Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems 85196 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector: A Review of 10 Years of Private Management of Small Town Water Systems Maximilian Hirn December 2013 The Water and Sanitation Program is a multi-donor partnership administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. Acknowledgements Task Managers: Jemima Sy, Samuel Mutono Author: Maximilian Hirn Photographs: WSP Africa Peer reviewers: David Bot (IFC), Yogita Mumssen (World Bank) Water and Sanitation Program: Glenn Pearce-Oroz, Principal Regional Team Leader for Africa WSP is a multi-donor partnership created in 1978 and administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP’s donors include Australia, Austria, Canada, Denmark, Finland, France, the Bill & Melinda Gates Foundation, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. WSP reports are published to communicate the results of WSP’s work to the development community. Some sources cited may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed herein are entirely those of the author and should not be attributed to the World Bank or its affiliated organizations, or to members of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to wsp@worldbank.org. WSP encourages the dissemination of its work and will normally grant permission promptly. For more information, please visit www.wsp.org. © 2013 International Bank for Reconstruction and Development/The World Bank Sustainable Services Through Domestic Private Sector Participation Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector: A Review of 10 Years of Private Management of Small Town Water Systems Maximilian Hirn December 2013 ii Sustainable Services Through Domestic Private Sector Participation Contents Executive Summary. ..................................................................................................................................................... v .............................................................................................................................................................viii Abbreviations. I. The Context: PSP in Small Town Water Supply in Uganda................................................................................. 1 Defining “Small Towns”............................................................................................................................................ 1 Piped Systems in Small Towns................................................................................................................................ 2 Private Operators.................................................................................................................................................... 3 Institutional Framework. ........................................................................................................................................... 6 Tenders and Tariff Setting........................................................................................................................................ 7 Regulatory Role of the Ministry of Water and Environment....................................................................................... 7 Support Institutions................................................................................................................................................. 8 . The Water and Sanitation Development Facilities.............................................................................................. 8 . The Umbrella Organizations.............................................................................................................................. 9 . Association of Private Water Operators............................................................................................................. 9 The Planning and Budgeting Process in Uganda..................................................................................................... 9 II. Status Quo: Current Access, Finance, and System Performance. ................................................................ 12 Current Access to Safe Water: Small Towns Lag Behind....................................................................................... 12 Targets for Small Town Safe Water Access............................................................................................................ 12 Estimated Investment Requirements..................................................................................................................... 13 Mechanisms of Small-Town Financing in Uganda.................................................................................................. 14 Private Credit by Commercial Banks. ..................................................................................................................... 15 The IFC and GPOBA Pilots: New Transmission Mechanisms................................................................................. 16 Sources and Flows of Public Funding.................................................................................................................... 17 Analysis of Available PSP Performance Data......................................................................................................... 17 Cross-sectional Analysis of Gazetted Systems in 2010-11.................................................................................... 21 Regression Analysis for Gazetted Systems............................................................................................................ 21 Comparison to Non-gazetted Systems. ................................................................................................................. 22 III. Conclusions: Remaining Challenges and Future Reforms. ............................................................................ 24 Capital Investments: Raising More Funds.............................................................................................................. 24 Improved Regulatory Control and Expanded Technical Support. ............................................................................ 24 Auditing Reform: Three Necessary Changes. ......................................................................................................... 25 Improving System Data by Building up Asset Registries........................................................................................ 26 Tariff Reform: Indexing the Cost of Water to Inflation.............................................................................................. 26 Contract and Fee Reform: Longer Duration and Covering Depreciation................................................................. 27 Clustering.............................................................................................................................................................. 27 Moving Forward.................................................................................................................................................... 29 References................................................................................................................................................................. 30 Appendix A: Understanding Uganda’s Decentralized Political Structure............................................................ 31 www.wsp.org iii Executive Summary This working paper reviews the first decade (2001-11) of thorough understanding of what has driven the successes Uganda’s pioneering private sector participation (PSP) model achieved, and why challenges remain. Among the key for small town water supply. The number of towns under achievements of the Ugandan small town PSP approach, the PSP model has steadily risen from only 15 in 2001-02 the following deserve particular attention: to over 90 in 2010-11 with a combined population of over • Connections expanded: Connections in the 19 towns 1.5 million. In evaluating the impact of this development, that were under private management since 2002 this working paper aims to guide further reform within expanded much faster than population, rising from Uganda, and to inform other countries considering similar 4,883 to over 13,000 in 2010-11. This expansion of PSP approaches. connections has been partially driven by the private sector, with a key role also played by public subsidies The core idea behind PSP centered reform in Uganda was that are an essential part of the Ugandan PSP to improve sustainability and efficiency of piped networks framework. in small towns by hiring private operators (POs) for their • System sustainability improved: Tariff collection commercial management. Driven by a profit motive, POs rose from almost zero to approximately US$2 million were expected to maximize revenue, minimize waste and (UGX5 billion) in tariffs collected across the 88 maintain and expand networks in a sustainable manner. towns reporting in 2010-11. The average PSP system To guard social objectives, infrastructure remained under now achieves a positive operational balance, that is, government ownership and the introduction of POs was revenues from tariffs and fees cover running costs accompanied by a complex regulation — as well as support even without direct subsidies. In fiscal year 2010-11, — framework. average operating ratio (cost over revenues) was 95 percent. This is a key step to making water services in PSP in essential services such as water supply has been small towns more sustainable. intensely debated over the past decade, and hopes such as • Collection efficiency rising: Collection efficiency in those that motivated the Ugandan experiment have not the average town rose by more than 15 percent within always been borne out.1 If regulation is weak, the quest for three years of the introduction of private operators. private profit can fuel corruption, monopolistic pricing and In 2010-11, almost 90 percent of issued bills were a decrease of investments through short-term profit taking; successfully collected by POs. Unfortunately, yet a well-designed framework can cause private actors to comparisons with the period prior to the POs are reduce waste and improve services. Private incentive does not possible as the first year of PO management is not per se lead to better public services, but it has potential generally also the first for which data is available. to do so if channeled wisely. • Metering almost universal: The metering ratio — the key element of a rational payment based system To evaluate how well the Ugandan model has managed — has risen to over 90 percent in small towns under this balance between public and private interest in water PO management.2 service delivery, this paper starts with a concise description • Water remains affordable: Increases in tariffs have of its current performance and characteristics as well as its been limited. Water has remained affordable with the institutional and regulatory framework. This will allow a average price less than UGX2000 (US$1) per cubic 1 Marin, P. 2009. Public-Private Partnerships for Urban Water Utilities – A Review of Experiences in Developing Countries. Washington D.C: The World Bank 2 Based on FY2010-11 systems performance data from the Ministry of Water and Environment, using a sample of 85 private operators www.wsp.org v Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems meter. In fact, prices have risen by less than inflation, book–keeping and auditing that undermines lender that is, real prices have tended to fall. This shows confidence and the lack of assets of small operators to that PSP does not necessarily cause price rises as is borrow against. Until reforms relieve these constraints often feared. Indeed, capped tariffs decreasing in real in the medium term, special subsidized credit products terms now constitute a problem for operation and for the water sector may help trigger a more significant maintenance (O&M) sustainability. role of private finance. • Better sector organization: The transition to private • Regulatory gaps: Regulatory control is still too management of small town schemes was accompanied weak, leaving room for underperformance to go by the introduction of better sector coordination and a without consequences. The central regulatory unit number of (mostly public) support institutions for the that administers tariff control, subsidy flows and fledgling POs. These institutions are a crucial part of supervises tenders is relatively small, overstretched and the sector framework that explains PO performance. lacks independence. Current auditing arrangements Operators have been mandated to submit performance are particularly weak, lacking regularity, quality and data which are published in annual sector reports, and consequences. Audits by the Auditor General cover is also reviewed in biannual Joint Sector/Technical only national subsidies from the central government, Reviews. The Water and Sanitation Development but not the bulk of revenue generated and used. Some Facilities (WSDFs) have been created to implement schemes carry out internal audits, but there are no publicly financed infrastructure interventions in recognized minimum standards or enforced penalties small towns, Umbrella Organizations have assisted for transgressions. Regulation is only as good as its inexperienced local governments and POs with enforcement, and in the Ugandan PSP model, the technical tasks, and POs have been organized into the latter falls short. Strengthening regulatory authorities interest group Association of Private Water Operators at central and local levels, and establishing a system (APWO). of financial audits by independent, qualified auditors, will be essential to ensure that private incentives As the above points illustrate, over the past 10 years Uganda remain aligned with public goals. has arrived at a stable, and by many measures, successful • Capacity gaps: Many local authorities who are elected model to use POs to manage piped water systems in small and thus have considerable turnover lack the technical towns. However, even as some impressive results have been expertise to supervise operators effectively; even basic achieved, the system that has evolved in Uganda still faces asset records are frequently missing. Organizations serious challenges that require further reform: such as the Umbrellas and the private operator • Capital investments remain subsidy dependent interest group, APWO, should receive further support and underfunded: While the average PSP system in to provide more technical assistance at local level. fiscal year 2010-11 could cover operating expenses, Ongoing efforts to build up asset registries should new capital investments and major rehabilitations also receive strong support to complete them. Water remain subsidy dependent and underfunded. While quality issues should also receive greater recognition continued public investment is important, the lack of and financial resources. significant private finance in the subsector constitutes • Revenue erosion through inflation: The government a missed opportunity, especially in view of the controlled