70006 LGI DEVELOPMENT Ltd. OSF, 5th Floor, Cambridge House 100 Cambridge Grove, London W6 0LE, United Kingdom c/o LGID Repoffice, Október 6. u. 12, H-1051 Budapest, Hungary Tel: (36 1) 327-3100 ext. 2359, Fax: (36 1) 327-3105, E-mail: info@lgidev.com Technical assistance to the Republic of Serbia Advisory support to the working group designing a reform strategy for municipal public utility companies Final report January 11, 2010 Table of contents PROJECT PLAN AND ITS MODIFICATIONS ............................................................................................... 3 DELAYED START OF THE PROJECT ....................................................................................................................... 3 SHIFT IN PROJECT IMPLEMENTATION: ACTIVE TECHNICAL SUPPORT TO PUC REFORM STRATEGY DESIGN ........... 4 ACTIVITIES IMPLEMENTED .......................................................................................................................... 5 STAGE 1: LAUNCHING THE WORKING GROUP OPERATION ................................................................................... 5 1. Identification of proposed reform areas .................................................................................................... 5 2. Technical assistance and development programs...................................................................................... 5 3. Proposed topics, partners and timing ........................................................................................................ 6 4. Support to the first session of the Working Group ..................................................................................... 6 STAGE 2: DRAFTING THE PUC REFORM STRATEGY.............................................................................................. 6 1. Work plan for the international team ........................................................................................................ 6 2. Writing background reports and case studies ........................................................................................... 6 3. Data collection on PUCs in Serbia........................................................................................................... 7 4. Strategy design .......................................................................................................................................... 7 5. Presenting the draft strategy to the WG .................................................................................................... 7 PUC REFORM: POTENTIAL ROADBLOCKS AND PROPOSALS FOR FURTHER INVESTIGATION ................................................................................................................................................................................ 7 CONTINUOUS NEED FOR REFORM ........................................................................................................................ 7 REFORM STRATEGY PRIORITIES AND SEQUENCING .............................................................................................. 9 1. Ownership of companies and the infrastructure network .......................................................................... 9 2. Corporate forms and management ............................................................................................................ 9 3. Control over service organisations ........................................................................................................... 9 4. User charge setting .................................................................................................................................. 10 5. Capital investment finances ..................................................................................................................... 10 6. Private sector participation ..................................................................................................................... 10 PROCEDURAL ISSUES OF STRATEGY DESIGN ...................................................................................................... 11 PROPOSALS FOR FURTHER ACTIONS .................................................................................................................. 11 1. Preparation of the action plan ................................................................................................................. 12 2. Introducing benchmarking and service agreements ................................................................................ 12 3. Modernization of tariff setting ................................................................................................................. 13 4. PUC transformation - transfer of assets – privatization ......................................................................... 13 5. Support to Public-Private Partnerships .................................................................................................. 14 ANNEXES ........................................................................................................................................................... 15 ANNEX 1. GOVERNMENT DECISION ON ESTABLISHING A SPECIAL WORKING GROUP .......................................... 15 ANNEX 2. MEMBERS OF THE WORKING GROUP ................................................................................................ 15 ANNEX 3. JOINT LETTER TO MERD BY THE FIVE DONORS................................................................................. 