the context at hand, while drawing often considered that the more sophisticated the reg- on good practices and global experiences, but not ulatory intervention, the better the outcome would blindly adopting them. This means designing regula- be, and resulted in the adoption (or semblance of tory frameworks embedded within political economy adoption) of regulatory models from OECD countries. and governance structures and aligned with policy and This situation was a classic example of “best practice” institutional frameworks. It also means recognizing being applied without consideration of the local situ- the need to develop regulatory designs that corre- ation in terms of its technical, financial, and human spond with existing institutional capacity to respond capacity; its governance; or its political economy. The to PIR incentives and adapt over time as the regulator “copy and paste” model ignored the fact that good and the service providers learn and improve (e.g., quality data do not exist in many countries (and the softer incentives for weaker institutions and vice sophisticated models adopted depended on exten- versa). The regulatory model in England and Wales has sive data requirements); human capacity is weak in been in place now for almost 20 years and has been both the regulator and the regulated entities; political modified in each five-year regulatory cycle to reflect will for real sector reform (including greater transpar- learning and changes in the operating environment, be ency and accountability) is often muted, and, there- that technical, political, environmental, or customer fore, incentives and penalties cannot be established expectations. With this in mind, the conclusions here or enforced. At the same time, the advanced models are framed around the subsection themes in the pre- came from situations in which service providers have ceding chapters. Regulation of Water Supply and Sanitation in Bank Client Countries 65 5.2  Regulatory Objectives stylized examples identified through the literature and the examples analyzed (note that it is not exhaustive). There are some common baseline objectives of WSS regulation in LMICs. The degree to which some objec- tives often cited, for example, transparency, account- 5.4 Regulatory Functions ability, and predictability, are actually demanded from The ultimate success of achieving given regulatory regulation will depend on the political economy objectives is completely dependent on broader gov- ­ context. But what can broadly be stated as objectives ernment support and political economy, including, for for the WSS sector in most LMICs, and relatedly, the example, credibility of enforcement and punishment, key objectives of WSS regulation in LMICs are to provide as well as institutional alignment across government the framework and instruments, and in turn incentives, (e.g., ministries of finance, planning, water resources that support the following: and environment, and health). Regulators can use numerous tools to incentivize utilities to implement • Increasing access, especially to peri-urban and rural desired actions and achieve the sector objectives; areas, and to poor and vulnerable groups; some of the tools and approaches identified for the • Improving quality of service delivery; WSS sector in the LMIC context are described here. • Improving efficiency of service providers; and Improving Financial Sustainability • Securing access to capital markets for sector The role of regulation in designing and implementing financing. tariffs and subsidies in a manner that is transparent and predictable is critical in enhancing financial sustainabil- There will be many other objectives of regulation ity and meeting the objectives of improved access and depending on the specific state of the WSS sector and the services and supporting an appropriate investment cli- political economy context. But it is important to note mate to attract the necessary investments. Regulators that regulation will usually help define only the mecha- aim to ensure that utilities recover costs while protect- nisms to incentivize service providers, users, and other ing customers from monopolistic price setting and key stakeholders in the sector; it is the role of sector pol- ensuring affordability. Accordingly, tariff regimes such icy to determine what the objectives are, which will as price cap regulation and rate of return regulation aim shape what type of regulation will ultimately be needed. to provide utilities with the opportunity to recover costs and incentivize performance improvement. 5.3 Regulatory Forms Although the form of regulation that was often imported Adopting phased approaches in tariff implementation from OECD countries in the 1990s and 2000s was a ded- may be optimal in LMIC contexts, which exhibit com- icated national sector regulatory agency, often with mon challenges such as the lack of data, capacity, and aspirations of “independence,” the reality with regard political will. This entails placing an initial focus on to the forms of regulation that exist and that may be quality regulation until the required information and most effective in LMICs is varied, depending on the capacity levels are met by utilities. Thereafter, tariff set- local institutional context. This includes a multitude of ting processes that support transparency may be imple- factors such as the existing legal foundations, WSS sec- mented, such as rate of return regulation. In Colombia, tor policies and strategies, governance structures, a phased approach was adopted to tariff reform wherein extent of decentralization, whether the country is a fed- it focused first on acquiring unit costs and standardiz- eral system, the extent of national SOEs or municipally ing accounting norms used by utilities, followed by run service providers, etc. See Table 3.1 for the main introducing efficiencies to fully reflect operational 66 Regulation of Water Supply and Sanitation in Bank Client Countries costs and then increasingly investments. Noteworthy, monitoring and auditing arrangements. However, achieving financing sustainability allows utilities to risks remain in terms of tools available to regulators demonstrate creditworthiness, which is an important to ensure contract enforcement, and risk manage- way to attract commercial finance. As observed in ment and sharing. Kenya, regulation played a key role in facilitating • Corporatization: allows for implementation of increased access to commercial finance for utilities. results-based approaches and sets clear KPI targets and associated incentives. Improving Service Provider Performance Another regulatory tool to help provide incentives for • Client and service provider contracts. Such contracts allow for clearer performance improvement targets improved access and service delivery is the process of to be set. For example, in Brazil all state companies performance monitoring, carried out through measur- have program contracts with municipalities, which able metrics, often coupled with some form of reward are the owners of the assets. In Argentina, the state- or penalty—or, at least, shining the light on good or run utility Agua y Saneamientos (AySA), the Buenos poor performers (“sunshine regulation”). In LMICs, Aires operator, and most other utility companies key challenges related to data availability, financial have contracts with provinces that are the owners of and technical resources, and monitoring and enforce- the WSS facilities. ment persist. These are compounded when the politi- cal economy does not provide credible institutional Increasing Accountability, Transparency, incentives to the key stakeholders. Nonetheless, there and Consumer Voice exists a multitude of performance management tools Implementing mechanisms that enhance accountabil- implemented with varying degrees of success, includ- ity and transparency within the WSS sector is crucial ing but not limited to the following: for achieving objectives. Regulators play an instru- • Benchmarking: a practice implemented widely mental role in implementation of various mechanisms across LMICs that creates the incentive to improve that allow for institutionalization of consumer protec- performance through associated rewards and tion and engagement practices that support account- penalties. A prerequisite for benchmarking is estab- ­ ability and transparency in order to improve overall lishment of data collection and dissemination sector performance. A variety of successful mecha- ­ systems, as in Albania, Peru, and Tanzania. nisms are implemented across LMICs range from WWGs of local volunteers in Zambia or public hearing • Licensing: issuing licenses allows regulators to moni- and consultation processes implemented widely tor agreed service standards, as is in Albania’s WRA, across Latin America. which is responsible for ensuring service providers meet stipulated service standards. Pro-Poor and Non-Network Services Regulation • Performance- and results-based contracts: perfor- A variety of regulatory instruments are available that mance improvements can be achieved through offer utilities incentives to expand access to poor com- development of KPIs through public-public con- munities, including (a) universal service standards tracts, as in Burkina Faso, or public-private con- (setting clear access targets with enforceable penalties tracts, as in Senegal. Performance contracts can be in the case targets are unmet); (b) regulation (by con- effective in delivering performance improvements tract, agency, or other), which could allow for perfor- if they depict some of the following desirable fea- mance-based instruments such as OBA to subsidize tures: simplicity of agreements, clear responsibili- costs of installation of water connections for the poor, ties, realistic targets, reporting requirements, and supporting the incentive regimes while insuring Regulation of Water Supply and Sanitation in Bank Client Countries 67 through appropriate financial modeling the sustain- poor data. As we have seen through past PPP attempts ability of the interventions1; and (c) differentiated ser- in the sector, when it does happen, contentious con- vice standards and alternative service providers. tract renegotiations are likely to ensue due to actual However, when low-income households already have baselines being quite different than those reported access to services, regulators might implement social prior to contracting. tariffs to secure affordability of services for the poor Furthermore, data are necessary to create incentives (e.g., lifeline schemes, although with varying success through the setting of performance targets and to at pro-poor targeting), or provide targeted subsidies enable a multitude of factors that contribute to through direct transfers. Ultimately, regulation is the enhanced sustainability ranging from operational effi- mechanism to incentivize service providers and users; ciency to financial sustainability. Regulators are pro-poor social and sector policies will ultimately well-positioned to carry out data collection, manage- shape the objectives regulation should try to achieve. ment, analysis, and sharing activities because these are aligned with stated regulatory mandates, objec- Regulation Fit