tariff cap has worked well to contain water constraints imposed by a low sector ceiling that limits costs for consumers; however, combined with high public spending, to an underfunding of up to US$18- inflation rates of over 10 percent in some years, the 33 million per year. inflexible tariff cap has led to an uncontrolled erosion The core constraints on larger private investments are of real revenues of water systems. This undermines short-term contracts that create uncertainty about confidence in contracts, the ability to stick to agreed continuity even for good performers, lack of good business plans and thus service quality and system vi Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems sustainability. Plans to institute inflation indexed service goals is not an easy task. Even so, the pioneering business plans should be implemented, with an Ugandan PSP model that replaced the underperforming, associated indexing of the current tariff cap of purely public approach, has evolved from an experiment UGX2,500. into a stable system that can point to real successes. It has • Contract length and fee structure: The current model shown that though private expertise can greatly complement of simply paying POs a fixed percentage of revenues the public sector, it cannot, replace it. Indeed, to further disincentivizes long-term system maintenance. improve outcomes, it will be crucial to strengthen and fine- Operators automatically retain all revenue of their tune the public institutions and regulatory framework that fixed percentage that is not spent on operations and ensure that POs have the incentives to deliver clean water repairs; thus they have a direct incentive to minimize at a fair price. With its history of reforms and seasoned staff and maintenance expenditures as much as sector practitioners, Uganda is well placed to tackle these possible. Contract durations have also been too short, remaining challenges. disincentivizing maintenance and investments that do not pay off within three years. The sector should In doing so, it is encouraging to recognize that progress in work to develop contract models that at least cover any of the areas outlined above will have broad beneficial asset depreciation, and move all systems to five year effects on the PSP model as a whole, because the remaining contract durations that have been piloted in some challenges are all interlinked. For instance, improving towns. auditing, preventing inflation driven tariff erosion or • Inefficient single-scheme contracts: The current extending contract lengths are all crucial to making it easier model of contracting each scheme individually for POs to raise private finance. Likewise, asset registries leads to inefficient overhead costs for operators who will make it easier to develop contracts that better account find themselves managing geographically dispersed for hardware depreciation and improving capacity locally schemes. It is also suboptimal from the government’s will relieve pressure for auditing from the center. perspective due to high supervision costs for almost 100 individual contracts tendered at local level, In an interlinked PSP framework in which behavior is and because the opportunity of achieving cross- shaped by legal and regulatory rules and public and private subsidization by bundling less profitable with more agents are always interacting, each reform step will impact profitable schemes is forfeited. Though controversial and can contribute to improving, the overall system. The with local authorities who fear a loss of influence, the sector in Uganda has demonstrated its ability to successfully potential for efficiency gains means that stakeholders introduce an entirely new approach to small town water should at least continue discussions with the aim of supply over the past 10 years and now has an opportunity moving towards an exemplary pilot. for further dynamic improvements to increase affordable access to safe water for Ugandans living in small towns. These challenges have imposed real costs, and show that channeling private profit incentives to achieve public www.wsp.org vii Abbreviations ADC Austrian Development Cooperation APWO Association of Private Water Operators DWD Directorate of Water Development DWO District Water Offices DWSDCG District Water and Sanitation Development Conditional Grants GIZ (GTZ) Gesellschaft fuer Internationale Zusammenarbeit (German Development Corporation) GoU Government of Uganda GPOBA Global Partnership on Output-Based Aid IFC International Finance Corporation JMP Joint Monitoring Programme (WHO/UNICEF) JPF Joint Partnership Fund JSR Joint Sector Review LG Local government MDG Millennium Development Goal MoWE Ministry of Water and Environment MTEF Medium Term Expenditure Framework NDP National Development Plan NGO Non-governmental organization NRM National Resistance Movement NWSC National Water and Sewerage Corporation O&M Operation and maintenance PO Private operator PSP Private sector participation RGC Rural Growth Centers SME Small and Medium Enterprises SPR Sector Performance Report SSIP Sector Strategic Investment Plan WA Water Authority WATSUP Ugandan Water Supply Atlas WSC Water and Sanitation Committee WSDF Water and Sanitation Development Facilities WSS Water supply and sanitation WSSB Water Supply and Sewerage Board viii Sustainable Services Through Domestic Private Sector Participation I. The Context: PSP in Small Town Water Supply in Uganda Prior to the current private sector participation (PSP) Aid (GPOBA) and the International Finance Corporation framework of small town water supply, the Ugandan (IFC). national government administered all water supply networks The private sector is barely involved in small town sanitation through a highly centralized system. Decisions were made at present. Even though the mandate of POs was expanded far from local users, funding flows through the center and in 2011 to include the management of sanitation services, back were habitually delaying operations and maintenance, POs have not become involved in sludge management yet. record keeping was poor, and there were few direct financial PO involvement is limited to the administration of public incentives for systems to perform well. toilets in some towns. The PO interest group APWO Major reform efforts in the 1990s put the current PSP model (Association of Private Water Operators) has noted that this for small town water supply in place. The first step was the is often not profitable and lacks a clear business case. 1995 Constitution of Uganda which defined access to clean and safe water as a fundamental national objective, and Defining “Small Towns” formally called for greater use of private initiative. The Water As of 2010-11, there were 186 urban areas in Uganda: Statute (1995), Water Act (1997) and Local Government Kampala city, 22 municipalities and 163 town councils, Act (1997) then legally codified, and the National Water home to over five million Ugandans.4 A small town is then Policy (1999) operationalized, the PSP framework still in defined in the specific context of the water sector: A town place today. Over the last decade, Uganda thus pioneered is “large” if the water supply in the urban area is managed a new approach to small town water management that by the national utility, the National Water and Sewerage recognized the economic value of water, involved private Corporation (NWSC). If it is not, then the urban area is operators (POs), yet upheld the social principle of “some a “small town.” Thus, in 2010-11 there were 156 urban for all rather than all for some.”3 areas classified as “small towns,” that is, outside NWSC jurisdiction, with approximately 2.4 million inhabitants Today, “private sector participation” in Uganda’s small town or 7 percent of Uganda’s population. The population of water supply means that POs manage piped water systems small towns is generally between 5,000-15,000 inhabitants. in contracts with local government. All assets (pipes, As far as large towns are concerned, the Ministry’s Sector pumps, land and so on) remain under the ownership of Performance Report outlined: the government. Customers pay for water in order to finance operation and maintenance (O&M) work, though O&M remains partly subsidized, and system construction Large Towns are classified as those gazetted for and extensions are generally financed publicly. The private operation by [the utility] National Water and Sewerage sector also plays a role in the design and construction of Corporation (NWSC), which provides water and facilities under contract by local and central government. sewerage services. NWSC currently operates in 23 Point sources of water (for example, handpumps) are usually “Areas” covering [30 large towns, including] Kampala communally managed and thus not an object of this report. City Council, the municipalities of Jinja, Entebbe, Private credit to finance piped water supply schemes is still Tororo, Mbale, Masaka, Mbarara, Gulu, Lira, Fort rare in Uganda, and has been limited to pilot projects led Portal, Soroti, Kabale, Arua; and the Town Councils by the World Bank Global Partnership on Output-Based 3 Ministry of Water and Environment. 1999. National Water Policy. Kampala: Republic of Uganda 4 Almost fifty of these were only formally designated as urban in the last two years. The rural government unit hierarchically equivalent to municipalities and towns is the “sub- county” www.wsp.org 1 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Table 1: Characteristics of Gazetted Systems in 2010-11 including Nansana, Kira, Njeru, Bugembe, Lugazi, Bushenyi/Ishaka, Kasese Mukono, Malaba, Iganga, Variable (Number of Towns Reporting) Mean (Median) Mubende, Hoima, Masindi and Kaberamaido.5 The NWSC coverage area extends beyond the above urban Population (81) 20,160 (15,000) boundaries. Active connections (88) 392 (267) Date of commissioning (Data for only 2002 (2004) 49; range of 1958-2010) In addition to large and small towns, there is a further Metering ratio (85) 93% (100%) common agglomeration type, Rural Growth Centers, with System capacity utilization (83) 48% (37%) populations between 2,000-5,000 inhabitants, but these are formally classified as rural. Continuity of supply (88) 87% (94%) Staff (86) 5 (5) Piped Systems in Small Towns Water supplied per month, m3 (88) 4,013 (2,022) Of 156 small towns, 105 had operational piped water Non-revenue water, % (87) 19.3% (17.5%) systems in 2010-11.6 Of these 105 operational systems, 95 had a gazetted Water Authority, the key administrative Rate charged per m3, UGX (86) UGX1978 (1889) building block of the Ugandan PSP model. It is the Water Difference between rate and UGX179 (573) Authority that can contract a PO on the one hand, and enter production cost (86) into performance agreements with the national authorities Collection efficiency (Value of bills / bill 87% (89%) on the other. Of the 95 Water Authorities, 83 were in fact collection) employing a PO. Most of the 12 towns without a PO at Operational balance (Revenues minus UGX 245,378 the end of the reporting period 2010-11 were in the midst operational costs), monthly (88) (-79,655) of tenders after the end of a prior PO contract. Delays in Operating ratio (Cost/Revenue), % (88) 95% (103%) tendering mean there is often a gap between the transition of one PO contract to the next, resulting in town authorities Overall surplus/deficit incl. capital UGX -174,000 (-) investments, monthly (88) temporarily taking over the management of systems. The remaining 10 small towns had not been formally integrated Overall surplus/deficit w/o conditional UGX -1,248,000 grants income, monthly (88) (-778,400) into the new model yet, that is, still lacked gazetted Water Authorities and were either running the system directly or Note: See Tables 9-14 for historic figures. hiring individual operators.7 In 2010-11, almost 90 gazetted systems submitted is positive for the mean system. However, this turns performance data regularly, from which a basic overview of very strongly into the negative once capital investments their system characteristics can be given (see Table 1). (extensions, major upgrades, and so on) are factored in. The operational balance (revenues without subsidy grants Collection efficiency was also close to 90 percent and minus operational costs, but excluding capital investments) non–revenue water around 20 percent of production. The average number of active connections per system is just 5 Nansana, Kira and Mukono water services are managed by Kampala Area; Malaba town water supply is managed under Tororo Area while Lugazi, Njeru, Bugembe and Iganga town water supplies are managed under Jinja Area.Kaberamaido town water supply is managed under Soroti. Amuria water supply was gazetted as a new town under NWSC management in June 2010. See: Ministry of Water and Environment, 2010. Sector Performance Report 2010. Kampala: Republic of Uganda. p.121 6 Ministry of Water and Environment, 2010. Sector Performance Report 2010. Kampala: Republic of Uganda. p 118 7 Ibid., p.121; It should be noted at this point that piped schemes are not limited to (“large” and “small”) urban areas, but can also be found in rural areas. The Ugandan Water Supply Atlas (WATSUP, 2011) listed a total of approximately 700 piped schemes not managed by the NWSC (functional and non-functional, and including the above), of which 368 were gravity flow schemes, 296 are groundwater based, and 37 distributing surface water. The 105 small-town piped systems are thus only a sub-set of all piped-schemes outside the NWSC. 2 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems below 400, though this arithmetic average seems driven by a few large systems as the median is only 267. This is also reflected in the volume supplied, which averages 4,000 cubic meters but has a median of just over 2,000 cubic meters According to the new Ugandan Water Supply Atlas (WATSUP 2011), and including the above 105 small town piped systems, Uganda boasts a total of over 700 piped schemes not managed by the NWSC. Most of these are small and situated in rural growth centers without gazetted Water Authorities. This number comprises 368 gravity flow schemes, 296 ground water- based systems, and 37 distributing surface water. Private Operators In fiscal year 2010-11, Uganda had 18 different private water operators (that is, private companies) operating small town piped systems under active contract with local Water Supply and Sewerage Boards.8 Of these, 10 POs managed at least two or more systems. All but four have head offices in Kampala, and usually offer broader In total, the 88 systems for which the self-reported consultancy, engineering and contracting services.9 In other performance data is available employ a little above 450 staff, words, the operators are typically not pure, specialized water including technicians, accountants, cashiers, guards and so system management firms. Note that some town councils, on. The average system is staffed with approximately five especially those with small systems, hire private individuals employees. However, this data is self-reported by POs, and rather than firms to oversee their networks. This is also the reported number of staff may not attend to a system common practice for piped systems in rural growth centers full-time in all cases. (that is, non-gazetted). As Table 3 illustrates, running small systems in Uganda As can be seen in Table 2, operators choose different is not big business. Even the largest operator is paid just approaches — Bright TS runs five systems with a total of above US$25,000 per month for running 16 systems, and 2,410 connections (482 on average per town), while Kagula after adjusting for costs related to staff, power and water MS has 2,343 connections but spread over no less than 11 treatment, as well as minor repairs and taxes, makes an towns (213 on average per town). estimated monthly profit of around US$5,000. Other 8 Since then, the number has slightly increased to 21 by February 2012. 