15 ANNEX 4. REFORM AREAS FOR THE TRANSFORMATION OF MUNICIPAL PUBLIC UTILITY COMPANIES ................. 15 ANNEX 5. TECHNICAL ASSISTANCE AND DEVELOPMENT PROGRAMS WORKING ON TRANSFORMATION OF MUNICIPAL PUBLIC UTILITY COMPANIES IN SERBIA ........................................................................................... 15 ANNEX 6. PROPOSED TOPICS, PARTNERS AND TIMING ....................................................................................... 15 ANNEX 7. PRESENTATION ON THE “TRANSFORMATION OF MUNICIPAL JKPS, REFORM STRATEGY DESIGN� ...... 15 ANNEX 8.REFORM OF PUBLIC UTILITY COMPANIES, SKGO PRESENTATION AT THE WG LAUNCHING SESSION.. 15 ANNEX 9. MEMO ON THE AREAS AND MANAGEMENT OF LOCAL PUC REFORM STRATEGY DESIGN.................... 15 ANNEX 10. BENCHMARKING OF PUBLIC UTILITY SERVICES ............................................................................. 15 ANNEX 11. SOCIAL POLICY ASPECTS OF THE PUC TRANSFORMATION STRATEGY ........................................... 15 ANNEX 12. COMPONENTS OF DECENTRALIZATION AND MARKETISATION OF LOCAL UTILITY SERVICES: ........... 15 THE HUNGARIAN CASE ...................................................................................................................................... 15 ANNEX 13. PUBLIC UTILITY COMPANIES IN SERBIA ......................................................................................... 15 ANNEX 14. STRATEGY FOR RESTRUCTURING THE LOCAL PUBLIC UTILITY COMPANIES IN SERBIA .................. 15 ANNEX 15. STRATEGIJA RESTRUKTURIRANJA JAVNIH KOMUNALNIH PREDUZEĆA U SRBIJI ............................... 15 ANNEX 16. ANNEX TO THE STRATEGY IN SERBIAN ........................................................................................... 15 2 Support to PUC reform strategy design in Serbia. Final Report, LGID Project plan and its modifications The World Bank within the framework of the Public-Private Infrastructure Advisory Facility (PPIAF) launched a technical assistance project in Serbia to support the design of national strategy on local Public Utility Companies. It was a response to the request from the Ministry of Economy and Regional Development (MERD) in early 2008. According to the Terms of Reference the project objectives were, as follows: (i) To assist the MERD in steering the working group; (ii) To provide specific targeted inputs to working group discussions; (iii) To help the Government determine the extent and nature of informational, analytical, and institutional steps required to fully elaborate and implement a reform strategy. (iv) To advise the Bank and PPIAF regarding the potential demand for further external assistance to the reform process. Originally our tasks were to provide written outputs in the form of short briefs to dissemination among working group members and materials for presentations during working group sessions. The required specific deliverables were, as follows: a) An inception note including the consultant’s first views after reading existing background reports, recommendation for any changes in the TOR for the services; b) A first draft of agenda items for the working group; c) Following the second and subsequent visit(s), briefs on case studies, comparative sectoral analyses, and other contributions to working group discussions; d) Final summary report, including a terms of reference for further recommended studies and identification of potential roadblocks. It was expected that these tasks are implemented by making at least three trips to Serbia. The planned deadline was end of September, 2008. Delayed start of the project The project was started with a significant delay. There were Parliamentary and local government elections in Serbia in May, 2008. In the new government the leadership of the Ministry of Economy and Regional Development has been changed. Due to these factors the Working Group has not been set up and new partners were appointed at the MERD. So the launching meeting of the project was held in Belgrade on October 31, 2008, only. This meeting was the actual start of the project, when the local partner at the World Bank office was appointed. At the same time the EU funded MISP project, as a potential partner in assisting the Working Group was identified. The Government decision on setting up the Working Group was made on November 6, 2008. (Annex 1.) The Ministry of Economy and Regional Development was responsible for inviting the members of the Working Group. (Annex 2.) The task of Working Group was to “conduct the analysis of the status of local utility companies and propose the strategy of their restructuring, that is, their privatization.� The deadline for presenting the PUC reform strategy set by the government decree at that time was June 30, 2009. At our first official meeting on February 6, 2009 with Mr. Nebojsa Ciric, state secretary of MERD the LGID team was informed about the Government decision on setting up the 3 Support to PUC reform strategy design in Serbia. Final Report, LGID Working Group, under the leadership of the MERD. The ministry staff assigned to this task were Misela Nikolic and Nenad Iljic. No specific budget line has been allocated to the technical and administrative work of the WG. Members of the WG have been invited from various ministries and the local government association (SKGO). At that time the members of the Working Group were intended to be invited from the key ministries, only (e.g. MoF, MoLGA, MoESP). The ministry representatives were planned to be assistant ministers or state secretaries. The Working Group launching meeting