for Purpose: 5.5  tives, and general functions. Accordingly, basic regula- What Does it Take? tion should predominantly focus on data collection, Any regulatory model must be fit for purpose and, cus- validation, analysis and dissemination, the objectives tomized to the institutional context and political econ- of which are twofold: (a) identification of key problem omy at hand. In other words, regulatory functions are areas (collecting and analyzing financial, operational, tailored to existing realities. This entails a dynamic governance, and citizen engagement data and devising learning process and a need to adapt over time as the action plans that would lead to improved utility per- regulator and the service providers learn and improve. formance and sustainability of services in the long After reaching more advanced stages, regulators would run); and (b) performance measurement (measurement be able to contribute to better sector governance. Data of performance data allows for the implementation of and capacity are essential features of this approach. incentive mechanisms that identify and reward best performers and allows for utilities to learn best prac- Data Availability tices and continue progress on areas of performance improvement). An effectively designed data collection Data availability will depend on the incentives and system usually comprises the following elements: (a) a resources for collecting, validating, and analyzing dedicated team that has the capacity to identify the data. For evidence-based policy making, decision relevant data and sources; (b) a participatory approach makers, including regulators, will rely on what they to data development and collection; (c) protocols and can measure and observe when determining policies guidelines and schedules for data collection; (d) secur- and rules of the game. Without the data and related ing data reliability and consistency to allow for com- resources for developing and sustaining decision anal- parisons to be made across utilities; (e) developing ysis tools, it is unlikely that sector objectives such as policies and standards for public disclosure of data; financial sustainability and increased access will be and (f) analyzing data to improve policy development, achieved. Because private sector participation will implementation, and performance evaluation. heavily rely on the ability to analyze operational data regarding costs, service quality, revenues, and fore- Considering the context of LMICs, data collection casts of financial and operating performance, it is efforts rely significantly on the collaboration of several unlikely that significant private sources of financing entities across different government institutions and investment will take place in the context of and  even sectors. In some cases, regulators could 68 Regulation of Water Supply and Sanitation in Bank Client Countries incentivize data collection initiatives for local leader- Capacity ship and communities. This is particularly essential in Outcomes of regulatory interventions depend on the areas where informal service providers operate. capacity of regulators to implement their mandated Therefore, recruiting and training people to collect, roles and responsibilities in an effective manner. In the validate, and report data is key to delivering sustain- majority of LMICs, experience demonstrates that regu- able services and to improve performance in the long latory capacity is often weak and is a major contribut- run. Business plans are good tools with which to ing factor to unsustainable services. Although capacity establish performance targets and monitor whether ­ building strategies should be designed to build the citizens’ expectations are being met (Berg and institutional capacity of regulators to address the com- Philips 2017). plexity of service delivery challenges, it is important to recognize that capacity building is a long-term, contin- Liberia has developed a digital map that includes uous process. Therefore, regulatory functions must be inventories of safe water points with collaboration tailored to existing capacity levels such that responsi- between government institutions and donors. bilities would evolve over time in terms of variety and Initiatives such as this need to be embedded within complexity as capacity levels improve. After reaching utility and regulatory frameworks and procedures. In advanced capacity levels, regulators would be able to Nigeria, the Ministry of Water has made it mandatory contribute to better sector governance and effectively that all state utilities implement the International implement transparency and accountability mecha- Benchmarking Network (IBNET) system, thus encour- nisms that result in the creation of an appropriate aging the collection of basic KPIs. In Uganda, a enabling environment that provides incentives for national monitoring system has been developed in improved service provision. line with a sector performance management frame- work that monitors 11 KPIs. These include data on Multiple forms of capacity building are available water access, quality, and quantity. A number of gov- although the impact of capacity building programs ernment entities collaborate to set the same defini- greatly depends on many factors including the com- tions for KPIs and to collect the data. These efforts mitment of participants to engage. More importantly, have facilitated the development of annual perfor- technical knowledge needs to be applied to the local mance reports that provide information on achieve- institutional context and key lessons learned applied ments as well as challenges and recommendations to the realities of the participants. Moreover, leader- (Berg and Philips 2017). ship must support capacity building programs under- taken by individuals. This requires some level of When the regulator lacks tools, requiring the submis- reform in organizational culture in order to allow and sion of business plans presents one way to consistently motivate professionals to apply their newly acquired report utility objectives and targets. SUNASS in Peru skills. It is also useful to ensure that capacity building utilizes benchmarking as a tool to identify strong and programs are evaluated regularly in order to ensure weak performance. However, in addition to this, the that continued education contributes to sound techni- law requires that utilities develop business plans to be cal and strategic decisions. submitted to SUNASS for review and approval. This has allowed SUNASS to collect financial data, operat- Delivering capacity building programs in an effective ing variables, and targets. Additionally, publicly dis- manner requires that linkages are made between closing the business plans has allowed for improved knowledge dissemination and implementation, such transparency (Mumssen, Saltiel, and Kingdom 2018). that the following steps are followed in development Regulation of Water Supply and Sanitation in Bank Client Countries 69 of the program: (a) diagnostic and capacity needs comparable or similar challenges and resources in assessment; (b) knowledge selection and creation; order to gain the most benefit. (c)  knowledge dissemination; (d) learning process; • Global and regional networking: allow agencies to and (e) implementation. The most typical capacity obtain outputs that could otherwise be unavailable building approaches include the following (World or expensive. Dedicated organizations act as inter- Bank 2017): mediaries within the region to provide a forum for discussions, sharing data for benchmarking pur- • Self-study: vast resources are available for profession- poses, providing capacity building, and evaluating als to enhance their personal skills and knowledge on best practices. This form of training promotes regulatory practices and interventions that could knowledge exchange of practical advice regarding lead to performance improvements. Despite this, regulatory processes and substantive rules. The much of the existing information is inaccessible and Danube region provides an example of an effective out of date. In addition, although a lot of good mate- regional program whereby regulators and utilities rial exists regarding the promotion of sound infra- have developed a shared database of KPIs and tech- structure regulation, there is still a need to identify nical training on a vast number of issues. Space is interventions that are well tailored to best fit the local also given for discussions to promote the exchange institutional and sector context. of ideas across organizations. • Open-enrollment programs: these comprise training courses for which interested individuals may apply. Strengthening Regulation: 5.6  There are multiple formats through which these The Way Forward courses are delivered, including lectures, exercises, and case studies. A particular advantage of open There are no one-size-fits-all solutions. Developing a enrollment programs is that participants can benefit regulatory framework that delivers sustainable out- from cross-country learning. comes depends on how well regulatory interventions are embedded within a country’s enabling environ- • Customized courses: the greatest advantage of this ment and aligned with the existing policy and institu- form of capacity building is that training is custom- tional frameworks of the sector. Designing effective ized to the needs of the agency and is tailored to the interventions is a continuous learning and adapting specifics of the local context. process. Mumssen, Saltiel, and Kingdom (2018) pro- • University-based certification programs: such pro- vide the following guiding principles that can generate grams could address fundamental skill gaps positive incentives through context-specific policies, required to improve effectiveness and efficiency of institutions, and regulation (PIR) interventions: regulators. The greatest incentive to enroll in a uni- versity-based program is the certification obtained a. Identify key reform drivers. The main motivating fac- upon completion. tors for reform and improvements of the WSS sector that stem from endogenous factors (politicians or • Study tours: comprise site visits, peer-to-peer meet- government officials) or exogenous factors (donors ings, and in some cases collaborations with other and development agencies). organizations. A notable advantage of study tours is the opportunity for participants to engage in infor- b. Understand the existing institutional environment of mal discussions and to share information about the sector. Identify the key actors in the sector, lead- specific challenges they face. However, care must ership, national policies and strategies; legal frame- be taken in collaborating with agencies that have work; and regulatory framework. 