9 http://www.apwouganda.org/members [4.9.2012] www.wsp.org 3 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems POs even reported losses in FY10-11. These limited profit Likewise, the cause of nonrevenue water should be margins also help to explain why water operators tend not investigated as the lost (or hidden) revenues are quite to be solely specialized on running small towns schemes, substantial. For instance, the 33 percent nonrevenue water but typically do so only as one out of many contracting and reported by George & Co in fiscal year 2010-11 has a value engineering services. of over US$7,000 per month at current water tariffs. Note that the estimation of profits in Table 3 assumes that all power The figures in Tables 2 and 3 offer guidance, but should costs and reported repairs were borne by the operators out be treated as approximations pending more detailed of their management fees. However, in practice conditional auditing. Data is self-reported and insufficient supervision grant subsidies sometimes subsidize power costs and repairs leaves room for extra profits if POs were unscrupulous. and thereby free up profits. For instance, George & Co For instance, given that power costs are to be paid directly received over US$300 per month in power subsidies in the out of the operators’ share of the revenue, over-declaring fiscal year 2010-11. electricity costs would justify excessively high operator fees and thus increase actual over reported profits. The As can be seen on Map 1, some operators have managed to variations in self-reported costs (for example, electricity cost cluster their systems in certain regions by winning individual per connection) call for a more regular, detailed auditing to contracts for a number of neighboring systems. For instance, ensure compliance and accurate reporting. Kagulu MS (in light red) is running a de-facto cluster in the north-west of Uganda, and another in the central-east, Jowa Ltd (blue) is concentrated in central and central-eastern Uganda. However, these patterns are neither universal, nor are the schemes clustered in a rational pre-planned way. Moreover, piped systems run by town councils, subcontracted individuals or by firms managing only one network are scattered throughout. Rational clustering could improve efficiency by reducing overheads created by geographic dispersion of schemes. The self-selection of operators into clusters suggests that considerable efficiency gains could be realized in this manner. Examining staff costs reveals average expenditures of around US$60-100 per staff month. While most companies pay around US$1 in staff costs per connection, POs seem to take different approaches to the trade-off between staff quality and quantity. Some POs such as Trandint pay relatively high wages but each staff has to 4 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems MAP 1: Distribution of Water Authorities and POS in Uganda (FY10-11) deal with a lot of connections, whereas others have a better of Water Development (DWD). The Water Act (1997) staff to connection ratio, but pay each staff less. empowers the Minister to “gazette” a Water Supply Area and appoint a Water Authority for it. The basic function of Institutional Framework the Water Authority as specified in the law is: The current institutional framework of small town water a) to provide water supply services for domestic, stock, supply in Uganda is set within a decentralized political horticultural, industrial, commercial, recreational, structure outlined in greater detail in the Appendix A. The environmental and other beneficial uses as is required regulatory and executive authority rests with the Ministry by the declaration establishing the authority or the of Water and Environment, represented by the Directorate performance contract; www.wsp.org 5 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Once in place, the Water Authority proceeds to set up an executive Water Supply and Sewerage Board (WSSB), which is entrusted with the infrastructure, negotiates a tariff with the operator (which then has to be cleared by the central MoWE and oversees the operation of water services. The WSSBs’ activities are financed through a fee of 5 percent of user water payments. While some WSSB choose to run their town water supply directly, typically a PO is hired. As outlined in the previous section, of the total 95 Water Authorities in existence in 2010-11, 83 had hired a PO, while 11 temporarily ran the systems directly and one system had a special private-public arrangement. Ten of the 105 small towns with piped system have yet to form their own Water Authority. In practice, the District Water Offices (DWO) — and the District Water and Sanitation Development Conditional Grants (DWSDCG) they control — are focused on rural areas and do not play a significant role in the institutional and contractual relationship chain that governs small town water supply, and that is illustrated in Figure 1. The described small town system is not in place in Kampala and other large towns, which are supplied by the national utility NWSC. In rural sub-counties, b) to manage the water resources entrusted to it; c) to provide and manage sewerage services as may be “the situation is less formalized; typically a user elected required by the declaration or performance contract; Water and Sanitation Committee (WSC) is responsible d) to give effect to any direction by the Minister relating for the management of the water supply system and to water or sewerage; and, a local individual is hired for the operation of the e) to do anything connected or incidental to the scheme.”12 above.10 Usually the Town Council is appointed as the Water Authority.11 The relationship between the Water Authority/ Tenders and Tariff setting Town Council and the Ministry is governed by a performance POs are chosen in a competitive tendering process contract, which specifies the detailed terms of reference and administered by the local WSSB and then sign a renewable service targets of the Water Authority. management contract. The contract duration has 10 Republic of Uganda. 1997. Water Act (Cap 152). Kampala: Republic of Uganda. 11 Recall that Kampala and all but one municipality are supplied by the national utility the NWSC, that is, not supplied through the Water Authority system like the town councils. In areas that are neither supplied by the NWSC, nor integrated into the Water Authority system, responsibility for water supply typically lies with more informal Water User Associations / Water and Sanitation Committees 12 Ministry of Water and Environment. 2008. Feasibility Review of the Umbrella Organisations Model. Directorate of Water Development (DWD). p.1 6 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Figure 1: Key Institutional Relationships in Small The tariff is set ahead of bidding, so that bids by potential Town Water Supply in Uganda operators can be evaluated based on the percentage of revenue demanded and the business plan. The MoWE has Ministry of Water and Environment (MoWE) developed a simple spreadsheet to assist the calculation of an appropriate tariff. These are based on historical production and operation costs along with allowances for possible MoWE gazettes Water Supply Area and appoints Water Authority (WA) planned measures for improving efficiency and cost levels, Performance Contract between MoWE and WA and subject to a cap of UGX2,500 to which exceptions are rarely granted. Proposed tariffs are forwarded to the Ministry for clearance. Crucially, at present tariffs are not Water Authority (Typically a Town Council) supposed to reflect capital investments, only O&M costs. appoints Water Supply and Sanitation Board (WSSB) Management contracts contain provisions that allow withholding of funds and termination of contracts in case WSSB may hire a Private Operator (PO) of nonperformance. However, these are rarely applied due Management Contract between WSSB and PO to capacity constraints on the side of the WSSBs, which are often struggling to effectively supervise POs, much less challenge performance quality and see through contractual Private Water Operator (PO) conflicts resulting in termination of a contract. Regulatory role of the Ministry of Water and Environment traditionally been three years, though after successful pilots To complement the executive and regulatory authority it is now slowly being shifted to five-year contracts. The of the MoWE as described above, a Regulation Unit has management contracts between the local WSSB and PO been established, provisionally within the Directorate of must be in line with the service obligations specified in the Water Development (DWD), but with the aim of creating performance contract between the Water Authority and the an independent regulatory authority in the near future Ministry. (however, the interim status has persisted for years now). Its purpose is to oversee the urban water and sanitation The management fee of the PO is set as a percentage of subsector, and with respect to small towns in particular revenue and arrived at through the tendering process to supervise the performance contracts with WSSBs, to administered at a local level. The fee is typically between review and approve tariffs in small towns, impose penalties 65-90 percent of revenue. This management fee includes and suggest solutions to substandard performance, review the agreed expenses necessary for running the scheme such business plans and promote pro-poor service delivery. On as staff salaries, (minor) repairs and energy costs. request, the unit also provides support to tendering processes Operators bidding for a system must also submit business in small towns. However, with only five technical staff and plans including planned investments (primarily new limited transport facilities, the unit is too small relative customer connections), though in practice these have to the scope of its tasks and has accumulated a backlog of proven hard to enforce. On average, the time that passes unresolved cases and complaints.13 between the publication requests for the expression of The Ministry provides further direct support to the day- interest and the actual signature of a PO contract has been to-day management of small town schemes by regularly more than nine months. training members of the WSSBs (the executive organs 13 Ministry of Water and Environment, 2010. Sector Performance Report 2012. Kampala: Republic of Uganda. pp.87-88 www.wsp.org 7 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems of the Water Authorities) and town engineers, to allow them to better carry out their supervisory duties. Due to the relatively high turnover of WSSB members, and the considerable skill gap between these and the operators, this remains an area of concern. Support Institutions The POs thus manage systems in a well-defined contractual framework. The institutional relationships and central role of the MoWE outlined above, however, do not fully describe the Ugandan PSP model, which is further complemented by a number of private, state- and donor-funded support institutions. These have emerged to provide additional capacity and assistance to local governments and private operators. In addition to support provided directly from MoWE units, the four most important support institutions are the Water and Sanitation Development Facilities (WSDF), the Umbrella Organizations and the APWO. The Water and Sanitation Development Facilities The WSDFs are the primary funding and implementation mechanism of the MoWE for major rehabilitations and new system constructions. The WSDFs are regionally organized, employing trained engineers and managers. Their key purpose is to compensate for the inadequate capacity of local governments to plan and implement major investments. Overall accounting responsibilities for the WSDF lies with the Ministry, but WSDF branches operate with a considerable degree of independence. however, is entirely through the Government of Uganda (GoU) and the Joint Partnership Fund (JPF) with small, The WSDF concept was piloted in the south-west of often in-kind (for example, land, labor) contributions by Uganda with major support from the Austrian Development the communities. The WSDF trains the Water Supply and Cooperation (ADC), and has now been expanded to Sanitation Boards (WSSBs) of newly constructed systems, three additional regions of the country (North, East and which in turn contract POs to manage them, or may Central). The original south-western WSDF is currently decide to run the smaller, less profitable systems under a implementing a budget of over US$25 million14 for a community operations and maintenance model. targeted 75 rural towns in the period 2009-13. Table 5 summarizes achievements so far and current activities. The WSDF model has been reviewed in a 2008 study which did raise some issues regarding the current model’s lack The WSDF network developments involve the private of clearly defined legal status, but highlighted the overall sector in contractor roles during construction. Funding, success of the WSDFs: 14 EUR17.5 million at an exchange rate of 1.45 15 Number of districts covered updated with SPR 2011, p.120. 