was planned for March and with a mandate to present a reform strategy by September or October. Based on this formal invitation we could start our advisory project under PPIAF. The meeting with Ms. Misela Nikolic, Assistant Minister and the two WG staff members was held on March 10, 2009. At the meeting the practical tasks of the WG launching session were discussed. It was reiterated, that the WG has no budget for technical work, so local experts might be invited in drafting the strategy. The launching session of the Working Group was held on March 27, 2009. The participants received the invitation and the briefing materials only two days before the meeting. Despite this fact representatives of all the ministries were present. Two introductory presentations were made: one by LGID and another by the local government association (SKGO). The WG session was concluded with the main decision obliging the participants to submit their comments and suggestions regarding the material presented and provided by the World Bank and the Standing Conference of Towns and Municipalities. It was agreed, that the next WG meeting will be held in three weeks. It was WG Chair’s specific request, that the media cannot be informed about the WG activities until the first comprehensive draft strategy is prepared. Shift in project implementation: active technical support to PUC reform strategy design The Government of Serbia's new legislative agenda calls for approval of the strategy and related laws by the end of 2009. Given that not even half of the Ministries responded to the Working Group requests on March 27, 2009 the internal team of five donors agreed to combine their expertise and to provide active technical assistance in preparing the PUC reform strategy. Expert team of five international organizations (EBRD, KfW, MISP, MEGA, WB) has decided to take a more active role in strategy design and will draft the strategy. It was confirmed in a letter sent to MERD on May 22, 2009 by EBRD, KfW, MEGA/USAID, MISP/EC and the World Bank. (Annex 3.) Representatives of the five organizations agreed to achieve consensus on a detailed structure for the PUC reform strategy by early July and to produce a draft strategy document for the Special Working Group’s review by mid-September. It was also agreed, that the full Working Group, with MERD's leadership and not the donors, will present the strategy at the Ministry of Economy level, and MERD will advocate the strategy in the Cabinet. This pro-active role of the five development organizations has modified our tasks, as well. As it was indicated in our inception report at that time it was not known how the reform strategy would be structured and whether the proposed form of operation was acceptable or not. As the Working Group practically had no internal capacity to prepare the PUC reform strategy the five development organizations took over the technical task of strategy design. 4 Support to PUC reform strategy design in Serbia. Final Report, LGID LGID played an active role in structuring the issues of PUC reform strategy and contributed to the actual strategy design in several ways. But the originally planned case studies had been partially replaced by other inputs and our role within the donor team was changed. Based on the agreement within the five-member-team, the strategy design was coordinated by the lead expert of the MEGA/USAID project. After selecting the issues of PUC reform that could be discussed within this limited framework, LGID operated as one of the international team members. The deadline for our project implementation was extended to December 31, 2009. Activities implemented Project implementation was divided into two phases: stage 1 was realized according to the original plans, that is providing indirect support to the Working Group; while stage 2 aimed to prepare the actual PUC reform strategy. Stage 1: launching the Working Group operation After the formal launch of the project in February, 2009 LGID has prepared the following documents in English and in Serbian languages: 1. Identification of proposed reform areas Main areas for transformation of municipal public utility companies (Annex 4.): a) Structuring the process, identifying reform tools and instruments b) Ownership and property issues c) Status of PUCs d) Operational funding mechanisms e) Capital investment planning f) PUC internal management and regulations g) Inter-municipal cooperation: local government incentives and capacity h) Social policy i) Transparency and customer relations 2. Technical assistance and development programs Several international development organization work on transformation of municipal public utility companies in Serbia (Annex 5.). This brief compilation of various donor programs was based on interviews with program managers and the information available on the projects’ websites. It is our interpretation of the project activities. It does not mean any commitment from the project; it aims only to inform the Working Group members about some PUC reform related aspects of these major technical assistance programs. 5 Support to PUC reform strategy design in Serbia. Final Report, LGID 3. Proposed topics, partners and timing In a table format the eight technical issues were matched with the international development assistance programs, as potential contributors to the relevant chapters of the reform strategy (Annex 6.):. Two options were recommended for the schedule of the WG meetings: one accepting the set June 30 deadline, the other one, which is based on the more realistic assumption, that the strategy is going to be prepared only by the Autumn of 2009. 