70 Regulation of Water Supply and Sanitation in Bank Client Countries c. Understand the political economy of the country and pivotal for most, if not all, regulatory tools. This not sector. Identify how the public sector has developed only requires capacity building but also the ability and over time, cultural influences in the design of the readiness to take the decisions regarding incentives public sector, or cultural attitudes to WSS services. and targets that reflect reality rather than political aspirations. d. Identify intrinsic incentives of key actors. Analysis of intrinsic incentives of the people expected to imple- For LMICs, the role of regulation will and should evolve ment reforms. over time. Thus, establishing a successful regulatory e. Design institutional interventions that align exoge- regime is best accomplished by taking a phased, or nous and endogenous incentives. Consider WSS sec- step-by-step approach. For example: tor and country-specific characteristics as well as 1. For countries without a WSS regulator and/or that are aligning WSS sector objectives and institutional considering one, a simplified RIA can clarify the interventions with intrinsic incentives of key actors. objectives, costs, and benefits of regulation, and f. Design interventions that are fit for purpose. Ensure reveal opportunities for incentivizing utility perfor- that interventions are not overly complex for the mance. In turn, clarification of regulatory objectives given context and capacities. and functions enable the development of the legal g. Provide sufficient capacity support. To ensure reform and other frameworks that support regulation in the objectives are realized, capacity building should be sector, aligning it with existing political economy grounded in the realities on the ground. and sector policies. h. Ensure there is sufficient financial capacity. To sustain 2. Building data capacity is an essential first step for reg- results and obtain human resources required to ulation. Whether the chosen form of regulation is implement the desired interventions. through an independent regulatory entity, contract, The depth and complexity of a regulatory regime in any decentralized department, or utility, data is key. country not only depends on the country context and During the incipient stages of regulation, before a needs, but also capacity. In some cases, for example, more formalized regulatory arrangement is devel- FCS or very low-income economies, require simple oped, creating a ring-fenced unit within a ministry regulatory approaches such as the collection and anal- or department might be the best or only option. ysis of information on utility performance and quality Resources and data capacity building should be pro- of services combined with public awareness cam- vided so that the tasked unit can establish a system paigns about the value of water. In others, more com- to monitor and evaluate service providers and ser- plex regulatory approaches may be appropriate and vice delivery, and can be the initial foundations for a effective. But what is clear is that in all cases, for any more substantive regulatory arrangement. start to be made along the ladder of regulatory reform, 3. As institutions continue to build their capacity, regula- basic quality data collection is a prerequisite. Without tors should focus on improving utility performance understanding the state of the sector and the gaps in through monitoring, benchmarking, and appropri- financing, quality, and access, for starters, it is very dif- ate performance incentives. ficult to develop a regulatory regime to direct incen- tives for performance. WSS sector stakeholders must 4. As institutional capacity and utility performance recognize the importance of beginning data collection improve, regulators can take on additional responsi- efforts and developing the capacity in financial and bilities, such as accounting for their regulatory base; technical terms to be able to adequately do so. Data are gradually installing protocols for covering CAPEX Regulation of Water Supply and Sanitation in Bank Client Countries 71 once all operating costs are covered by tariffs; and and practical insights on the dynamics of reform and introducing development of rigorous business plan- underpinnings of how the political economy influ- ning, information management, and customer ences WSS sector policies, institutions, and regulation, engagement. and, in turn, how they can deliver sustainable out- comes. The study provides actionable guidance that 5. As utilities begin to achieve performance objectives would benefit the design process of reforms. In addi- and service standards set out by regulators, norms and tion, practitioners interested in exploring and under- methods to monitor creditworthiness can be estab- standing the current policy, institutional, and lished to raise capital through available markets. regulatory situation in a specific client country may 6. Finally, regulators can work with multiple stakeholders start by employing the Institutional Diagnostic Tool and may often provide important input into policy (IDT), developed by the World Bank-Water, Poverty, ­discussions. This includes interfacing with the and Economics Global Solutions Group. IDT may serve ministries—including the Ministry of Finance in case ­ as a first step to understand the WSS sector of a specific transfer of funding and subsidies is needed—as well country as well as its enabling environment to better as with development partners. However, most regu- understand the institutional dimensions. Table 5.1 latory objectives and functions imply that regulators highlights a small number of World Bank tools and must engage with all sector stakeholders at arm’s guidelines relevant to this discussion paper. length, including utilities, consumers, and the gov- This discussion paper is intended to explore the salient ernment. Through implementation of citizen issues for regulating the WSS sector in LMICs, learning engagement ­ mechanisms and oversight of utility from the experience of the past two decades. As such it ­ egulators are well positioned to con- performance, r should be seen as complementary to the many docu- tribute evidence-​ based recommendations to policy ments on the more detailed technical aspects of regu- makers. Accordingly, regulators may sometimes play lation. The paper also alludes to areas of future work, policy-related issues; at the least a role in resolving ­ including deep dive reviews exploring regulation in providing expert advice and data without compro- specific countries or on specific topics to provide addi- mising their regulatory decision-making process. tional lessons and ideas for sector officials who intend to operationalize the next generation of regulatory The Body of Knowledge on Infrastructure Regulation2 reforms in their country, seeking out “best fits” for is a key source for practitioners seeking further infor- their respective context as well as the most appropri- mation and guidance on all topics relevant to regula- ate implementation strategy. Some of the specific top- tion. The site offers some of the best and most up to ics highlighted for further research include: date thinking on infrastructure policy and provides links to over 500 references comprised of publications, 1. role of regulation in incentivizing differentiated government decisions, policy advisory and research. It ­service levels, also includes multiple tools and guidelines to help 2. regulation and informal service providers, users think through specific regulatory challenges. An example is the self-assessment tool designed to assist 3. regulation and sanitation (non-network services), decision makers develop appropriate strategies to 4. more effective regulation of SOEs, reinstate regulatory systems or to improve effective- 5. improving links between WRM and WSS regulation, ness of regulation. 3 For guidance specific to the insti- tutional dimensions of regulation and policy making, 6. further development of appropriate regulation of Mumssen, Saltiel, and Kingdom (2018) offer analysis PPPs. 72 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE 5.1. Regulatory Assessment Tools and Guidelines Tool Description World Bank (IDT) The IDT is an Excel-based tool designed to help World Bank task teams map and evaluate institutions in the WSS sector in client countries, isolate problems (to an extent possible), determine “entry points” where sustainable changes can be made, and design appropriate project activities to address the identified challenges. Specifically, the tool guides the user through a list of targeted questions to identify institutional gaps and priority areas, and suggest activities to strengthen institutions. Regulation Body of Knowledge This instrument provides a self-assessment of six categories: economic activity, political stability, Self-Assessment Tool Infrastructure social cohesion, governance, security, and infrastructure performance. These characteristics affect Strategies for Fragile or Conflict- infrastructure development and performance, and the types of regulatory systems that can be Affected Situations effectively developed, and they serve as indicators of areas of weakness that should be worked on if possible.a World Bank Approaches to Private This tool is designed for stakeholders to use when they begin their search for private operators. Participation in Water Services This toolkit outlines the issues that must be explored to identify which private sector arrangement best meets a given country’s context. Most of the toolkit focuses on the details of the design of arrangements for PSP.b World Bank Structuring PSP This toolkit provides guidance for water authorities and sector professionals who intend to contract Contracts for Small-Scale Water private operators on how to structure a contract and bidding documents for PSP in small-scale water Projects projects. The toolkit focuses on small-scale water schemes typically serving a settlement with a population from 1,000–10,000.c Note: IDT = Institutional Diagnostic Tool; PSP = Private Sector Participation. a.  See the World Bank website: http://regulationbodyofknowledge.org/self-assessment-tool/#/home. b.  See the World Bank website: http://regulationbodyofknowledge.org/wp-content/uploads/2013/07/WorldBank_Selecting_an_option.pdf. c.  