8 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Association of Private Water Operators “The existing WSDF-SW model constitutes essentially The APWO is a lobby and support organization for a well-established implementation approach... The Uganda’s POs, advocating on the PO’s behalf relative to the approach combines strong involvement of LGs [local government and also supporting them with training. They governments] — in line with their mandate — with play a critical role in voicing concerns of POs. Over the technical support that ensures project quality and last few years, the organization has been heavily subsidized sustainability. Fiduciary risks are kept low by the through the European Water Facility and GIZ, with only presence of qualified staff and by the joint handling of about US$4,000 of its estimated annual costs of around procurement, contract management and supervision US$ 100,000 raised from member fees. issues by WSDF and LGs.”16 The three support institutions play a critical role by providing planning advice, construction finance, training and subsidized maintenance services without which the The Umbrella Organizations commercial viability of POs would likely be much reduced. The Umbrella Organizations are regional membership These support institutions underline the fact that the associations of the local WSSBs and small community Ugandan model is really one of private sector participation, managed systems. Though the members pay fees, the that is, one in which private companies play a key role, but umbrellas are heavily subsidized, with up to 95 percent of are both supported and circumscribed in their actions by a their budget financed by government and donor partners. host of regulations and institutions. Umbrella membership is voluntary, and many schemes have not joined up. The principal objective of the Umbrella The Planning and Budgeting Process in Organizations is to provide O&M back-up support, Uganda training, and other services such as the supervision of The national planning and budgeting process remains minor rehabilitation and extension works and water quality of major importance to small town water supply even as monitoring. POs are managing an increasing number of small-town Whereas WSDFs are primarily aimed at compensating for TABLE 6: OVERVIEW OF UMBRELLA ORGANIZATIONS local governments’ weakness in planning and implementing (AS OF 2011-2012) major engineering and construction tasks such as greenfield investments and rehabilitations, Umbrellas support local WSSBs and their private operators with maintenance and operation tasks. The Umbrella Organizations have been the subject of a study by the MoWE’s Directorate of Water Development. The study found that “O&M of water schemes has improved tremendously” through the umbrellas, and that the “benefits of operating an umbrella organizations model are far greater than the costs.”17 Though defending the Umbrella model, the report nevertheless points to the “bitter reality that there are not many options for long–term financing of Umbrella operations apart from government.”18 16 Hydrophil. 2008. Identification Study and Feasibility Assessment of Options to Establish a Water and Sanitation Development Facility (WSDF). p.37 17 Ministry of Water and Environment. 2008. Feasibility Review of the Umbrella Organisations Model of Operation and Maintenance of Small Towns and Rural Growth Centres’ Water and Sanitation Systems. Kampala: Directorate of Water Development. p.28. 18 Ibid., p.17. www.wsp.org 9 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems schemes. Public funds, channeled through vehicles such as Actual budget allocations are guided by these policies and the WSDFs and Umbrellas, constitute the major source of planning documents, but operationalized through the finance for capital investments and provide considerable Medium Term Expenditure Framework (MTEF) and the O&M support, so the national budgeting process is a national budget. The annual budgeting process is structured central piece of the small town PSP framework. as outlined in Figure 2. Allocations are informed by the basic principles of the 1999 The key bodies handling the allocation process at sector National Water Policy, and in particular its guiding statement level are the Water Policy Committee (WPC) and the Water of providing “some for all — rather than more for some.” and Environment Sector Working Group (WESWG). Sector planning and estimates of required investments At the district level, the District Water and Sanitation are given in the Strategic Sector Investment Plan (SSIP), Coordination Committees (DWSCC) coordinate activities, which was comprehensively updated in 2009, providing though their practical role with respect to the small town investment estimates with target setting for the years PSP system is limited as responsibility rests mostly with 2015, 2020, and 2035. These detailed sector requirement town-based Water Authorities and WSDFs. estimates are framed by the National Development Plan (NDP) which formulates Uganda’s medium-term (2010- The Water Policy Committee (WPC) was established by 15) development strategy, prioritizing between water and the 1997 Water Act and consists primarily of high-level other sectors.19 government and utility staff in the water sector, as well as Figure 2: Outline of Annual Ugandan Planning and Budgeting Process Key Planning Documents National Strategic Sector Development Investment Plan Plan (NDP) (SSIP) Information Budgeting Process National Budget Workshop sets indicative sector ceilings and budget guidelines October to December Line Ministries prepare sector Budget Framework Paper (BFP) and revised Medium Term Expenditure Framework (MTEF) allocations January to Cabinet and Parliament approve aggregate National BFP and MTEF March Ministry of Finance, Planning and Economic Development finalizes budget allocations / MTEF in correspondence with line ministries April to June Cabinet approves final budget 19 The NDP has replaced the Poverty Eradication Action Plan (PEAP) as the main planning document of the Government of Uganda. 20 In large towns, most funds are disbursed through the NWSC, whereas in rural water supply the main spending agencies are the districts via the Ministry of LG. 10 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems representatives from district level and the nongovernmental technical guidance for the sector. It also organizes the annual organization (NGO)/private sector. Their key function is GoU and Donor Joint Sector Reviews (JSRs) during which to advise the sector minister on water and sanitation policy, stakeholders meet to assess sector progress and discuss key legislation, and regulation. strategic policy issues. The Water and Environment Sector Working Group Once allocated, government and donor funds are channeled (WESWG) provides overall coordination of the sector. to small towns primarily through the MoWE’s Directorate It is chaired by the Permanent Secretary of the MoWE of Water Development, with the WSDFs emerging as key and meets at least once per quarter to provide policy and vehicles to disburse investment funds in particular.20 20 In large towns, most funds are disbursed through the NWSC, whereas in rural water supply the main spending agencies are the districts via the Ministry of LG. www.wsp.org 11 II. Status Quo: Current Access, Finance, and System Performance Current Access to Safe Water: Small towns 75 percent in large towns supplied by the national utility, Lag Behind but was only 54 percent in small towns.23 For urban areas The rapid population growth combined with a relative shift as a whole, safe water access was 66 percent.24 towards secondary urban areas has created considerable The higher urban coverage figures computed by the pressure on basic services in small towns. Uganda has long international Joint Monitoring Programme or JMP (WHO/ remained a relatively rural society, with only 14 percent UNICEF) are due to differences in methodology and of Uganda’s population living in urban areas even today. definition. The JMP figures rely exclusively on household This is now changing rapidly. Uganda’s current annual surveys and the JMP definition of coverage does not include urban growth rate of 5.9 percent is decidedly higher than a minimum distance between household and source. The that of the Sub-Saharan region as a whole (3.67 percent).21 government figures, on the other hand, are computed by Secondary urban areas are gaining in importance at extrapolating from known sources (for example, household Kampala’s expense. In 1960, more than 50 percent of connections, public pumps) based on assumptions about Uganda’s urban population lived in Kampala, today only the number of users, and only count a person as having approximately 35 percent do. access if s/he is within 1km (rural) or 0.2km (urban) from Recent statistics by the MoWE show that small towns have the source. a significantly lower access to improved water than large Water quality samples from small towns have revealed towns.22 Thus in 2011, average safe-water coverage stood at a declining compliance with standards, with only 63 percent of the sample meeting bacteriological water quality standards in 2012 (down from 97 percent in 2008).26 This illustrates that definitions that define “safe water” simply as access to piped water may fall short if the quality of the piped water supply is not in fact maintained at a high level. Ensuring compliance with water quality standards should thus be given more priority in Uganda. Targets for Small Town Safe Water Access Uganda’s national targets for access to safe water are spelled out in the National Development Plan (NDP) and Sector Performance Report and amount to a coverage rate of 100% 21 Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision and World Urbanization Prospects: The 2011 Revision Sunday, May 19, 2013; 1:54:59 PM; Average for 2005-10; Note that the annual rate of change of percentage urban (another measure of urbanization) is 2.69% annually for 2005-10 in Uganda, and 1.19% for Sub-Saharan Africa. 22 See below for precise definitions of “large” and “small” towns. 23 Note that the Strategic Investment Plan (SIP) cites a current coverage rate of 42 percent. However, preference has been given to the figures from the more recent Sector Performance Report 2011, p.136 24 Access in rural areas is given as 65 percent in the Ministry of Water and Environment, Sector Performance Report 2011, p.21 25 Implied by urban/rural population distribution and urban/rural access figures, value not actually given in SPR 2010. 26 Ministry of Water and Environment, 2010. Sector Performance Report 2012. Kampala, Republic of Uganda. p.112 12 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems in urban areas by 2014-15, including small towns.27 The Table 8: Estimated Funding Needs, Expenditure and Funding Gap (FY10–11) 2009 Strategic Sector Investment Plan (SSIP) recognized this official target as “Scenario A,” but to be realistic in face of “the present low level of funding” has also developed a less ambitious “Scenario B.” Under Scenario B, the coverage target for urban areas is to achieve 100 percent coverage by 2035, but only 80 percent for large urban areas and 65 percent for small towns by 2015.28 These national sector targets diverge from the international Millennium Development Goals (MDGs), which are defined as halving the percentage of the population without access to safe water in 1990 by 2015. Based on the household survey statistics compiled by the JMP, this would imply an overall water sector target of 72 percent by 2015.29 The MDGs do not officially set separate rural and urban targets, but the implied values of these would be 70 percent access in rural areas and 89 percent in urban areas. Due to a lack of baseline statistics for access in small towns in 1990, it is not possible to apply the MDG target methodology to small towns in Uganda. Estimated Investment Requirements The NDP which set the basic national targets provides some investment guidance, but these estimates are limited and now outdated, and do not specify financial requirements for small towns.30 The key source for a comprehensive estimate of investment requirements to reach national targets is the SSIP (2009). As Table 8 highlights, the public funding shortfall relative to SIP targets, even under the more realistic Scenario B, is at least US$54 million (UGX135 billion) for the water sector as a whole, of which US$37 million is in the urban sector, and US$18 million in small towns. These figures mean that the water and sanitation subsector is clearly underfunded The recent second Country Status Overview report for relative to the targets specified under both Scenario A and the Ugandan water and sanitation sector did not estimate B in the NDP and SSIP. specific funding requirements for small town water supply. Republic of Uganda. 2010. National Development Plan (2010-11-2014-15). Table 7.10, p.270; For rural areas, a target of 77 percent has been set for 2014-15. See: Ministry of 27 Water and Environment, Sector Performance Report 2010, p.xii 28 Ministry of Water and Environment. 2009. Strategic Sector Investment Plan for the Water and Sanitation Sector in Uganda, p.ix 29 The MDGs do not officially set separate rural and urban targets, but the implied values of these would be 70 percent access in rural areas and 89 percent in urban areas. 30 The above figures are described as necessary to finance “some of the projects that sectors are expected to carry out during the NDP period” (rather than all projects judged necessary to reach the cited targets). Republic of Uganda, National Development Plan (2010-11-2014-15), April 2010; p.385 www.wsp.org 13 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems However, its estimates for the total sector capital investment Instead, the declining budget is due to sector ceilings in deficit was similar at US$73 million annually, with an urban the MTEF, that is, a political decision to prioritize other capital investment deficit of US$38 million annually.31 sectors. Even if donors were to increase funds to the sector, these would be offset by a reduction in government funding. As the SSIP envisages a progressive increase of funding over The relatively low funding allocation to water is motivated the years, the under-funding is likely to get worse unless a by the government giving priority to sectors such as roads, more decisive effort to stock-up funds is made. The budget energy, health and education in the short- or medium-term. trend, however, has been in the opposite direction both in The sector ceiling for water and environment is as illustrated absolute and relative terms. On-budget resources in the by Figure 3. Private investment may be a way to exceed the water supply and sanitation subsector have fallen from over public finance ceiling. However, given the limited nature of US$80 million (UGX200 billion) in fiscal year 2003-04 current attempts to involve private finance in the Ugandan to US$66 million (UGX165 billion) at present — even water sector, this is unlikely to happen in the short or even without adjusting for inflation.32 Relative to the total GoU medium term. budget, the share of the WSS subsector has declined from 4.9 percent in 2004-05 to around 1.9 percent in 2010-11. Mechanisms of Small-Town Financing in Lack of implementation capacity does not seem to be a Uganda reason for the limited budget assignments as implementation Small-town water systems are funded through a variety performance has been generally good. According to the of mechanisms, but the single most important are the 2011 Sector Performance Report, absorption rates (that is, WSDF, which implement major small town infrastructure the ratio of actual expenditure to released funds) were above construction and rehabilitation, as well as sanitation 95 percent for both rural and urban subsectors. interventions (for example, Ecosan toilets). This is where the Figure 3: MTEF Proposed Sector Allocations over the Medium Term (UGX BN) Source: Ministry of Finance, Planning and Economic Development. 