4. Support to the first session of the Working Group At the launching session of the Working Group on March 27, 2009 we made an introductory presentation on three main issues to decide: (i) areas of transformation, subjects of reform; (ii) forms of interventions and (iii) Working Group rules and procedures. (Annex 7.) It was followed by the presentation of the SKGO representative on local government association’s approach to the reform of public utility companies (Annex 8.). There was no real discussion about any of the issues raised by the presenters. The WG members were asked to share their organizations’ recent plans on PUC reform with the Working Group and to send their comments in writing. Stage 2: drafting the PUC reform strategy As the Government of Serbia Working Group did not operate effectively in the period before the summer holidays, the five donor organizations agreed to provide direct assistance to MERD by drafting the PUC reform strategy. In this second phase of the project between June and December 2009 LGID has provided the technical assistance services through this international team. 1. Work plan for the international team LGID, as a WB consultant and member of this team prepared an internal "work plan-table of contents" on the PUC reform strategy. It included the proposed themes as well as made recommendations on the potential authors among the donors who signed the memo in May, 2009. The nine themes outlined in March will form the core of the chapters in the Strategy to be written by the internal members and affiliated consultants. This document together with the proposed timing was discussed and later sent to the Chair of the WG. (Annex 9.) 2. Writing background reports and case studies After several preparatory meetings of the international team it was agreed, that the LGID team will contribute to PUC reform strategy design by preparing background studies and the relevant sections of the strategy on the following areas: a) Benchmarking public utility services (Annex 10.) b) Social policy aspects of the PUC transformation strategy (Annex 11.) 6 Support to PUC reform strategy design in Serbia. Final Report, LGID c) Local public utility company reform – case of Hungary (Annex 12.) All these documents were prepared both in English and in Serbian languages. 3. Data collection on PUCs in Serbia Due to the lack of information on the status, services, employment, assets and finances of public utility companies LGID was asked by the international team to collect data on PUCs. We have launched a survey on the public utilities in the 23 major cities of Serbia. The survey was implemented in cooperation with Democratic Transition Initiative (DTI), a local consultancy. In addition to this city survey financial information on PUCs was collected from the Ministry of Finance database and from the professional association of PUCs (KOMDEL), as well. The summary tables were shared with the team (Annex 13.). 4. Strategy design LGID lead consultants actively participated in the PUC reform strategy design. Draft chapters and background studies of the strategy were edited in cooperation with the MEGA/USAID team leader. The final drafts were reviewed and discussed at several meetings in Belgrade. (Annex 14.) The strategy and the background studies were translated to Serbian by LGID (Annex 15. and Annex 16.) 5. Presenting the draft strategy to the WG Finally the draft PUC reform strategy was put on the Working Group agenda on December 19, 2009. The WG members being present – with the visible exception of the Ministry of Finance, and the Ministry of Local Self-Government and Public Administration - agreed, that all the will send their comments in writing by January 15, 2010. The pending issues of PUC ownership, tariff setting, assets, audit of PUCs will be discussed at internal meetings in the future. Following these meetings the strategy will be finalised and it can be presented for public discussion. That will be the moment, when the Working Group concludes and Government of Serbia takes over the responsibility of approving strategy and starting its implementation. PUC reform: potential roadblocks and proposals for further investigation According to the original Term of Reference at the end of the assignment, LGID should provide a concluding report on the key issues requiring further investigation, together with identification of potential roadblocks. This last, summary chapter of our final report aims to discuss the main issues of the local public utility company reform and the proposed next steps of PUC reform strategy implementation. Continuous need for reform There are several obstacles to efficient operation of the public utility and communal sector in Serbia. Resistance towards regulated market based service delivery prevents corporatization 7 Support to PUC reform strategy design in Serbia. Final Report, LGID of PUCs and setting of clear economic incentives. Lacking proper local government accountability mechanisms, the management of public utility companies became over- politicized. This leads to significant increase in employment and causes losses in operation. On the founder’s and owner’s side the monitoring capacity and oversight over company management is limited. There is no proper information base for comparing and benchmarking service performance, company finances and operation. In the case of multi-purpose communal companies there are no clear financial incentives