See the World Bank website: http://www.wsp.org/sites/wsp.org/files/publications/PPP-Contracting-Toolkit.pdf. the collaborative efforts of the University of Toulouse, the  Pontificia Notes Universidad Católica, the  World Bank,  and a panel of international 1. Identified in many countries, including the Philippines, Morocco, experts. This site provides links to more than 500 references, an exten- Kenya, Colombia, and Uganda. sive glossary, and self-testing features to facilitate learning and can be accessed here: http://regulationbodyofknowledge.org. 2. The Body of Knowledge on Infrastructure Regulation is an online plat- form for all topics related to infrastructure regulation, developed by the 3. The self-assessment tool can be accessed here: http://regulationbody​ Public Utility Research Center (PURC) at the University of Florida, and ofknowledge.org/self-assessment-tool/#/home. Regulation of Water Supply and Sanitation in Bank Client Countries 73 Appendix A TABLE A.1. Performance Management Implemented by Regulators in Latin America Regulator Quality of service regulation Use of performance indicators Sunshine regulation Tariff consequences ERAS and others Yes Accessibility of service (2) Yes No (Argentina) Protection of public health (5) Service provision (3) Asset maintenance and demand ­fulfillment (7) Environment protection (4) Needs fulfillment and expectations of users (3) Operational sustainability (2) Financial sustainability (5) Activities costs (6) AAPS (Bolivia) Yes Reliability of resource (4) Yes No Stability of service (6) Environment protection (3) Service management (9) Administrative and economic ­sustainability (10) Brazil (several) Only few cases — Yes (when exist) No SISS (Chile) Yes Service provision (3) Yes Yes Financial management (3) Quality of service (7) CRA (Colombia) No (provided by SSPD) No No Yes ARESEP Yes Service coverage (2) No No (Costa Rica) Continuity (2) Water quality (1) Others for other purposes ERSAPS Yes Water quality (1) No No (Honduras) Some financial indicators INAA (Nicaragua) Yes (but not updated) General (5) No No ASEP (Panama) Yes Commercial (4) No No Financial (5) table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 75 TABLE A.1. continued Regulator Quality of service regulation Use of performance indicators Sunshine regulation Tariff consequences ERSSAN Yes Water quality No No (Paraguay) Service coverage SUNASS (Peru) Yes Service access (2) Yes No Quality of service (3) Sustainability of services (4) Clients (3) URSEA Yes Service coverage (1) No No (Uruguay) Quality of service (3) Financial (3) Commercial (5) Note: — = information unavailable; AAPS = Autoridad de Fiscalización y Control Social de Agua Potable y Saneamiento Básico; ARESEP = Autoridad Reguladora de los Servicios Públicos; ASEP = Autoridad Nacional de Servicios Públicos; CRA = National Water Regulatory Commission; ERAS = Ente Regulador de Aguas y Saneamiento; ERSAPS = Ente Regulador de los Servicios de Agua Potable y Saneamiento; ERSSAN = Ente Regulador de Servicios Sanitarios; INAA = Instituto Nicaragüense de Acueductos y Alcantarillados; SISS = Superintendencia de Servicios Sanitarios; SSPD = Superintendencia de Servicios Publicos Domiciliarios; SUNASS = Superintendencia Nacional de Servicios de Saneamiento; URSEA = Unidad Reguladora de Servicios de Energía y Agua. TABLE A.2. Subsidization Mechanisms in Latin American Countries and the Role of Regulators Regulator Subsidization mechanisms Role of regulator Argentina Cross-subsidization (among users and locations) Setting the level Bolivia Cross-subsidization (among users) Setting the level Brazil Cross-subsidization (among users) Setting the level Chile Cross-subsidization (among users). There is also a Setting the level of cross-subsidy among the type of users ­ subsidization from municipalities to utilities for the poor but not the eligibility (Law No. 18.778 of 1989) in quantity. Colombia Cross-subsidization (among type of users and their income) Setting the level of subsidy but not the customers eligibility that is defined by general law of essential services Costa Rica Cross-subsidization (among users and locations) Setting the level of subsidy and tariff structure Honduras Cross-subsidization (among users) Setting the level Nicaragua Cross-subsidization (among users and locations) Setting the level Panama Cross-subsidization (among users) Setting the level of subsidy and tariff structure Paraguay Cross-subsidization (among users) Setting the level Peru Cross-subsidization (among users) Setting the level Uruguay Cross-subsidization (among users and locations) Setting the level Source: Marques, forthcoming. 76 Regulation of Water Supply and Sanitation in Bank Client Countries Appendix B TABLE B.1. Typology of WSS Regulatory Frameworks and Tools in Low- and Middle-Income Countries WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Africa Benina The parastatal utility Société Nationale In 2013, a regulation unit was created • Municipalities are in charge of des Eaux du Bénin (SONEB) is in charge within DG-Eau, with responsibility for setting tariffs as well as fees and of providing drinking water in urban and regulating the rural water sector. The charges paid by POs for operating peri-urban areas of more than 20,000 scope of these regulatory functions is PWS. Tariffs are calculated based on people. SONEB is present in 69 cities yet to be fully defined. The primary a methodology provided by DG-Eau, over 77 municipalities. objectives of this unit include but are generally higher in rural areas and In rural and semi-urban areas of not limited to the following: small towns than in urban and peri- less than 20,000, the provision of Monitoring the sustainable urban areas. water (and sanitation) services is the management of rural infrastructure, • DG-Eau is also responsible for responsibility of municipalities. and piped water schemes (PWS) in monitoring the water sector. At central level, responsibility for particular, including PSP; enforcing The main monitoring tool is an rural and small-town services sits compliance with standards; supporting integrated database (Base de within the Ministry of Energy, Petrol SONEB in its assistance to communes Données Intégrée, or BDI), shared Research, Water and Renewable Energy in implementing the delegation of with the municipalities, which Development (Ministère de l’Energie, rural water services, particularly in gathers data on water resources de la Recherche Pétrolière, de l’Eau relation to PWS. and infrastructure. DG-Eau also et du Développement des Energies Regulation by contract: since 2007, provides technical assistance to the Renouvelables, or MERPMEDER) the sector actively supported the municipalities to help them carry out through the DG-Eau. Through its implementation of PPP contracts for their responsibilities for water and Directorate of Drinking Water Supply, operating PWS. The sector introduced sanitation. DG-Eau is responsible for proposing an affermage-type PPP model to water policy, informing national connect decentralized municipalities strategies for water services, and and small-scale private operators overseeing their implementation (POs). The number of PWS managed at municipalities level. through an affermage contract went from 1 in 2007 to 269 (57% of the total number of PWS) in 2014. These 269 PWS under affermage deliver water services to an estimated 1.7 million people (28% of the population). Burkina Office National de l’Eau et de ONEA is owned and managed by the • Multiyear financial equilibrium model Faso l’Assainissement (ONEA) is the state- government through performance for regulating tariff adjustments. owned WSS utility responsible for contracts; regulation of ONEA is • ONEA’s contract with Veolia includes service provision across all urban through performance contracts performance-based bonus/penalties and peri-urban areas. Communes are stipulating targets for technical, above a fixed monthly fee. responsible for WSS services in other financial, and commercial performance. rural areas. ONEA has performance Contract lays out government and contracts with the government. ONEA ONEA commitments that are assessed has performance management contracts by an external auditor. with private firms (Veolia). table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 77 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Ghanab • The Ministry of Water Resources, The Public Utility Resources Commission PURC’s responsibilities include the Works and Housing (MWRWH), (PURC) is a multisector regulator that following: through its Water Directorate covers the urban water sector. PURC • Tariff setting: review and approval (WD), is responsible for providing is an independent body. The Office of of tariffs and ensure financial leadership for sector activities in the President exercises administrative sustainability of the urban water policy development, implementation, oversight for the Commission.c system. It provides guidelines to coordination, monitoring and Standard setting: the Ghana Standards utilities for tariff setting. evaluation. Authority (GSA) sets drinking water • Consumer protection: the PURC • The Ghana Water Company Limited standards for water services in Ghana. is responsible for receiving and (GWCL) is a state-owned limited The Environmental Protection Agency investigating complaints as well as liability utility and is responsible (EPA) was established to, among resolving issues between consumers for urban water supply throughout others, protect water resources and and utilities. the country. regulate activities within catchment areas including effluent standards. • Promoting transparency: information is • The Community Water and Sanitation publicly available on the PURC website. Agency (CWSA) is responsible for Water allocation: the Water Resource Commission (WRC) is responsible • Public participation: PURC undertakes facilitating delivery of water and for water resources regulation public consultations, including sanitation services in rural areas and and management, implementing stakeholder consultations regarding small towns. the Integrated Water Resource tariff reviews. Details regarding Management Strategic Plan (2011–15) consultations are documented on the and granting water rights. PURC website. Kenya Pursuant to Water Act No. 8 of 2002, WASREB’s mandate is derived from • Regulatory tools include licensing, the Water Sector Regulatory Board, or the 2002 Water Act, set up as an drinking water guidelines, service WASREB, was created in 2003. Under independent, single sector regulator; standards, nonrevenue water (NRW) new Water Act of 2016, there are 47 it is governed by a board of directors standards, tariff guidelines, compliance water development boards, one for each and performs its functions through strategy, and consumer engagement county; there are currently 91 water technical directorates; it regulates all rules. Key regulatory outputs other service providers (WSPs). 