2009. National Budget Framework Paper. Table 2.4, p. 34 31 WSP. 2010. Water Supply and Sanitation in Uganda: Turning Finance into Services for 2015 and Beyond [CSO2]. Nairobi: WSP. p.10 32 Note that there are also US$24 million in WSS off-budget resources, of which US$17 million are from NWSC (donor and self-investment funds) and US$7 million from NGOs. No comparable number could be traced for 2003-4. Exchange rate at 2480 (UN Operational Rate, 30th June 2011). Not inflation adjusted. Includes Water for Production and Water Resource Management (which are excluded in Table 7!). 14 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems bulk of the government and donor capital for non-NWSC, Private Credit by Commercial Banks that is, small towns was concentrated both in FY09-10 and Private credit has played a marginal role in Uganda so far. FY10-11. Specifying the annual flows to WSDFs is difficult Ugandan banks have been reluctant to lend to POs except from the Ministerial Policy Statements, but these flows when approached with the backing of third parties such as were clearly above US$10 million in FY10-11 (also partly the World Bank or IFC. In the IFC supported Busembatia benefiting Rural Growth Centers). PPP, which included a GPOBA subsidy that lowered the operators default risk and was one of the first contracts Total tariffs and fees raised in the gazetted small towns are with a five year duration (rather than the normal three), estimated at around US$2 million (UGX5 billion),33 enough the Ugandan DFCU bank agreed to loan approximately to make a very significant contribution to operations and US$100,000 (UGX350,000,000) at 19 percent interest. maintenance, but still far short of the sums necessary to Another operator managed to obtain a loan in a World Bank- expand existing networks and build new ones. The average GPOBA supported project for the equivalent of US$20,000 tariff level in FY10-11 was just below UGX2,000 (US$0.8) (UGX50,000,000) from Barclays Bank of Uganda for two per cubic meter, with a range from UGX750 (US$0.3) to years with an annual interest rate of 27 percent. Barclays has UGX4,704 (US$1.9).34 also worked with other POs to provide limited financing Even with these tariff payments, however, O&M is still totaling at least $40,000 (UGX100,000,000) under its subsidized in some small town schemes through so-called Small and Medium Enterprises umbrella using instruments O&M grants (sometimes confusingly called conditional such as small loans, contract financing, invoice discounting, grants, even though these are separate from the District overdrafts and letters of credit.36 Water and Sanitation Development Conditional Grants, In general, however, such examples are still rare and at a which go to the district level authorities for general water small scale. Banks are reluctant to work with companies and sanitation expenditures). The O&M grants are allocated dealing with the public sector fearing delays in payment by the MoWE in three categories: energy subsidies, new (for example, because the joint escrow account of private connections and “system specific” emergency funds. For operators is partly controlled by the town council). FY10-11, the total amount of conditional grant subsidies Furthermore, the lack of asset ownership by operators and was approximately US$600,000 (UGX1.5 billion).35 the limited duration of contracts undermine the credibility More difficult to quantify are indirect subsidies through with which operators can commit future revenue streams training, repairs and other technical assistance provided towards repaying loans. Limited monitoring of PO by the support institutions, in particular, the Umbrella operations and often poor record keeping pose additional Organizations and the APWO. These organizations are problems. heavily subsidized: the APWO has been almost entirely To counter such structural issues until reforms address donor funded, and the Umbrellas receive up to 90 percent them, and to normalize the use of private credit in the of funds from GoU and donors (the rest from member small town water sector, a dedicated, subsidized lending contributions). Though rising, the Umbrella budgets have program may be critical. It could make a big difference in been below US$1,000,000 and APWO’s budget has been a situation where many banks are reluctant but interested. around US$100,000 annually. In an IFC-commissioned Deloitte study, only three out of 12 banks outright declined interest in working with POs in the current PSP framework, while others indicated their 33 Ministry of Water and Environment, Private Operator Performance Reports, extrapolated from reported average monthly values. 34 The upper bound exceeds the UGX2,500 cap because the Ministry allowed higher tariffs in some special cases with very high production costs. 35 Ministry of Water and Environment. 2011. Sector Performance Report 2011. Kampala: Republic of Uganda. p.16 36 Deloitte. 2009. Assessment of Private Water Operator Ability to Expand Service Delivery. IFC. p.58 www.wsp.org 15 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems willingness to provide short-term working-capital loans subsidies for infrastructure construction, the OBA approach at interest rates of between 18-27 percent per annum, transferred the risk to the PO because subsidy payments especially if backed by outside institutions.37 Given limited compensating for private prefinancing were conditional on public resources, and the sector ceilings in place, pursuing actual performance. Secondly, investments were not 100 a greater use of private finance in well-performing towns percent subsidized in all cases, that is, private investments would be advisable. did make a net contribution. The IFC and GPOBA Pilots: New Transmission The necessity to prefinance led POs to seek out private Mechanisms sources of credit. As described in the preceding section, In 2005, the MoWE cooperated with the GPOBA to with the involvement of subsidies from international pilot a new, output-based aid model for greenfield small- institutions, the longer contract period, the higher fee town networks (design, build and operate) as well as the percentage and more flexible tariffs, at least two operators operation of selected existing brownfield small town managed to obtain a significant bank loan. Even in these schemes. Contracts for nine pilot towns were signed in special circumstances of the GPOBA pilots, however, 2008-9. In addition to this first output-based aid pilot, the commercial loans were difficult to obtain for other POs IFC in 2007 signed a mandate to implement the Uganda who reverted to balance sheet financing and pushing their Small Scale Infrastructure Provider Water Program. In suppliers for prefinancing. This illustrates the challenges of June 2010, the IFC awarded the first contract for the town expanding the role of private credit in the Ugandan water of Busembatia to a private contractor, with the GPOBA sector in general, where conditions with shorter contracts, contributing the capital investment costs for the project. less supervision, less flexible tariffs and lower fees are considerably less favorable for obtaining private credit. In both cases, the basic idea was to increase financial participation of private actors and to incentivize good While a thorough review of the GPOBA pilots is still performance by making reimbursement dependent on outstanding, the contracted POs were still operating in outputs. In line with this goal, the contracts between all towns in 2010-11. An interim assessment of the first operators and Water Authorities differed from the standard GPOBA pilot project found significant efficiency gains, model. Contract duration was extended to five years in in particular, lower overall subsidies per new person given duration instead of the regular three, typically also allowing access, better payment efficiency, and lower transaction operators a higher percentage of revenues to compensate costs. Some of these effects, however, may be due to the for their prefinancing risk and a tariff level that priced in high-profile technical support by international partners and some of the investment costs (usually tariffs are set only to the involvement of a private fiduciary agent. cover O&M). The POs were also partially reimbursed for In spite of a generally favorable perception of the pilots, prefinanced investments after targeted yard-tap and public a scale-up has not been implemented so far. For this to stand-post connection targets were met and independently happen, POs would need better access to private finance verified. For the first pilot, the Ministry of Finance provided than is currently the case, a sustainable equivalent to the an exemption from the sector ceiling and allowed a private private verification agent would have to be found, and fiduciary agent (PricewaterhouseCoopers) to check quality transaction support to local authorities and POs would and quantity of outputs. need to increase. These issues touch on the key reforms While the standard framework of a chain of contractual which are discussed in greater detail in the final sections responsibility from Ministry to Water Authorities (with a of this working paper. If these reforms were implemented, performance contract) and from WSSBs to the PO (with a OBA transmission mechanisms could make a valuable management contract) was left in place, there are two key contribution to improve the efficiency and risk profile of differences: Instead of the usual 100 percent upfront public PO management and investments. Until then, however, 37 Ibid. 16 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems it will remain an interesting pilot with limited broader With the exception of the small-town O&M grants, the applicability. local-government administered water sector funds are almost entirely classified and spent on rural rather than urban Sources and Flows of Public Funding projects, that is, boreholes, protected springs, shallow wells The FY10-11 water and sanitation sub-sector budget of and the occasional piped gravity flow system.42 Thus, the UGX164.9 billion (US$66.5 million) was pledged to funds benefiting small towns are predominantly disbursed 70.5 percent from GoU sources, and 29.5 percent direct by the center, that is, over 80 percent of funds for “Urban donor contributions.38 The donor contributions include all Water Supply and Sanitation” (excluding the NWSC) are project-earmarked donor funding as well as the (nominally) under the control of the MoWE. earmarked budget support provided through the Poverty Action Fund.39 However, non-earmarked donor budget Analysis of Available PSP Performance Data support to the GoU is included under GoU sources. Thus Only 15 systems reported performance data in the first fiscal in total, over 30 percent of the WSS subsector funding is year with records (2001-02), which has increased to 88 externally financed if nonearmarked budget support and systems in 2010-11. Moreover, even for the 15 first systems, loans were taken into account. This is an improvement over some variables were not reported in the beginning. the period before 2007-08, however, when the percentage of donor funding was consistently above 50 percent.40 In To track performance over time, it is important to analyze this bigger sector picture, revenues from tariffs and fees of the same set of systems to avoid changes in variables solely small-towns were significant but overall minor at approx. due to new systems starting to report (for example, “water US$2 million in fiscal year FY10-11. supplied” suddenly spiking because 10 more systems start reporting). For 19 towns, we can track key variables for the Of the total subsector budget in fiscal year FY10- nine years between 2002-3 and 2010-11.43 This means we 11, 63.2 percent were for programs managed by the can analyze performance from shortly after these towns central government (including the WSDFs, which enjoy were made gazetted water authorities with POs until today. considerable independence in practice). The remaining We may expect a gradual increase of performance over the funds were flowing directly to local governments in the years if, indeed, the POs and the associated management form of conditional grants. Of these grants, over 97 percent and support model was a success. were in the form of DWSDCG and 2.6 percent (that is, UGX1.5 billion) for O&M grants for small towns.41 These As can be seen in Table 9, the number of active connections O&M grants have been kept at the current level for the last has almost tripled in these 19 towns since 2010-11. From decade in a deliberate policy to limit subsidies to existing 4,883 (with a mean of 257) it has risen to over 13,000 (and systems. a mean of over 700). We do not have population figures for the complete set of 19 towns, but UNICEF estimates 38 Ministry of Water and Environment, 2010, Sector Performance Report 2010, p.36; Note that in the Ministerial Policy Statement 2010-11, the total FY09-10 approved budget of the WSS subsector of 154.635 is broken down into 40.3477 donor contributions, and 114.287bn GoU. All the donor contribution is to the MoWE budget, and zero to LG budget. (p.28/p.347). In other words, there’s a roughly UGX7bn difference. 39 As outlined in the DfID “Evaluation of General Budget Support – Uganda” country report (p.23), notional earmarking “involves justifying the allocation of budget support against pre-agreed budget lines, but disbursement is against a pre-agreed schedule, and not a reimbursement of actual expenditures”. By contrast, in “real earmarking” spending on pre-agreed budget lines precedes the disbursement of sector budget support” i.e. the budget support is a reimbursement. 40 Ministry of Water and Environment. 2010, Sector Performance Report 2010. p.37 41 Ministry of Water and Environment. 2011, Sector Performance Report 2011. p.19 42 Ministry of Water and Environment. 