for efficient operation, as the costs are not properly allocated and they are not known by the company management nor by the owners of the PUCs. Despite the fact that municipalities are relatively large, the benefits of economies of scale are still not fully utilized because of lacking inter-municipal cooperation mechanisms and regionalization schemes. Since the Parliamentary elections in 2008, when this PPIAF project was launched, there were some important events, which strengthened the need for a national strategy on PUC reform. First of all, the global financial crisis seriously hit the Serbian public sector. The fiscal austerity measures to limit the budget deficit led to significant cuts in local government transfers in the middle of the fiscal year 2009. The local government transfers were reduced by 37%, which is equal to 9% of total local government revenues. As part of the stand-by loan agreement with IMF the Government of Serbia committed itself to launch several structural reforms, which would affect the public utility services, as well. The capital investments in this rather centralized local government system are financed mostly through the National Investment Plan (NIP). Its project finance fund was cut for 37%. So the local governments as co-funders of capital investment projects were not able provide the pre-financing of jointly financed capital projects. Local government borrowing is rather underdeveloped in Serbia. Municipal bonds are not used by local governments. The regulatory framework for this segment of the capital market was started to be developed in these months only. The reform of local public utility companies was specifically mentioned among the Government’s structural proposals. Within the overall goal to “privatize, restructure, put in bankruptcy, or liquidate a wide range of public enterprises, utilities, non-core companies spun off from public utilities…� local enterprise reform is a priority1. The stand-by loan agreement promised a comprehensive review of the business and financial conditions of all locally owned utilities. The present Ministry of Economy and Regional Development program is also mentioned in the loan agreement. However, compared to the original government decree from 2008 the emphasis of the transformation strategy has been slightly modified. It does not talk exclusively about privatization of PUCs, but the stress in more on “determining ways and modalities of private capital involvement.�. This re-definition of the main goal of the strategy might help its approval and the further implementation. Recent history of other state/public property reform shows, that the targeted privatization might be an obstacle to any changes in this sector. There are political debates over the scope, form, timing of the privatization, which could slowed down or obstruct the other reforms in the local utility sector. Efficiency of local utility services can be increased by restructuring of service organizations, which does not necessarily mean privatization of the PUCs. Restructuring could be corporatization of PUCs and changing the ownership structure by devolving the company assets to the original owners, to the local governments. 1 Letter of intent, GoS to IMF on April 30, 2009 8 Support to PUC reform strategy design in Serbia. Final Report, LGID In this decade several municipalities in Serbia have contracted with private service providers, mostly in municipal solid waste, urban transportation services and water management. They were implemented under exceptional circumstances, usually negotiated by the donor organizations or the international financial institutions. The key element of these deals is the agreement on abolishing the cap on user charges. There is an increasing pressure on the national government to improve regulatory mechanisms on tariffs. In December, 2009 Serbia has formally applied for the European Union membership. This symbolic step is a start of the long accession process, which will influence several conditions of local public utilities, as well. Beyond the negotiations on the various chapters, the absorbing capacity of the European Union grants for large infrastructure investments has to be increased. It will require the development of institutional forms of inter-municipal cooperation and regionalization, and significant improvement in local implementation capacity. Reform strategy priorities and sequencing The draft PUC reform strategy presented at the Working Group session on December 19, 2009 has identified sixteen specific reform topics. The document’s main focus is to promote private sector participation. Some conditions of successful local public utility sector transformation are also mentioned, like benchmarking, service standards and regionalization of services. The main areas of PUC reform are the following ones: 1. Ownership of companies and the infrastructure network The strategy argues that inefficiencies in the public utility sector are primarily caused by the mixed central and local ownership structure. Local governments used to be the owners of former PUCs, but since mid-1990s they lost control over the physical infrastructure and assets of the operating companies. Lack of clear ownership creates wrong incentives at the local level, prevents the introduction of market based regulatory mechanisms and limits the involvement of private sector investments. The assets managed by the PUCs should be transferred to municipalities. 