91 WSPs. than determinations on each of the above tools include (a) WSP Creditworthiness Index, and (b) WSP performance benchmarking reports. Mozambique The main challenges facing the WSS sector CRA-Mozambique reports directly to • CRA-Mozambique is responsible in Mozambique include (a) inadequate the Ministry of Public Housing. Its for promoting, monitoring, and infrastructure and access; (b) poor board members are appointed by the advising on the design of delegated financial sustainability; and (c) weak Prime Minister’s office. management contracts institutional capacity. In 1995 a National CRA receives funding through a • Review and approval of tariffs Water Policy (NWP) was devised to regulatory levy on gross annual • Consumer protection address these challenges. This policy revenues, which incentivizes CRA to entailed (a) devolution of WSS services • Regulation of service quality encourage higher revenues. for urban WSS services in the largest promote and improve the delegation cities. Responsibilities were centralized of water supply services to third in an asset holding company that in turn parties delegated management of the private sector through the delegated management framework; (b) rural WSS services were decentralized to local government that provided capacity building; and (c) financial sustainability of WSS services. table continues next page 78 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Nigeriad The Federal Ministry of Water State governments are responsible for Tariff setting: Nigeria generally Resources’ (FMWR) 2000 National WSS regulation. Currently only Lagos lacks an explicit water tariff policy. Water Supply and Sanitation Policy state has a regulatory entity: Lagos Therefore, water tariffs between defined the following roles for the State Water Regulatory Commission states vary significantly. While Bayelsa, delivery of WSS service delivery: (LSWRC), established in 2004.e Benué, and Zamfara provide water free • Federal government: formulating to residential consumers, others charge and coordinating national based on groupings of customers, water policies; managing water which can mean they have 20 or more resources, including allocations to different tariff schedules. State water states; and approving development agencies (SWAs) report that not only projects. It is also responsible do they not have power to set tariffs for data collection, resource and but also they do not regularly review demand surveys, monitoring, them. State governments set tariffs evaluation, and coordination, for SWAs, and it is not clear who is research and development, responsible for regular tariff review. national funding and technical support, and creation of an enabling environment for PSP. • State government: agencies such as State governments establish tariffs water supply authorities, state water and set water services regulation boards, and the Small Towns Water for their water boards. The main and Sanitation Agency are responsible regulatory functions of the LSWRC for the establishment, operation, include monitoring water quality; quality control, and maintenance of access to services; demand urban and semi-urban water supply management; consumer protection; systems (and in some cases for rural dispute resolution; assess tariff supply). They are also responsible affordability, cost recovery, return on for licensing and monitoring private investment, subsidies, and pro-poor water suppliers. policies; licensing of service providers; • Local government: local government collection and publication of sector authorities and local government information; and facilitate PSP. councils, of which there are 774, are responsible for establishing, operating, and maintaining rural water supply and sanitation facilities with the beneficiary communities. Senegal Senegal has promoted PPP in WSS SONES, as the state asset holding n.a. sector since 1996, starting with the company, is authorized to manage the large PPP contract between Sénégalaise sector through a 30-year concession des Eaux (SDE) and Société Nationale contract signed with the state, des Eaux du Sénégal (SONES). One of represented by the ministry. SONES the major aspects of these reforms signs a sector planning contract has been the contractual framework (contrat plan) with the ministry, which between the different stakeholders, outlines its investment obligations which established the principle of (and was included in the request for regulation by contract. proposals for the affermage contract). table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 79 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods The urban water supply sector is The 10-year affermage contract governed by four types of contract: governing operation of the system concession, planning, affermage, and is signed between three parties: the performance, between the Ministère de state, represented by the ministry, l’hydraulique, the SDE, and SONES. SONES, and a private operating company, the SDE. The SDE signs a performance contract with SONES (including the affermage contract) for the same duration (10 years). The contract is renewable every five years after the first 10 years, and contains provision for review of the performance targets every two years. Ugandaf, g The Ministry of Water and Environment Uganda adopts regulation by contract • Monitoring and evaluation: a sector (MoWE) is responsible for determining as its predominant form of regulation. performance report is published priorities, setting policies and standards The Water Utility and Regulation annually providing information on for water development, as well Department (WURD) was established budgets, expenditure, and outputs, as managing and regulating water within the MoWE to regulate water as well as progress against a balanced resources. authorities managing piped water set of indicators (including access to Over 100 local governments are systems by contract. A performance water and sanitation, functionality, responsible for the implementation contract defines relationship between equity, value for money, and of rural water supply and sanitation the ministry and the Water Authority. compliance with permit conditions). programs at the district level. The contracts detail the terms of • Performance management: in the reference and service targets that the case of the NWSC, performance The National Water and Sewerage Water Authority must deliver. contracts setting out goals and Corporation (NWSC) is a parastatal that provides water and sewerage services in As a requirement in the performance targets have been signed since 23 large urban centers. contract, a management contract 2000, with the fourth contract defining the operation and signed in 2010. Performance of Local governments play a significant management roles is signed between utilities is benchmarked, and results role in overseeing piped water supplies the Water Authority and the private are produced and publicized online. while the private sector is increasingly operator. Normally, the board hires • Standards setting: define KPIs and taking up construction and operation a private operator to operate and specify performance targets to be and maintenance (O&M) roles in the maintain the system and provide fulfilled by NWSC and the water sector, in small towns and rural growth services through a management supply and sewerage authorities centers. contract of no more than three years. (WSSAs) together with incentives or penalties applied to achieving such performance targets. Develop guidelines for tariff setting, water quality, corporate governance, and customer handling. • Tariff setting: receive and review business plans and tariff proposals from NWSC; WSSAs and their respective service providers provide approvals accordingly. table continues next page 80 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Zambia Urban WSS services are provided by National Water Supply and Sanitation • Licensing: utilities have to meet 11 utilities and six private schemes. The Council (NWASCO) is an independent certain requirements to obtain a Zambian urban WSS sector presents the WSS regulator. It is funded through 2% license and pay a fee. following problems: (a) overlapping levy utility revenues as well as some • Service level guarantees (SLGs): institutional roles and responsibilities; government funds. SLGs are set by NWASCO, which (b) lack of investment; (c) inefficient benchmarks performance utility legislation; (d) lack of skills in WSS performance against minimum service provision. In many towns water service level targets. If a utility’s was only available for six to eight hours performance falls below the a day. A National Water Policy was minimum service level, the utility introduced in 1994, which has sought and NWASCO form a three-year to separate regulatory and executive improvement plan. functions, devolution of authority to • Regulation by incentive scheme. local authorities and private enterprises, Two institutional incentives are achievements of full cost recovery, and offered for achieving service level human resources development. guarantees. This includes equipment and staff incentives systems. NWASCO would monitor and audit performance data and grant the incentives on positive improvements. • WSS performance guidelines • Tariff approval and negotiation • Special regulatory supervision of poor performing utilities • Monitoring and regular reporting Zimbabwe WSS service delivery (rural and urban) The Zimbabwe National Water Responsibilities of the WWSRU include is decentralized and is the responsibility Authority (ZINWA) is both a service the following: of local government. Local governments provider and regulator. The National • Monitor performance and quality of may choose to contract with the Water Policy of 2013 includes service standards. proposed national water supply services the establishment of a Water and • Receive and assess tariff applications utility as a water services provider (but Wastewater Services Regulatory Unit in collaboration with relevant they are not obliged to do so), provide (WWSRU) housed within the Ministry ministries. services themselves, create utilities, or of Water Resources Development and outsource supply.h Management. • Monitor, oversee, and provide guidance to water services The District Development Fund is a authorities related to the licensing technical parastatal responsible for rural of water service providers by water water supply and maintenance services authorities. • Coordinate between all sector entities, particularly regarding tariff revisions. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 81 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Europe and Central Asia Albania Albania has high access rates due to The WRA is directly accountable to • Licensing all WSS service providers. infrastructure spending during the parliament, which it reports to through The WRA issues licenses to water Soviet era, however much of this its annual report. The decision-making utilities that meet licensing criteria infrastructure requires maintenance. body is the National Regulatory and monitors the performance WSS sector reforms began in 1992. Council (NRC). The Chair of the NRC is of licensees to ensure they meet Upon independence Albania acquired also the executive director of the WRA licensing conditions. 