2011. Ministerial Policy Statement 2010-11. p.351: Most LG funds budgeted for rural water supply and sanitation, see Table V3.1 The 19 towns with data for 9 years are: Budadiri, Bugiri, Busembatia, Busia, Buwenge, Kalangala, Kaliro, Kalisizo, Kamuli, Katwe-Kabatoro, Kayunga, Kitgum, Lyantonde, 43 Moyo, Nkokonjeru, Ntungamo, Pallisa, Rakai, Rukungiri. www.wsp.org 17 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems the annual growth rate of urban population at 4.2 percent supplying less water in 2010-11 than it did in 2002-03. since 2000.44 For the period under consideration, this Available data indicate that this is generally not due to would imply an estimated population growth of around 45 systems reaching their capacity constraints (in terms of percent, that is, active connections expanded much faster source extraction, pumping, and so on). than population given the overall increase of 159 percent. This indicates that privately managed systems not only kept While average reported system capacity utilization has up with population growth, but expanded access (with risen from 44 percent to almost 70 percent over the period, contributing help of state subsidies). systems are only operating at full capacity in three cases.45 A possible explanation may lie in a shift towards more low- Given that capital investments such as pipe extensions are volume private connections at the expense of high-volume still largely funded through subsidies (conditional grants), public standposts. However, due to the lack of connection- the steady expansion is, to a large extent a result of state type data for the first half of the 2000s, this cannot be support, rather than just private initiative. The percentage ascertained. of active connections relative to the total number of connections has remained fairly stable, with around 20 Interestingly, the percentage of nonrevenue water has percent of existing connections not being active, usually actually risen over the years in the 19 examined systems. due to nonpayment or damage. One may speculate that the fast expansion of pipes and connections has led to more opportunities for leaks and The amount of water supplied has also risen and reached illegal connections. Future auditors should keep in mind, almost 110,000m3 per month across the 19 selected however, that an alternative explanation is water paid for systems (around 5,700m3 per system per month on but not reported as sold by operators to retain the full average). However, the 78 percent increase since 2000-03 amount of revenue rather than just the official percentage. is considerably less than the expansion in the number of The relatively high number of connections reported as connections. This means each connection is on average inactive may also be reviewed in this light. Table 9: Total Number of Connections in Set of 19 Towns 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 15 19 19 19 19 19 19 19 19 19 Connections 3,130 4,883 5,742 6,728 7,872 8,327 9,519 11,477 11,596 13,359 Active 2,840 4,193 4,589 5,402 6,236 6,487 7,854 8,237 9,051 10,858 % active 91% 86% 80% 80% 79% 78% 83% 72% 78% 81% Increase na na 396 813 834 251 1,367 383 814 1,807 44 www.unicef.org/infobycountry/uganda_statistics.html [September 20th,2011] 45 System capacity utilization is defined as “Average daily volume of water supplied [in m3/day] in the peak month during the assessment period over maximum daily system capacity”. Note that the definition does not consider daily peak supply. 18 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Table 10: Water Supplied and Nonrevenue Water 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 14 19 19 19 19 19 19 19 19 19 Water supply 2,793 60,646 59,392 70,990 68,922 64,959 83,087 92,599 100,0531 108,238 (monthly, m3) Water sold 2,182 48,307 52,378 56,411 55,073 51,005 65,859 70,469 77,580 79,497 (monthly, m3) NRW (%) 22% 20% 12% 21% 20% 21% 21% 24% 23% 27% Note: These are totals for all 19 systems (average month). The most dramatic improvements have occurred in the approximately doubled, bill collections have almost tripled, variables that may be expected to be most directly impacted leading to a rise of collection efficiency from around 70 by a switch to POs driven by a profit incentive: bills issued percent to 90 percent in 2010-11. and collection efficiency. While the value of bills issued has Table 11: Collection Efficiency UGX ‘000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 13 19 19 19 19 14 19 19 19 19 Bill value 29,752 59,960 76,171 72,577 62,503 49,077 75,777 89,955 111,710 123,998 (monthly) Collections 21,104 42,687 48,997 56,846 53,322 41,237 65,005 78,029 89,949 111,497 (monthly, m3) Collection 71% 71% 64% 78% 85% 84% 86% 87% 81% 90% efficiency It should be noted that in addition to the pressure brought make the idea of paying for water services more acceptable on bill payers by operators motivated by profit incentive, (the key strategy being to emphasize that the service of the government has also carried out local campaigns to delivering clean water is charged for, not the water itself ). Table 12: Average Production Costs and Selling Rates 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 1 8 9 10 13 12 19 19 19 19 Cost per m3 (UGX) 932 661 1,267 1,068 939 937 859 851 893 1,198 Average tariff (m ) 3 1,170 991 1,282 1,284 1,050 1,147 1,151 1,277 1,440 1,560 Data for the cost per cubic meter sold (not counting costs of 2004-05. For these 10 schemes, nominal tariffs rose by 10 capital investments) unfortunately only go back to 2007-08 percent in five years, but strong inflation more than offset for the full dataset, and for 10 systems, we have data since this nominal rise in tariffs and resulted in a 33 percent decline www.wsp.org 19 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems in real prices. Thus water tariffs are considerably lower today decreased between 2004-05 and 2010-11. Moreover, than they were five or 10 years ago in real terms. given that system operation involves certain fixed-costs, compensating for inflation through cost savings is certainly Operators seem to have reacted with cost-saving measures, not a productive long-term strategy as it will undermine the achieving a decline in real costs to offset the decline in quality of O&M. real tariffs. However, overall profit margins nevertheless Table 13: Development of Tariffs and Inflation, 10 Systems 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 10 10 10 10 10 10 10 Cost per m (UGX) 3 1,068 1,017 872 900 806 756 1,068 Average tariff per m3 (UGX) 1,284 1,070 1,083 1,151 1,195 1,272 1,408 Average Tariff (2004 prices, UGX) 1,284 987 930 932 863 813 866 Annual inflation (%) * 3.7% 8.4% 7.3% 6.1% 12.1% 13% 4% * Data source is DDP World Bank, annual % consumer price index (FP.CPI.TOTL.ZG), multiplied over the period. The analysis of overall costs and revenues is unfortunately revenues. However, given the positive operational balance, also hampered by a lack of full data in the early 2000s. these core systems may be able to repay private loans if they The basic story the available numbers tell, however, is the had access (which is hampered for a number of reasons, following: Since the early 2000s, the systems examined here such as lack of precedence and asset ownership and short seem to have slowly edged towards a positive operational contracts). It should be noted that a positive operational balance, whereby bill and fee revenues cover at least balance implies spare funds in addition to operator profits operational costs (including minor repairs). However, capital which are included in the management fee and thus “cost investments such as pipe extensions, which are critical in of operation.” Theoretically, these private profits are also view of the rapidly growing population, are not covered by available as investment capital. Table 14: Costs and Revenues in Examined Systems 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 No. of towns 1 8 9 10 13 12 19 19 19 19 Cost of operations 2,029 10,901 23,033 38,483 45,874 36,304 56,599 59,957 69,316 95,223 (UGX ‘000)* Total expenditure na na na na na na 70,386 90,901 107,337 144,376 (UGX ‘000)** Revenue (UGX 7,045 15,783 18,119 35,032 44,559 38,730 66,089 81,198 96,428 115,603 ‘000) *** % costs funded by 347% 145% 79% 91% 97% 107% 117% 135% 139% 121% revenue % expenditure na na na na na na 94% 89% 90% 80% funded by revenue * Excluding capital investments ** Including capital investments *** Excluding grants 20 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Cross-sectional Analysis of Gazetted systems Firstly, having a PO (private) was shown to have a highly in 2010–11 significant positive effect on the operational balance. Since In fiscal year 2010-11, 88 systems submitted complete collection efficiency, electrical costs, staff numbers, system performance reports for at least some months of the year. size, metering ratio and nonrevenue water are all controlled This fairly large sample of small town systems has been used for, this potentially captures a general “efficiency bonus” for a cross-sectional analysis. associated with private management (for example, less wasteful spending). It should be noted that for POs, the The descriptive statistics for these 88 systems in 2010-11 operational balance is already net of profits and all fees. broadly confirm the results from the examination of the 19 systems since 2002. Thus, the operational balance However, this finding has to be qualified: 11 out of the 17 (revenues without grants minus operational costs excluding currently nonprivately run schemes have had POs before. capital investments) is positive for the mean system; In a few cases the negative impact of public management however, this turns very strongly into the negative once may be an illusion, as the schemes were only taken over by capital investments are factored in (overall surplus without the public for a short time after private (mis)management. conditional grants). The latter reflects the fact that contracts However, ceteris paribus and given the current data, statistical and tariffs are designed to cover only O&M while major analysis does suggest that POs manage schemes at least as or rehabilitations and investments still remain an almost more efficiently than communal approaches on average. entirely publicly funded affair. Collection efficiency was Further confirmation of this result with additional data also close to 90 percent and nonrevenue water around 20 is necessary. A variable representing the time since a percent of production. Details may be taken from Table 1. system has had a PO was not significant, that is, there is In the full FY10-11 sample, active connections (with a no significant positive effect associated with having been mean just below 400) and water supplied (with a mean of operated privately for a longer time. around 4,000 m3 per month) are considerably below the The second variable with a significant positive impact on mean values of the 19 systems examined above, which operational balance is the difference between selling rate makes sense if one considers that these 19 systems were and production cost of a cubic meter (ratedif ). Though the gazetted first, that is, likely already somewhat larger and effect is relatively small in size, it illustrates that pushing then systematically developed for a longer time than systems down costs and increasing rates will improve operational that were gazetted more recently. balance. Collection efficiency was somewhat lower for non-PO Thirdly, the number of active connections (act_con) is a run schemes (84 percent mean), and even lower for the significant positive determinant of operational balance. This subset that had never been run by a PO (74 percent mean). is a strong pointer towards the importance of economies However, although it is tempting to use this as evidence of scale – bigger systems have it easier turning a positive that POs drive bill collection improvements, the sample operational balance. The result implies that, on average and of towns that had never been run privately is too small to ceteris paribus, an additional 100 active connections will lead ascertain the statistical significance of the difference. This is, to an increase of over US$55 in the monthly operational thus, only circumstantial evidence. balance. This may not sound much, but it is significant in an environment where the monthly operational balance Regression Analysis for Gazetted systems of the average system is only approximately US$99 Regression analysis can show which factors significantly (UGX245,378) in the positive. determined whether a gazetted small-town system turned a positive operational balance or not. Over 67 percent of This finding provides hard evidence for the anecdotal the variation in the operational balance could be explained knowledge that smaller schemes are less suitable for with the chosen variables (R2). Six individual variables commercial management. In the absence of clustering, this were found to have a significant effect on the operational may circumscribe further expansion of the current model balance. www.wsp.org 21 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems in Uganda, given that the larger schemes are already either authorities in charge of tendering system contracts make privately managed or under control of the national utility. them susceptible to exaggerated claims of operational costs to justify high fee percentages (often re–negotiated after a A further strong and significant determinant is collection low bid was first used to win the actual contract). In other efficiency (col_eff): In the present sample of gazetted words, the higher the management fee percentage, the less systems, a 10 percent increase in collection efficiency would money is available in jointly administered escrow accounts, on average lead to an increase in the monthly operational and the more likely the operational balance to dip into the balance of US$76 (UGX189,644). Given the association negative as revenues are creamed off by the operator rather of collection efficiency increases with private management, than used for operational expenses or investments. this reinforces the evidence for a positive impact of PSP. The cost of electricity per cubic meter of water is also Two variables have a significant negative effect: On the one significant, however, not in the expected direction. This can hand, having to treat water chemically (chemdummy) has be explained by the fact that the direct (negative) cost effect a significant negative impact on the operational balance. of electricity is already captured by the variable ratedif, This simply shows that systems with sources that require to which is the smaller the higher production costs. It is likely be treated chemically to be drinkable have additional costs that the significant positive effect of ecost2 indicates some and a harder time breaking even. A system that is treating significant variation of operational balance on top of the its water chemically on average has an operational balance already accounted for direct electricity cost effects. that is US$195 lower. Neither the number of staff, nor the percentage of nonrevenue Finally, the management fee percentage has a significant water has a significant effect on the operational balance. negative effect. In the Ugandan system, management fees With respect to staff numbers, the effect of additional staff is are negotiated as a percentage of total revenues. The fees likely to be ambiguous: on the one hand, additional staff is a are then supposed to cover operational costs including cost factor, and overstaffing a classic reason for inefficiency. staff and profits. The management fees are paid out of an On the other hand, well-trained capable staff is necessary to escrow account that receives revenues, once a standard 5 oversee the effective operation and revenue collection of a percent of collections is subtracted as water board fee. The complex small town water system. result obtained here suggested that systems in which the PO negotiated a higher percentage of takings as fees have a Comparison to Non-gazetted systems lower operational balance on average. Out of the hundreds of non-gazetted piped schemes outside the PSP model, approximately 70 which are members of The causality behind this effect may be ascribed to two the Umbrella Organizations reported limited performance effects: The first explanation may be that operators in statistics in fiscal year 2009-10. Specifically, the number of more