2. Corporate forms and management PUCs should be transformed to corporate entities under the company law. These new structures should focus on core services or at least the multi-sector companies need to separate cost centres for each service. The other non-core utility services need to be contracted through competitive bidding. PUCs should be governed by service level agreements with their municipal owners. PUC business plans should address the targets established by the service agreements. Regionalisation of services and PUCs, particularly in solid waste and water sectors, should be encouraged. 3. Control over service organisations 9 Support to PUC reform strategy design in Serbia. Final Report, LGID Accountability mechanisms should be improved at the national level, at the owner local government level and towards the customers of utility services. A proper benchmarking system on key performance and financial indicators is a condition of administrative accountability, and is a necessary part of any future service contract with either public or private sector entities. For establishing national and local benchmarking system the methods of regular information collection, the purposes of financial and service indicators, the administrative-institutional capacities and publicity of benchmark information have to be defined. There are rather weak accountability mechanisms towards the elected local governments as future owners of PUCs and charge setting bodies. The customers’ direct oversight over the service companies is negligible. 4. User charge setting The draft reform strategy is very clear on the tariff issue: the charges should be set at cost recovery levels and contractual agreements with municipalities have to finance any differences between the actual costs and the levies. There is need for transparent and standardised formulas for tariff setting in water, wastewater and solid waste sectors. The PUCs should not bear the financial burden of providing services at a discounted price. Social support mechanisms should be introduced to reduce the impact of tariff increases on the poorest sections of the population. 5. Capital investment finances PUCs should be responsible for their own capital investment planning. Decisions on capital investments should be part of their service agreements with the owner-client local governments. PUCs should be required to provide at least a percentage of their capital investment costs from their own funds, assuming that the assets are revalued and charging proper depreciation costs is allowed. Municipalities should be allowed to guarantee debt of PUCs. 6. Private sector participation Legislative changes needed to encourage private sector participation should be developed and adopted. Private sector participation should be encouraged by focusing on pilot or demonstration projects in several sectors. Local initiatives in developing PPPs should not be restricted by the government. The proper sequencing of these reform-steps is the critical condition of successful transformation of PUCs. At the Working Group session the discussion focused on two main issues: the future of property and the tariffs. They are the politically most sensitive reform areas. The unsuccessful privatization actions at national level caused fears of any form of ownership change. Decentralization policies and even draft laws on transferring public assets to municipalities are blocked by the reluctant political forces since 2002. Tariff-cap on local utility services is justified by the government’s anti-inflation policy. In reality most of the 10 Support to PUC reform strategy design in Serbia. Final Report, LGID utility services represent a rather low share in household expenditures, with the exception of energy costs in urban areas. The sequencing of reform steps proposed by the national association of local governments (SKGO) can be fully supported. According to their opinion, first the organizational and regulatory changes have to be made for increasing PUC’s operational efficiency. It should be accompanied by the modified rules in tariff setting and wider use of performance standards. The politically sensitive issues of the relationships with municipalities (e.g. property transfer) and conditions for involving private capital in local utility services might be left for the later stages of reform. Procedural issues of strategy design Preparation of the public utility company reform strategy was hindered by the limited experiences with public policy making in Serbia: a) Main political targets of the reform strategy were not specified by the government and the high emphasis on privatization did not gain public support and it was misinterpreted. b) Mandate of the special Working Group was well defined, but neither its members nor the operational conditions were properly set. Only the national government agencies and the local government association were invited to the WG, so the public utility companies were not represented through their professional associations. The Working Group did not have the internal management and technical capacity to prepare the strategy. c) Lack of full political support within the government for the PUC reform resulted minimal cooperation with the other ministries and agencies. Written inputs at the launching stage and comments on the draft strategy were not prepared by several critical actors. d) Management of the Working Group sessions did not help its effective operation. The invitations and the documents were disseminated with delay, the timing of the WG session was modified in the last minute. e) The Working Group