52 SOEs. Introduction of PSP policies and is appointed by the Council of • Ensure quality services are offered at in the 1990s led to the creation of an Ministers in addition to four other NRC affordable rates. independent regulatory agency, the members. • The WRA is responsible for tariff Water Regulatory Authority (WRA). approvals of submissions by utilities. Regulate tariffs to ensure financial sustainability of service providers and affordability. • Monitoring and benchmarking the performance of service providers. KPIs are monitored and an annual sector performance report is published on WRA’s website. • Protect consumer interests, analyze consumer complaints and support complaint resolution, • Administer penalties for non- performance. Portugal Portugal’s 308 municipalities retain ERSAR, established in 2009, is • Benchmarking of KPIs across three responsibility for WSS service provision; mandated to improve market efficiency main areas: utility sustainability, however, multi-municipal systems for and protect consumers. interface with consumers, and bulk water supply and wastewater environmental sustainability treatment were formed by merging at • Monitoring of concession contracts least two municipalities and creating • Tariff regulation of multi-municipal a company in which the state is the systems majority shareholder. Latin America and the Caribbean Argentina The Ministry of Public Works is Regulation is implemented through • Tariff setting: ERAS is responsible responsible for urban WSS policy provincial regulators in 14 out of for setting tariffs and implements making and the provinces or 23 provinces. For Buenos Aires the the cost plus methodology. Tariffs municipalities are responsible for urban regulator is ERAS, and other regulators are reviewed annually. WSS service delivery. are financially autonomous (does not • Performance management: depend on state budget) and enjoy ERAS undertakes performance administrative autonomy. management and regulates service The ERAS board (three members) is regulation using KPIs. Sunshine appointed by the president with a regulation is implemented. four-year mandate, which is renewable once. The board can be dismissed based on merit. table continues next page 82 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods There are a range of service providers: The Agencia de Planificación (APLA) • Promoting transparency: legislation, • Public company: AySA operates in the was established as a technical sector information, and information capital and 17 municipalities regulatory agency overseeing technical on the regulated entities are publicly evaluation, study, planning, design, available. Decision and regulatory • 14 provincial public companies execution, and control and supervision opinions, benchmarking and quality • Municipal and multi-municipal of the investments of AySA. of service regulation, and major staff companies information are available online. Regulation of AySA continues to • 12 private companies be regulated mostly by a contract • Public participation: although the • More than 1.700 cooperative (11% of together with ERAS and APLA. public hearing is promoted, there is population) The concessionaire of AySA, in no register of that on the regulatory collaboration with APLA, develops activity. There is a board for users • Neighborhood associations a business model, which contains, (Sindicatura de Usuarios). Formal besides the financial maps, the consultation processes such as investment plan to improve, maintain, public hearings take place. There and expand the water services for the is also promotion of consumer next five years. satisfaction surveys. • Pro-poor regulation: cross- subsidization mechanisms implemented by the regulator. • Consumer protection: ERAS enforces conflict and complaint addressing mechanisms. Bolivia Municipalities are responsible for WSS Regulation is undertaken via a • Tariff setting: AAPS is responsible service delivery. There are 14 WSS national agency, the Autoridad de for setting tariffs and implements service providers (Empresas Prestadores Fiscalización y Control Social de Agua the cost plus tariff setting de Servicios de Agua Potable y Potable y Saneamiento Básico (AAPS), methodology. Alcantarillado, or EPSA). established in 2009. • Performance management: KPIs EPSAs can be decentralized public AAPS enjoys administrative, financial, specific to service quality and companies El Servicio Autónomo legal, and technical autonomy, under management are monitored. Utility Municipal de Agua Potable y the Ministry of Environment and performance is also benchmarked. Alcantarillado (SAMAPA) and Water. The director is nominated by • Promoting transparency: the Servicio Municipal de Agua Potable y president of the republic. The revenues regulator ensures that key Alcantarillado (SEMAPA), cooperatives cover the costs (50% from state regulatory is publicly available (e.g., Servicio de Agua Potable y budget). The director can be dismissed • Public participation: public hearing Alcantarillado Sanitario, SAGUAPAC), based on merit. is promoted, but there is no register or mixed companies (e.g., EPSA in of that on the regulatory activity. Mancomunidad del Chaco MANCHACO); juntas; or water committees in rural • Pro-poor regulation: cross- areas. subsidization scheme of tariffs is developed by the regulator. • Consumer protection: AAPS enforces conflict and complaint mechanisms to address consumer grievances. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 83 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Brazil Highly decentralized political and No single sector WSS regulator; • While regulation is diverse, Law of WSS/water supply, sanitation, and different states have different Fiscal Responsibility requires cost hygiene (WASH) structures; overall 26 arrangements. PSP accounts for 70% reflective tariffs. states and 5,570 municipalities (more of WSS provision; local public suppliers • Standards regulations are varied like districts); there are state-level constitute 25% and private suppliers and derived from various legal water and sanitation companies, some represent 5% of WSS service provision. mandates including drinking water municipalities have PSP; Ministry of quality, wastewater discharge, and Cities is responsible for urban WSS treatment. and Ministry of Health for rural WASH. Key legal mandates: 2007 Water and Sanitation Law and 2013 National Sanitation Plan. Chile 53 (mostly private) companies operate Chile has an established national water • Tariff setting: SISS sets tariffs in urban areas. sector regulator: Superintendencia and shares responsibility with Local water cooperatives and water de Servicios Sanitarios (SISS). municipalities to enforce subsidies. committees are responsible for WSS Superintendent appointed by the The tariff setting methodology service delivery in rural areas. president, through the Ministry of follows the price cap method and is Public Works, for a period of four reviewed every five  years, which is renewable. The • Performance management: KPIs SISS is considered to be financially are used to monitor service quality. autonomous (does not depend on Performance is benchmarked with state budget). consequences reflected in tariff decisions for underperforming utilities. Sunshine regulation is also enforced. • Promoting transparency: the following type of Information is made publicly available: management and financial, legislation and sector, regulatory decisions; economic regulatory activities; benchmarking and quality of service regulation; consultations and hearings; supervision and auditing activities and staffing. • Public participation: there are formal consultation processes in the form of public hearings. An advisory board for civil society is established (Consejo de la Sociedad Civil). • Consumer protection: SISS enforces conflict and complaint addressing mechanisms. table continues next page 84 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Colombia WSS is decentralized to municipalities National Water Regulatory • Tariff setting: CRA is responsible (Law 60 of 1993 and Law 715 of 2001) Commission (CRA) established in for tariff setting in accordance with pursuant to Constitution of 1991. 1994 to promote competition among price cap methodologies. Tariffs are The WSS market is geographically service providers; initial wave of PPP reviewed every five years. concentrated with the 40 largest in 1995 with large companies and • Performance management: utilities serving 70% of urban water small private local companies in small performance management and users (equaling 55% of total population) towns. CRA promotes competition, standard setting are undertaken by with majority serving small towns, total sets tariffs, and the superintendent of a different entity: the SSPD. Poor of 12,000 WSS service providers (3,000 Public Services monitors WSS utility performance of utilities results in are registered water service providers performance. Regional environmental tariff consequences. and 1,180 registered sanitation service corporations (37) implement water • Promoting transparency: the operators). resources management (WRM) and regulator makes information publicly environmental standards and billing available, including that related to and collecting retributive fees and management, finance, minutes of taxes. For private concessionaires, board meetings, strategic plans, the contract stipulates the service decisions and regulatory opinions, standards and tariff methodology. economic regulatory activities, benchmarking and quality of service regulation, consultations and hearings, supervision and auditing activities, and major staff information. • Public participation: Formal consultation processes are in the form of public hearings and public consultations. • Consumer protection: the regulator enforces consumer protection mechanisms for complaints and grievance redressal. Costa Rica The following are the main service Water services are regulated by a • Tariff setting: ARESEP is responsible providers in Costa Rica: multisector regulator: Autoridad for setting the level of subsidy • Instituto Costarricense de Acueductos Reguladora de los Servicios Públicos and tariff structure. Accordingly, y Alcantarillados (AyA): 46% of pop. (ARESEP). Its board of directors it is responsible for determining comprises five members and has cross-subsidization levels among • Municipalities: 16% of pop. mandates equal to that of the users and locations. Cost plus tariff • La Empresa de Servicios Públicos government. ARESEP has some level methodology is implemented and de Heredia (ESPH S.A.): 5% of of financial autonomy; however, reviewed annually. population. although revenues cover costs, it • Performance management: KPIs on • Comités Administradores de relies on partial funding from the service coverage, continuity, and Acueductos Rurales (CAARs) state budget. The board can be water quality are measured. dismissed based on merit. • Asociaciones Administradoras • Promoting transparency: the de Sistemas de Acueductos y regulator makes all relevant Alcantarillados Sanitarios (ASADAS): regulatory information publicly rural areas. available. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 85 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Honduras Municipalities are responsible for A national regulator undertakes • Tariff setting: ERSAPS is responsible delivery of WSS services in some urban regulatory functions within the WSS for tariff setting and implements areas. Service providers operating sector: Ente Regulador de los Servicios cost plus pricing methods, which are within the sector: de Agua Potable y Saneamiento reviewed on an annual basis. • Servicio Autónomo Nacional de (ERSAPS). The regulator was • Performance management: KPIs Acueductos y Alcantarillados established in 2003 and is managed measure various indicators for service (SANAA): 50% of pop. by a board of directors that comprises quality and sustainability; however, no three members appointed by the consequences are incurred in terms • About 5,000 Juntas Administradoras president, proposed by CONASA. The of tariff reviews if a utility performs de Agua (JAA) in rural areas and peri- regulator depends almost entirely on poorly. urban areas the state budget and, therefore, is not • All urban water services are public, • Promoting transparency: the regulator financially autonomous. except three: San Pedro Sula, makes all relevant regulatory concession for 30 years (2000); information publicly available. Puerto Cortés (1999), and Choloma • Public participation: public (mixed company) hearings are promoted through the regulator’s website and local trainings (capacitaciones) on legal and regulatory aspects are provided. Formal consultation processes such as public hearings also take place. • Consumer protection: ERSAPS adopts conflict and complaint addressing mechanisms to protect consumers. • Pro-poor policy: ERSAPS is responsible for implementing cross- subsidization policies and for setting the level of subsidies. Nicaragua Various operating models exist in Instituto Nicaragüense de Acueductos • Tariff setting: tariffs are Nicaragua: y Alcantarillados (INAA) is a national implemented using the cost plus • Empresa Nicaragüense de Acueductos WSS regulator established in 1979. methodology. Tariffs are not revised y Alcantarillados (ENACAL) delivers It is managed by a board of directors regularly. WSS services to 60% of the (appointed by the president with a • Performance management: KPIs population. term of six years, which is renewable). regarding general quality aspects The board may be dismissed based on of service delivery are collected. • 30% of the population is served by merit. INAA is financially dependent on However, information is not up to community organizations, in rural the state budget. date because data collection efforts areas. are not carried out regularly. • Less than 10% of users are served by a departmental water company in • Promoting transparency: the Rio Blanco as well as 26 other small following information is made municipalities. publicly available: legislation and sector information, information on the regulated entities, regulatory decisions, benchmarking and quality of service regulation, consultations and hearings, and supervision and auditing activities. table continues next page 86 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods • Public participation: public hearings are promoted by the regulator. Formal consultation processes such as public hearings take place. • Consumer protection: conflict and complaint addressing mechanisms are available to consumers through INAA. Panama The following WSS service delivery Autoridad Nacional de Servicios • Tariff setting: ASEP implements cost models operate in Panama: Públicos (ASEP) is a multisector plus approaches to tariff setting. regulator established in 1996. Tariffs are reviewed annually. ASEP • Instituto de Acueductos y The board of ASEP comprises is also responsible for implementing Alcantarillados Nacionales (IDAAN), three members appointed by the cross-subsidization policies. urban areas (> than 1,500 inhabitants, unless in Boquete) government and ratified by the • Performance management: KPIs on Legislative Assembly. The board is commercial and financial indicators • 3,300 water systems in rural areas, mandated a five-year term, which is are collected. of which 1,800 are managed by renewable once. ASEP is considered to • Promoting transparency: most Juntas Administrativas de Acueductos be financially autonomous. relevant regulatory information is Rurales (JAARs) publicly available. • Health committees manage the • Public participation: Public hearing remaining is promoted by ASEP. There are also formal consultation processes such as public hearings. • Consumer protection: conflict and complaint mechanisms are available for consumers. Paraguay In Paraguay, the national enterprise Ente Regulador de Servicios Sanitarios • Tariff setting: tariffs are set by the Empresa de Servicios Sanitarios de (ERSSAN), established in 2000, is regulator using the price cap tariff Paraguay (ESSAP) is responsible for responsible for WSS regulation. It is setting methodology. Tariffs are serving urban populations greater than managed by board comprising five reviewed every three years. Cross- 10,000 inhabitants. members with a five-year term. The subsidy mechanisms are implemented. Water associations are responsible board can be dismissed based on merit. • Performance management: KPIs Revenues received by ERSSAN cover its covering service quality and coverage for delivery WSS services in rural costs; however, it partly depends on are monitored. communities and small towns (with less than 10,000 inhabitants). the state budget. • Promoting transparency: publicly available information: management 500 small suppliers (private and and financial aspects, performance informal, aguateros) self-evaluation, legislation and sector information, regulated entities, regulatory decisions, benchmarking and quality of service regulation, supervision and auditing activities. • Public participation: regulator promotes public hearings. Formal consultation processes such as public hearings are carried out. • Consumer protection: conflict and complaint mechanisms are available for consumers. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 87 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Peru Until the 1990s, the urban water Regulation is carried out by a • Tariff setting: SUNASS implements the services were centralized, being national water sector regulator: price cap methodology in tariff setting. responsibility of the SENAPA (Servicio Superintendencia Nacional de Tariffs are reviewed every five years. It Nacional de Abastecimiento de Agua Servicios de Saneamiento (SUNASS). also devises cross-subsidy schemes. Potable y Alcantarilhado). In 1994 with The board comprises five members, • Performance management: SUNASS the enactment of the national law no. appointed by the president. The weights KPIs to develop a single 26.338 (Ley General de Servicios de board can be dismissed based on score of performance of WSS Saneamiento), SENAPA was dissolved performance. SUNASS is financially service delivery. Indicators cover the and the water services were transferred autonomous. following performance areas: (a) to the local government, creating the service access; (b) quality of services; Empresas Prestadoras de Servicios de (c) sustainability of services; and (d) Saneamiento (EPS). In 2003, with the clients. general act of decentralization of public • Public participation: Public hearings administration, EPS model powers are carried out; activities and were reinforced. In the rural area, regulatory activity are publicized the decentralization movement was through public hearings. similar. First, the rural water services were a responsibility of Dirección de • Consumer protection: TRASS is a Saneamiento Basico (DISABAR), a technical body of SUNASS, in charge national department of the Ministry of solving in the second and last of Health. In the 1990s, they were administrative instances customers’ transferred to the local government, complaints related to billing, which could delegate them to local operational, or commercial issues, communities. among others. Uruguay The following national institutions are A multisector regulator oversees URSEA’s regulatory functions include responsible for overall management WSS services: Unidad Reguladora de the following: of the WSS sector, as well as service Servicios de Energía y Agua (URSEA). • Tariff setting: the study of tariff delivery: URSEA was established in 2002 proposals and the presentation of • The Ministry of Economy and Finance as a decentralized executing unit these to the president, who grants is responsible for setting tariff that reports to the presidency. It is approval on behalf of the national policies. technically autonomous. government. • The Ministry of Housing and • Standard setting: URSEA is Environment is responsible for the responsible for the definition of definition of water policies. quality and safety regulations and • The Office of Budget and Planning is oversight of utility compliance with responsible for determining required existing norms and regulations. investment levels. • Promotion of transparency: the • The Administración de las Obras promotion of competition and Sanitarias del Estado (OSE) is a public transparency through the publication utility and provides water and sanitation of information and the holding of services to all of Uruguay with the public audiences. exception of Montevideo (where the • Consumer protection: protection of municipality provides sanitation and consumer rights and the resolution OSE provides water supply only). OSE of complaints. serves 2.8 million customers with water services and 0.5 million customers with sanitation services. table continues next page 88 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Middle East and North Africa Egypt, Egypt’s WSS sector is publicly owned. The Egypt Water and Wastewater According to Decree No. 136 of 2004, Arab Rep. Policy-making responsibilities are Regulatory Authority (EWRA) operates EWRA is mandated to carry out the carried out by the Ministry of Housing, under the MHUUC and is mandated following regulatory functions: Utilities and Urban Communities to regulate the quality of services, • Enforcement of regulatory (MHUUC). Responsibility for works monitor WSS tariffs, and undertake legislation: EWRA is responsible for planning and implementation of consumer protection responsibilities. data and information collection used infrastructure investments is under the to prepare an annual information National Organization for Potable Water report (AIR) presented to MHUUC. and Sanitary Drainage (NOPWASD) and • Investment planning the Cairo Alexandria Potable Water Organization (CAPWO), which operate • Setting technical standards and under the supervision of MHUUC. providing assistance Operation and management of assets • Financial monitoring are the responsibility of the Holding • Promotion of PSP Company for Water and Wastewater (HCWW), through its 25 local • Performance monitoring and subsidiaries, the Water and Sanitation information dissemination Companies (WSCs). A Program • Consumer protection Management Unit (PMU) (service • Tariff review and setting: tariff delivery unit) is housed within the setting responsibilities are currently MHUUC to oversee all WSS investments allocated to the ministerial cabinet; and is responsible for policy making however, a recent draft law within the sector. mandates EWRA to set economic tariffs, which are stipulated as an amount to be provided to WSCs for provision of WSS services. Social tariffs are to be set by the ministerial cabinet in addition to the economic tariff. • Licensing: the draft law envisions the provision of operational licenses. A licensing regime would provide EWRA additional autonomy to obtain information from WSCs as well as a mechanism for obtaining funds through license fees. table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 89 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Jordan The Jordanian water sector is highly Regulatory responsibilities are split • Tariff setting: WAJ and JVA recommend centralized and nationally integrated: between several national entities as water tariff changes as well as capital • The Ministry of Water and Irrigation opposed to adopting regulation by investment projects to the council of (MWI) is responsible for overall agency or contract: ministers for approval. Cost recovery leadership on water matters, • Ministries of Health and is currently inadequate, and tariffs for including strategy formulation and Environment: responsible regulation residential customers are low. provision of services, pricing and of drinking water and effluent • Customer protection: a customer’s monitoring. quality. first point of contact is with the • The Water Authority of Jordan (WAJ) • WAJ: responsible for licensing of utilities. If