difficult, less profitable systems negotiate a higher total connections, system capacity, water supplied and sold fee percentage as risk compensation. However, correlations (and thus nonrevenue water), total revenue and expenditure. between fee percentage and indicators of likely system This allows at least a brief comparison with the figures of profitability (number of connections, profit margin per gazetted schemes discussed above. cubic meter, functionality) are all positive. This indicates that higher management fees are associated with systems As may be expected, the average population of the towns that are easier to turn a profit on, and points away from the with nongazetted systems (8,900) is less than half that of the first hypothesis. towns with gazetted systems (20,160); the average number of total connections is only 90, whereas it is over 460 for the The second explanation suggests that rational POs try gazetted schemes. The percentage of nonrevenue water is 34 to take as much profit as possible by maximizing their percentage of revenue even if this leads to excessive profits percent and thus considerably above the less than 20 percent at the expense of the operational balance of the system. average in gazetted schemes. The average nongazetted scheme Inadequate supervision and assessment capacity by local also reports a positive operational surplus, but lower than 22 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Table 15: Robust Regression of Operational Balance on Explanatory Variables Linear regression (robust) Number of obs = 70 F( 10, 59) = 9.84 Prob > F = 0.0000 R-squared = 0.6774 Root MSE = 805.19 Robust balop Coef. Std. Err. t P>|t| [95% Conf. Interval] staff 55.22314 35.63418 1.55 0.127 -16.0807 126.527 ratedif .3073889 .1127063 2.73 0.008 .0818641 .5329137 meter_r -636.8445 541.5891 -1.18 0.244 -1720.562 446.8727 act_con 1.371073 .403987 3.39 0.001 .5626973 2.179449 col_eff 1894.644 844.0669 2.24 0.029 205.67 3583.618 ecost2 .6339405 .1695451 3.74 0.000 .2946815 .9731994 nrw 15.77033 16.23392 0.97 0.335 -16.71367 48.25433 private 1702.967 542.9529 3.14 0.003 616.5207 2789.413 chemdummy -485.0299 180.1013 -2.69 0.009 -845.4118 -124.6479 mgmfee -28.28829 7.020755 -4.03 0.000 -42.33679 -14.2398 _cons -1626.882 689.1052 -2.36 0.022 -3005.778 -247.9853 in the gazetted schemes. No data are available on capital of the schemes (for example, size) make turning a profit investment costs or any other performance variables. more difficult than is the case in the current set of gazetted systems. This will increase the pressure to reform the current What this shows is that schemes that remain outside the model, for instance, by improving contract design, carrying model of gazetted water authorities are on average smaller out better auditing and, in the long-term, clustering systems and less well performing than those already gazetted. While together to attain better economies of scale. this is partly because gazetted schemes have generally received more attention and investment, and may have had better The Ugandan PSP model has evolved into a complex and, management, the difference in population indicates that by many measures, successful system. There are, however, the primary reason is simply that bigger schemes in bigger still considerable challenges and thus scope to improve towns were the first that were chosen for the PO model. current arrangements. The most important are considered As the PO model is expanded to more systems, it is clearly in this section. entering territory where the basic structural characteristics www.wsp.org 23 III. Remaining Challenges and Future Reforms Capital Investments: Raising More Funds In Uganda, capital investments in small town water supply Box 1: Maji ni Maisha: Private finance for are primarily carried out by the public sector. Public funds, town water systems however, fall significantly short of what is needed according Maji ni Maisha worked with K-Rep Bank and the to the government’s own sector investment plan (Table prospective asset owners (i.e. Community Water Projects) 8). As outlined in Figure 3, this has been the result of a to develop a targeted and standardized lending project conscious political decision about medium-term priorities for small-town water systems. Using dedicated subsidies among sectors. Raising significantly more public finance for of up to 40 percent to lower risk, and considerable small-town water supply investments will require political outreach efforts to convince and support both the bank initiative to increase the profile and sector ceiling of the and the communities, the Maji ni Maisha program has water sector in the budgeting process. made loans to over 10 water projects for up to five years and up to over US$100,000 per loan with interest rates of Beyond the public purse, private finance offers a possible approximately 16-18 percent. source of funds that has not been tapped at scale so far. The scheme is now being expanded, targeting over POs have not been well positioned to obtain private finance 55 additional communities. The K-Rep Maji ni Maisha because lack of asset ownership and short-term contracts project in Kenya has demonstrated that small piped constrain their ability to guarantee revenue generated by water projects can successfully receive private loans at water systems beyond the end of their contracts or, indeed, competitive rates. A similar special lending program could a possible premature cancellation. What is more, short be adapted to the Ugandan context, working with Water contract durations also undercut the incentive of POs Authorities, POs and the WSDF support institutions. themselves to make investments that would only pay off in the medium- or long-term. These issues are compounded by the current lack of regular audits and high quality book- keeping, which further undercut the case of POs aiming to convince private creditors to provide loans. registers, an empirical case for investments will be harder If private financing is to be scaled up while other reforms to make; without tariff reform, uncontrolled inflation that are still outstanding, it may require a specially designed erodes real prices will make loans high risk and repayment program to counter some of the structural problems in the difficult; without clustering, smaller systems that are not current framework (for example, short contracts, and so efficient on their own may never benefit from private credit on), facilitate the credit-process for POs and give lenders and many small loans spread over multiple operators may more confidence to loan to the sector. In this respect, the be required where otherwise one larger loan to one PO Kenyan Maji ni Maisha GPOBA project may provide would suffice. inspiration for Uganda. Improved Regulatory Control and Expanded While a special lending vehicle may expand the use of private Technical Support credit, in the medium term private loans can only become a A recent report by the Water Integrity Network, WSP substantial and sustainable part of small-town water system and Transparency International found that “corruption investments if the other reform challenges outlined in this is pervasive in the Ugandan water sector” — both grand section are also addressed: without better performance corruption during procurement processes, and petty reporting and auditing, banks will not have the confidence corruption during commercial operations. POs reported to make loans; without at least five-year contracts, loans will that bribes and kickbacks are common and generally up be less attractive and more difficult to repay; without asset 24 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems to 10 percent of contract value.46 The recent 2012 Sector professionalizing and training operators, and should also Performance Report by the MoWE states that: receive further support, though with the aim of eventual financial independence. “There is lack of transparency during the A particular case of concern is the existing system procurement process of Private Water Operators. performance reporting, which is crucial to assess whether Undoubtedly, the process is characterized with POs are providing a satisfactory service in line with their limited levels of transparency, high levels of contracts. More regular verification is necessary, at least corruption and delays.”47 on a spot-check basis. This should be done at the center as local WSSBs may not always be incentivized to report irregularities. To effectively counter this situation will require greater investments in regulatory control and technical support, At present, and in spite of some control by local WSSBs both at central and local level. At central level, the and sporadic reviews by the existing regulation unit, provisional regulatory unit currently within the Directorate performance data are not regularly and comprehensively of Water Development of the MoWE should finally be verified. turned into an independent regulator that is appropriately staffed and funded and has clearly defined directive powers Auditing Reform: Three Necessary Changes (for example, to enforce fines after audits). After years of Financial auditing is a subset of regulatory control that is planning, internal discussion on how to best implement so important as to require specific emphasis here. Three such a regulator should now be swiftly concluded. challenges need to be addressed with respect to the financial auditing of small-town water systems: lack of quality, lack The counterpart to more central regulation is additional of regularity, and lack of consequences. technical support at local level. In many locations, WSSBs need more help to supervise POs from day-to-day. As a At present, there is no functioning system of regular, recent report reviewing Kisoro and Kitgum systems found, quality auditing of small-town water supply finances POs are “becoming increasingly more knowledgeable and performance. Annual audits by the Auditor General than WSSBs,” thus reducing the capacity of the WSSBs cover only conditional grants but not the bulk of revenue to control the operator. As the report notes, this “seems to generated and used. Some schemes carry out internal come from the wholesale changes made in the composition audits, but there is no recognized minimum qualification or of the boards [after elections] … New members take time standards for such internal audits where they take place, and to learn their responsibilities and rights let alone how to their independence is inherently compromised given that enforce them, even after training (usually done by DWD the town council is itself directly involved in administering or Umbrella)”.48 The low capacity of WSSBs means that water system finances. Umbrellas also carry out audits, but the first line of control is weak, making the task of central these are irregular, voluntary, and do not apply at all for regulators much more difficult. schemes that are not members. Given that the institutions to provide local technical In practice, there is thus no system of regular financial support are already in place in the form of Umbrellas, these auditing by an independent, qualified auditor. Even should be systematically strengthened and their mandate worse, the audits that are implemented have barely any expanded beyond O&M support to training WSSBs consequences. Umbrella audits are purely advisory and in regulatory tasks. The APWO is playing a key role in their results can simply be disregarded by operators and 46 WIN-S, WSP and Transparency International. 2009. Baseline Survey on Integrity in the Uganda Water Supply and Sanitation Sector. p.139 47 Ministry of Water and Environment. 2011. Sector Performance Report 2012. p.212 48 COWI / Austrian Development Cooperation. 2009. Evaluation of Water Supply and Sanitation Projects for Kisoro and Kitgum Towns. p.85 www.wsp.org 25 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems town-boards. Likewise, internal audits can be disregarded Reliable asset registries are also a critical precondition for with no mandatory consequences. Auditor General audits other suggested reforms. For instance, private financing, only affect conditional grants, which may be withheld as a for example, for system expansions will need to build a consequence, but are usually only a fraction of total revenue clear, empirical case for what is needed and how much it and thus provide only limited leverage. Even though a list will cost, which require full knowledge of asset conditions. of possible sanctions has been developed and submitted to The German technical assistance agency GIZ is currently the MoWE, it has not been effectively operationalized so undertaking an asset registry exercise in selected systems. far. Lack of effective auditing not only poses a risk to WSSB This effort should receive further support to expand it to all and citizens paying operators, but are a key constraint on small-town piped water systems. commercial lending. Tariff Reform: Indexing the Cost of Water to The three necessary improvements to accountability are Inflation thus to implement audits (a) with more independent, PSP is often opposed on the grounds that private tariff qualified staff; (b) on a regular basis; and (c) with mandatory setting would make safe water unaffordable to the poor. consequences. Better auditing of private operators and local While the introduction of the Ugandan PSP model has authorities, who will always have an incentive to maximize been accompanied by an introduction of paid service to their takings, is absolutely crucial. ensure more sustainable maintenance, the available data If capacity constraints prevent annual auditing of all schemes, show that prices have not tended to increase over time in these should be phased in by starting with selective high- real terms since. profile audits, eventually moving towards greater regularity. Indeed, the well-controlled system of negotiating the water Alongside the upgrading of internal auditing capacity, the tariff at local level with mandatory Ministry approval and Ministry and its partners should consider contracting a a tariff cap of UGX2,500 have put considerable downward reputable external company for the first of these audits in pressure on the real price of water. As outlined in the order to establish a high-quality precedent, with guidelines performance analysis above, in real terms water tariffs tend and procedures to follow subsequently. to be lower today than they were five or 10 years ago. POs Furthermore, the Ministry (or, once established, the new have reacted with cost savings to compensate for inflation, regulator) should enforce a set of mandatory consequences but uncontrolled erosion of revenues through inflation of audit results. Local WSSBs and POs should be required to undermines confidence in contracts and is a long-term at least discuss the Ministry audit reports and submit formal threat to proper system maintenance. answers with respect to any inefficiencies or irregularities The business plan process that includes the possibility of raised. Serious and not remedied transgressions by POs tariff reviews has proven a somewhat blunt instrument should also impact their ability to bid for new contracts. against real price erosion through inflation, not least because local political actors face strong popular pressures Improving System Data by Building up Asset against price increases even if just to keep up with inflation. Registries To avoid this, new inflation indexed business plans, which Closely linked to improving financial audits is the necessity have been piloted recently, should be supported and fully to carry out technical audits to build up a comprehensive, rolled out to all schemes to put an end to the uncontrolled up-to-date asset registry. As stated in the Sector Performance erosion of real tariffs through inflation. Moreover, the Report of 2011, most “systems lack system design reports, current cap of UGX 2,500 should also be increased in line operational manuals for the schemes, and/or systems layout with general inflation. In well performing schemes that have maps. This has hindered POs from effective management, a significant investment needs, POs’ role in investments monitoring and updating of the system in a professional manner.”49 49 Ministry of Water and Environment. 