operation was nontransparent, the media and the professional communities were not informed about any progress in the PUC reform strategy design. MERD did not accept our recommendation to open up the strategy design process from the very beginning. f) As the Working Group was not operational, the donors had to draft the strategy. At least the strategy document was prepared within the planned timeframe, but this emphasis on international inputs might have a negative effect in the future. There was already criticism at a Chamber of Commerce meeting, that the draft strategy advocates mass privatization and it is a "donor product". g) Lacking real support from the government the international team was not able to prepare a realistic action plan for the strategy implementation. So without an agreement on the feasible next activities, clear milestones and evaluation criteria there is a danger, that this strategy will remain on paper. Proposals for further actions 11 Support to PUC reform strategy design in Serbia. Final Report, LGID 1. Preparation of the action plan The PUC reform strategy design has not been completed. The implementation tools were not specified, so after its approval the Government of Serbia has to translate the strategy into manageable actions. The immediate task is to specify the future steps in the priority areas of reform, otherwise the strategy document will remain a piece of paper with a well justified list of wishes. This implementation plan should be based on the proper assessment of the administrative and financial capacity of the key government agencies. It cannot be done without the active cooperation of the relevant ministries, so the action plan has to be a joint product of the domestic and the international experts. 2. Introducing benchmarking and service agreements One most important aspects of the strategy, benchmarking and performance/level of service contracting, received limited attention, despite the general support of benchmarking within the international team. As it was pointed out by both the Standing Conference and KfW representative at the Working Group session, the purpose of the entire exercise is to improve technical and financial performance, and deliver better utility services to all members of the public at a fair and sustainable cost. In other words, the relationship of the future owner, the future service delivery entity, the public and the regulatory stakeholders have to be spelled out clearly, with specific performance indicators in mind. These performance indicators and customer expectations need to be priced and the institutional system of benchmarking has to be developed. As it was clearly specified by the LGID report on benchmarking, the government should perform three main functions: (i) setting the requirements for all PUCs to participate in the program; (ii) changing some of the regulations to ensure that the collected data is of sufficient quality to support benchmarking; (iii) using the results for regulatory purposes. There are several technical tasks for implementing this component of the strategy. Setting up a Benchmarking Office at the national level would require active cooperation of various ministries. It should be supported by drafting a detailed benchmarking methodology and the needed regulatory changes. There is the technical task of designing data survey instruments, setting up data collection system, including training of staff at PUCs. It has to be followed by generation of outputs, feedback tailored to the companies and generation of inputs to regulatory purposes. At local government level the benchmarking system should provide inputs to the service agreements. Regardless of the ownership structures and distribution of assets the service level agreements will create a new relationship between the client local government and the service organization. In this situation the public debate on local utility services will focus more on the role of the municipality as service provider and the service entities as contractors. The presently over-politicized issues of ownership, private capital involvement will be discussed in the overall context of better, sustainable services. The populist fears of massive price increases and foreign ownership of natural resources, the possibility for grand corruption will be put into the manageable, technical framework of contracting and service agreements. 12 Support to PUC reform strategy design in Serbia. Final Report, LGID 3. Modernization of tariff setting A better information system on utility services could divert the public discussion from the simple social aspects of user charges to explaining how much a glass of water, cubic meter of waste etc currently costs in total, how much of that is recovered from different sources. Even if Serbia retains full public ownership of both operating companies and assets, the operational and investment gap has to be explained, and the political process decide on how to cover the difference between user fees and total costs. Tariffs need to be set in a formula that accounts for service and performance expectations, as well providing for full maintenance and improvement costs. It is not fully apparent to the Working Group members that properly accounting for assets, provision for maintenance and required improvements will lead to price increases that have nothing to do with legal forms or perhaps privatization. The alternative would be to make the needed subsidy explicit, and funded from the municipal budget, that already faces pressures for