complaint is unresolved, is responsible for ensuring bulk utilities (subject to approval of the the customer may contact the WAJ water supply and for developing and MWI). and finally the MWI. operating WSS services throughout • MWI: responsible for groundwater • Performance monitoring: a Jordan. WAJ owns and provides bulk extraction. PMU within MWI is charged with water to three limited liability WSS developing PPPs and promoting PSP. utilities. It also monitors implementation of • The Program Management Unit of donor-funded projects and audits the MWI is responsible for auditing performance of three corporatized and monitoring performance of utilities. Other duties of the PMU corporatized utilities. include data collection, performance evaluation, periodic inspections, and investment policy feasibility reviews. Morocco Municipal councils have ultimate • The Ministry of Water Resources • Tariff setting and reviews: ONEE responsibility to manage WSS services. undertakes policy-making may submit a petition to the CIP for Municipalities may provide the services responsibilities of the sector. a tariff increase. Tariffs of regional themselves, delegate, or form regional • The Inter-ministerial Price Committee autonomous agencies are negotiated autonomous agencies. The sector (CIP): housed within the Ministry of and fixed by government based on comprises four different service delivery General Affairs and Governance, the CIP’s advice. Tariffs with private models: CIP plays an important role in tariff companies are first negotiated with • Delegation to National Office of setting and a quasi-regulatory role. the municipalities, and then with the Electricity and Drinking Water Supply Contracts, whether private or public, government. (ONEE) define the relationship between the • Service quality standards: each government and the service providers. contract operational within the • Autonomous agencies whereby the government has a contract between • The Ministry of Interior (MoI): sector has its own specified quality ONEE and 12 regional collectives responsible for monitoring and standards. The MoI is responsible supervision of the sector as well as for oversight and enforcement of • Delegation to private sector renegotiation of private concessions. technical standards. operators in four large cities through However, most monitoring and concession like arrangements • Financial audits and enforcement: supervision responsibilities are CIP and other government agencies, • Direct management by municipalities delegated to ONEE. such as the Court of Accounts, • At present, there is no independent are responsible for regulation of regulator. The prevalent arrangement in financial standards and audits. Morocco is the contractual model and, • Consumer protection and citizen thus, regulation is through contract. engagement: ONEE plans to improve • The CIP is the closest formal body to customer service by extending the a price regulator and approves tariff mandate of its Electricity Customer revisions and negotiates programs Relation Center to the water sector. and contracts. table continues next page 90 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods West Bank Much of the sector management The 2014 reforms established a The WSRC is responsible for the and Gaza and operations activities to date Water Sector Regulatory Council following: have been implemented by the (WSRC) as legal entity that reports • Licensing: to be administered by the Palestinian Water Authority to the cabinet of ministers and is WSRC for service providers and by (PWA), which include investment responsible for overall monitoring and the PWA for water resources. planning, regulation, and project regulation of the sector. The WSRC is • Standard setting: the PWA and implementation responsibilities. currently developing its institutional WSRC are responsible for setting Water service providers are arrangements and is completing its operational, technical, financial, and commercially weak, with poor service staffing. administrative standards. quality, intermittent supplies, and high levels of NRW. • Tariff setting: the PWA is responsible for setting tariff policies, The Water Law, introduced in 2014, and the WSRC is responsible for enforces a reformed institutional reviewing and approving tariffs. framework that separates roles and responsibilities between the following institutions: • PWA: drafting sector laws and legislations to be submitted to the cabinet of ministers for approval and overall policy making • Water Sector Regulatory Council • National Water Company: extraction and transmission of bulk water supplies. To the regional water utilities (RWUs) and joint water service councils (JWSCs). • RWUs: aggregation of utilities in larger municipalities will form RWUs • JWSCs: aggregation of small village councils in rural areas where political or geographical constraints exist; eventually, these will be absorbed in to RWUs • Local government units: LGUs are to be aggregated in to the RWUs • Water user associations: responsible for management of irrigation services table continues next page Regulation of Water Supply and Sanitation in Bank Client Countries 91 TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods South and East Asia Indiai • Responsibility for WSS services is • State governments are responsible The core obligations of the MWWRA shared between the central and for WSS sector regulation. Some are to ensure the following: state governments. Although state states have established independent • Independence from executive and governments have jurisdiction over regulators. For instance, the political systems and processes. water resources within their borders, Maharashtra Water Resources • Fixation of entitlements including they are subject to regulation Regulatory Authority (MWRRA) was individual and bulk water from central government. Central set up as an independent regulatory entitlements as well as intersectoral government is also responsible authority under the Maharashtra allocations. Under the MWRRA Act, for regulation of interstate water Water Resources Regulatory the term entitlement refers to an projects. Authority Act, 2005. The MWRRA authorization by the River Basin • Institutional arrangements for urban model has been emulated by other Agency (RBA) to use water. WSS service delivery vary between states including: Andhra Pradesh, Jammu and Kashmir, Gujarat, • Rationalization of water tariff: the states. Some cities have created Arunachal Pradesh, and Uttar MWRRA is required to establish a municipal utilities. There is limited Pradesh, among others. water tariff system, and to fix the private sector involvement with criteria for water charges at sub- some operational and management • The members of the MWRRA are basin, river basin, and state level contracts in Karnataka, Bangalore, to be appointed by the governor of after ascertaining the views of the and Maharashtra. Maharashtra, on recommendation of beneficiaries. The water charges • The government is the main a selection committee. must reflect the full recovery of the stakeholder within the rural WSS • In 2011, the Planning Commission cost of the irrigation management, sector.j of India introduced the Model State administration, and O&M of water Water Regulatory System Act, which resources project. The Uttar Pradesh allows all states to implement Water Management and Regulatory regulatory arrangements similar to Commission also includes the cost the MWRRA model, and would lead of depreciation and subsidies while to uniformity in the governance of calculating the water tariff. water resources. Indonesia 2004 Water Law covers both WSS and 2004 Water Law does not provide for Tariffs setting is carried out by WRM. Key actors: regulation or regulators. PDAMS, which require approval by • Ministry of Public Works, in charge of local governments, and performance asset creation, maintenance. monitoring is carried out by various agencies. • Indonesian Ministry of National Development Planning (BAPPENAS), in charge of planning. • Ministry of Home Affairs provides guidance and support to local governments (local government– owned WSS utilities, PDAMS, which are charged with service provision. • Ministry of Health guides drinking water quality standards. • Ministry of Finance allocates budget for asset creation and service provision (including providing loans). table continues next page 92 Regulation of Water Supply and Sanitation in Bank Client Countries TABLE B.1. continued WSS regulatory structure and Summary of regulatory tools and Country WSS institutional setting accountability methods Malaysia The 2003 reforms established WSS as The National Water Services SPAN is responsible for the following: the shared responsibility between the Commission (SPAN) is responsible for • Licensing WSS service providers, states and the federal government. WSS sector regulation. mainly state water companies; and The Water Services Industry Act of • Setting and enforcing performance 2006 establishes a national Water monitoring standards and indicators. Asset Management Company and a Licenses can be revoked if Water Forum to give voice to previously performance standards are not met. underrepresented stakeholders such as consumers. Philippines Department of Public Works and • Manila has two concessionaires that Distribution of duties: Highways (DPWH) is the lead agency are regulated by the Regulatory • MWSS regulates the concessionaires charged with achieving the goals of Office of Metropolitan Water Supply by contract. the GoP’s new policy as stated in the and Sewerage (MWSS) which sets • LWUA regulates water districts. 2011 Water Supply Sector Roadmap. the rules for tariff adjustments; its Service provision is decentralized to discretion is limited by contract • NWRB regulates other licensed local governments supported by DPWH; between MWSS and concessionaires service providers. two concessionaires provide services that provide services. • Regulated entities appear for public to metro Manila. National Anti-Poverty • National Water Resources Board hearings for tariff approval Commission (NAPC) governs special regulates all service providers projects for outreach to the poor. outside of Manila or MWSS. Sources: Primarily from extensive case study work undertaken by the Policy, Institutions and Regulatory (PIR) thematic group of the Water Supply and Sanitation Global Solutions Group, specifically: the global case studies included in Aligning Institutions and Incentives for Sustainable Water and Sanita- tion Services (Mumssen, Saltiel, and Kingdom 2018); the case studies included in the report on “Water Sector Regulation in the Middle East and North Africa”(Mumssen and Triche 2017); and the PIR LAC case studies. Additional information was drawn from previous published World Bank reports and from online sources in some cases. a. Migan and Trémolet 2015. b. Beck 2015. c. See the PURC website, http://www.purc.com.gh/purc/node/170. d. Macheve et al. 2015. e. See the State of Lago website, http://lswrc.lagosstate.gov.ng/. f. WSP. 2011. Water Supply and Sanitation in Uganda. Washington, DC: World Bank. http://wsp.org/sites/wsp.org/files/publications/CSO-uganda.pdf. g. 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