salaries, services and better infrastructure. Another problematic area involves tariff-setting rules and regulatory systems. There is a wide range of issues, which have to be further elaborated, such as (i) creating mandatory national tariff regulations that apply to all municipalities, (ii) review and control mechanisms, (iii) institutional aspects of tariff revision (establishing a national body or exercising an indirect control over municipal price authorities) and (iv) building social policy mechanism for managing arrears and low affordability. There seems to a general consensus at the government level, that the present limitations on tariff increases should be removed. It is a good start for introducing modern practices of user charge setting. Removing national caps on tariff increases comes at the price of using a transparent and explicit tariff formula that takes all costs into account, and demonstrates what the elastic and inelastic aspects of cost drivers actually are. 4. PUC transformation - transfer of assets – privatization The most misunderstood concepts of the PUC reform are (i) transformation to commercial company form, (ii) transfer of ownership to municipalities and (iii) perhaps the eventual involvement of non-public funds. Furthermore, transfers of physical assets such as pipes and equipment at an uncertain value - total assets on a company balance sheet - , and the concept of registered or “base capital� as reflected in a nominal share value of a PUC is often confused in professional discussions. Clear separation of these two concepts of total balance sheet value and base capital is critical. The draft strategy argued for retaining physical assets on the balance sheet of municipalities, while the operating company may only have a minimal registered capital. The identification, valuation and ultimate one or two step transfer of physical assets from the State Property Directorate to the books of the municipality, and then perhaps, in part or in full, to the books of the “transformed� PUC are the critical questions. There is a basic misunderstanding of this process and it was not decided by the Government of Serbia. Privatization that is the involvement of non-public capital in the PUC has a different meaning if the PUC owns few assets since the pipes and mechanical equipment stays on the municipal balance sheet. In this case no public assets are “sold� or transferred in any forms to the private sector. This option may seem to be more sympathetic to labor unions and those who fear the 13 Support to PUC reform strategy design in Serbia. Final Report, LGID private sector. However, there is no definition yet in Serbia as to what “core,� or critical assets are that may never be sold to the private sector. 5. Support to Public-Private Partnerships PPP was mentioned as an “alternative� to the actual sale of formerly public assets to future private operators of utility services. The most critical aspect of PPPs is the contract that allocates several types of risks between the public and private partner, as well as assigns specific performance expectations to each partner. For managing this process all the transition countries had to go through a long learning and adjustment period. In the public utility sector, dissemination of PPP schemes can be accelerated by combining the already proposed reform steps (e.g. financial and technical benchmarking) with targeted actions for supporting private sector participation. During the PUC reform implementation in the coming years this process can be assisted in several ways: a) Targeted capacity development for policy makers, the politicians at national and local level, the company managers affected by potential PPPs. Manuals, handbooks, training programs and study tours to neighboring countries could improve the overall level of understanding on this critical element of the public utility service provision.; b) Developing the administrative capacity of a selected ministry having primary responsibility for PPP schemes. It should work as an information source, advisory and support center, regulatory agency. c) Monitoring and oversight training for stakeholders such as watchdog groups, the press and other activists. 14 Support to PUC reform strategy design in Serbia. Final Report, LGID Annexes Annex 1. Government decision on establishing a special working group Annex 2. Members of the Working Group Annex 3. Joint letter to MERD by the five donors Annex 4. Reform areas for the transformation of municipal public utility companies Annex 5. Technical assistance and development programs working on transformation of municipal public utility companies in Serbia Annex 6. Proposed topics, partners and timing Annex 7. Presentation on the “Transformation of municipal JKPs, reform strategy design� Annex 8.Reform of public utility companies, SKGO presentation at the WG launching session Annex 9. Memo on the areas and management of local PUC reform strategy design Annex 10. Benchmarking of Public Utility Services Annex 11. Social Policy Aspects of the PUC Transformation Strategy Annex 12. Components of decentralization and marketisation of local utility services: the Hungarian case Annex 13. Public Utility Companies in Serbia Annex 14. Strategy for Restructuring the Local Public Utility Companies in Serbia Annex 15. Strategija restrukturiranja javnih komunalnih preduzeća u Srbiji Annex 16. Annex to the strategy in Serbian All the annexes are presented in a separate file. 15 Support to PUC reform strategy design in Serbia. Final Report, LGID