2011. Sector Performance Report 2011. p.140 26 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems may be expanded (for example, in the context of a private as major pumps and pipes is generally not covered by POs, credit program), and in such cases more flexibility to reflect even in some of the most profitable schemes. capital investment costs (rather than just O&M) in tariffs should be considered. The sector should carry out a thorough review of contracting options, and, in particular, rethink how asset depreciation Contract and Fee Reform: Longer Duration could be prevented more effectively by giving operators and Covering Depreciation the right incentives. Better performing systems with asset A longstanding issue has been the traditionally short PO registries may move towards lease contracts that ensure management contract duration of three years. This has that asset depreciation is covered by the operator whenever disincentivized POs from taking a longer-term view, possible. for example with respect to maintenance and system A final point concerns the standard 5 percent of revenue expansions. It has thus played a key role in limiting the fees given to WSSBs, which are supposed to cover board amount of private investments, and more generally the expenses. In the future, the 5 percent should be an upper ability of POs to familiarize themselves with a new system, limit rather than a fixed percentage. Board fees should be break even, and run it with continuity. negotiated with the Ministry to account for actual costs to Local governments have opposed longer contracts, fearing the board, which in large schemes may be considerably less the loss of leverage if new tenders were not compulsory than 5 percent of revenue. after three years. However, in practice new tendering after three years has proven problematic, both because Clustering transitions have not been smooth (leading unprepared A key reform to put the Ugandan small towns PSP model town councils to run schemes for months until a new on a more efficient, sustainable footing is system clustering. PO is procured) and because local tenders are particularly An IFC commissioned study on POs concluded in 2009: prone to irregularities. Moreover, if well designed, five-year contracts need not imply a loss of leverage as these could and “Clustering will be a good way of helping to improve the viability of the PO business. Currently [some] of the POs should be terminated in the absence of PO performance. end up with very small towns which are scattered all over This is particularly so if the regulator and local capacity is the country and this stretches their efforts to deliver. The strengthened as suggested above. After various pilots, the clustering processes can lead to efficient supervision, better longer five-year contract duration should thus be expanded management of services and reduction in corruption. to all towns going forward. Clustering would further aid the cross subsidization of smaller uneconomical towns...”50 In terms of operator fees, a key problem is that, at present, POs automatically retain all revenue of their fixed percentage that is not spent on operations and repairs. It is thus in The Ugandan APWO has strongly supported the idea of the operators’ direct financial interest to minimize any clustering as have representatives from the WSDFs and the operational outlays except those necessary to avoid short- MoWE, as well as the Urban Water Sector Vision 2025 term breakdowns during their three-year contract period. document.51, 52 System clustering is also important because This is not optimal in the long term as it leads to system larger small-town systems have been brought under PO neglect when quick fixes are substituted for necessary repairs. management by now, and the remaining systems tend to In particular, depreciation of critical system hardware such be smaller and less attractive. If the PSP model is to be extended further with success, clustering will be crucial. 50 Deloitte. 2010. Assessment of Private Water Ability to Expand Service Delivery. IFC. p.34 51 http://www.apwouganda.org/take-problems-of-private-water-operators-seriously [13.4.2012], also see Ministry of Water and Environment, 2011, Sector Performance Report 2011, p.139 52 Interviews carried out for this report. www.wsp.org 27 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems Without clustering, POs face higher overhead costs from The second advantage from the government’s point of view a number of sources. First, internal management is more would be a simplification of administration and supervision. expensive as managers have to travel far between the schemes At present, over 90 management contracts are put out for to resolve problems. A particularly well known issue is the tendering by local WSSBs in three-year cycles all across the requirement for the chief manager to sign for joint-escrow country. It has proven extremely challenging to guarantee account expenditures as local officers generally do not have an efficient, problem-free tendering process at the local signing power, causing considerable costs and delays. The level, and subsequently supervise performance and enforce geographical dispersion also prevents an optimization of management contracts. staffing across schemes, as technicians and accountants can often not be shared in an ideal way. Map 2: Distribution of Gazetted Small Town As illustrated in Map 2, in FY10-11 the PO Trandint Ltd. Schemes (FY10-11) managed 14 schemes spread over a distance of over 1,500 (road) kilometers, with over 100 kilometers between two schemes on average. The Trandint Ltd example also shows that operators have tended to counteract this problem by competing for contracts of schemes that are relatively close together, creating de-facto clusters. For example, as Map 2 highlights, the Trandint Ltd. schemes form three de-facto clusters with only one major outlier. Similar “self-selected clusters” are formed by some of the other operators, for example, Kagula MS in the north-west and center-east, or Jowa Ltd in central Uganda and WSS Ltd. In the south- west. However, these clusters are not stable as each contract must be competed for individually, and consequently they are interspersed and overlapped by other operators. This suggests that further efficiency gains are possible by creating larger, more stable, and more coherent clusters. Clustering could have further advantages. First, operators Note: Trandint Ltd. Has been highlighted tend to cherrypick well-performing schemes and disregard smaller, less profitable ones, which then fall back to public management (that is, run by town councils). In FY10- While clustering would not reduce the number of systems, 11, the systems managed by POs had almost 150 active it would provide for a move towards fewer tenders and connections more on average than publicly run systems, contracts. The reduced number and frequency of contracts, and also tended to be newer on average.53 Both indicators and lower number of interlopers, would allow for a better point towards a self-selection of operators into inherently preparation and supervision of contracts. However, it would more profitable schemes (that is, with better economies of also raise the stakes by increasing the value of each contract. scale and lower repair costs). Well-planned clustering could Clustering reform can only succeed if the associated gently counteract this by bundling some less attractive tendering system is implemented with a high standard of schemes with more attractive ones and thus achieve cross- transparency and supervision. subsidization. 53 Average age had to be inferred with data for only half the sample and excluding two extreme outliers. 28 Sustainable Services Through Domestic Private Sector Participation Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems In spite of a seemingly broad agreement on the desirability to the point that over US$2 million in tariffs are collected of clustering, no significant steps towards its realization annually and the average system can cover operating costs. have been taken. Stakeholders have been paralyzed by the Collection efficiency in PSP towns has improved to over perceived complexity of the reform of the current contracting 90 percent and metering is near universal, while water has model as well as political opposition from the local level. by and large remained affordable. The sector has been re- The Urban Water Sector Vision 2025 report, for instance, organized, with regular reviews attended by all stakeholders suggested the creation of regional utilities combining all and much better data collection than was previously the large towns, small towns and rural growth centers within an case. agreed geographic perimeter. This would require a complete overhaul of the entire Water Authority system, breakup of The remaining challenges outlined in this report are complex the current NWSC supply structure and creation of new and currently cause significant costs and inefficiencies, but regional WSSBs. There has been considerable opposition they can be overcome if the sector pursues the opportunities to the idea by local governments which oppose the idea of for reform described above. The interlinked nature of these yielding control to regional or national authorities as may be reform opportunities implies that improving one area can required in clusters that extend beyond the administrative have broad beneficial effects on the others. For example, area of, for example, individual town councils. better auditing, proper asset registries, and longer contract durations will not only improve system management but Stakeholders should realize, however, that basic forms also make raising private finance easier. This opportunity of clustering could build on the existing framework, for for dynamic improvements should be seized with example, by tendering sets of individual contracts within confidence and could considerably improve service quality districts. Existing regional Umbrellas and WSDFs, in and sustainability of small piped schemes in Uganda. cooperation with the cluster operator and local authorities, could provide support for rehabilitations, extensions and The reforms proposed in this working paper center on repairs to systems within clusters. Local Water Authorities fine-tuning the incentive framework within which POs would remain in charge of day-to-day supervision of work: extending contract durations to improve incentives individual schemes within clusters, continue to contribute to invest; developing special loan programs to increase to tariff setting, co-sign the local escrow account, and incentives to use private finance; improving regulatory drive extensions and investments with the help of support control and auditing to reduce incentives to cheat and institutions. With their key tasks and responsibilities intact, ensure alignment with public service provision goals, and performance contracts between Water Authorities and the so on. A working incentive framework, however, requires a Ministry should also be retained as a key tool to set targets strong, active, well-functioning public sector to design and for local governments. Over time, realized efficiency gains enforce it. may provide a strong enough argument to move to more The Ugandan experience thus shows that local POs can comprehensive clustering schemes across districts. be successfully engaged to manage public infrastructure The key next step will be a clear political endorsement and in small towns. However, it also underlines the continued the development of a detailed transition plan and pilot importance of the public sector. Private agents are rationally in one region. While clustering may not be a short-term self-interested and it takes a well-functioning state to ensure priority given the other challenges, it is a key reform in the that the technical, commercial, and financial resources of medium and long-term, and should remain on the agenda. the private sector are deployed in a way that is mutually beneficial for private agents and the public at large. A Moving Forward well-functioning PSP model is a symbiosis of public and A decade after its introduction, Uganda’s PSP approach to private. The Ugandan water sector has come a long way small-town piped water supply has evolved into a stable towards achieving this delicate balance, and with additional system with a number of solid achievements. Connections reforms to strengthen public institutions and the regulatory have steadily expanded and system sustainability has risen framework, further progress towards it is within reach. www.wsp.org 29 References COWI / Austrian Development Cooperation. 2009. Ministry of Water and Environment. 2010. Sector Evaluation of Water Supply and Sanitation Projects for Performance Report 2010. Kampala: Republic of Kisoro and Kitgum Towns. Uganda. Deloitte. 2010. Assessment of Private Water Ability to Ministry of Water and Environment, 2011. Sector Expand Service Delivery. Washington D.C: IFC. Performance Report 2011. Kampala: Republic of Uganda. Hydrophil. 2008. Identification Study and Feasibility Assessment of Options to Establish a Water and Sanitation Ministry of Water and Environment, 2012. Sector Development Facility (WSDF). Performance Report 2012. Kampala: Republic of Uganda. Marin, P. 2009. Public-Private Partnerships for Urban Water Utilities – A Review of Experiences in Developing Mugabi, E. 2004. Uganda’s Decentralisation Policy, Legal Countries. Washington D.C: The World Bank. Framework, Local Government Structure and Service Delivery. Paper prepared for the First Conference of Ministry of Water and Environment. 1999. National Regional Assemblies of Africa and Europe. Water Policy. Kampala: Republic of Uganda. Republic of Uganda. 1997. Water Act (Cap 152). Ministry of Water and Environment. 2008. Feasibility Kampala: Republic of Uganda. Review of the Umbrella Organisations Model. Kampala: Republic of Uganda. Republic of Uganda. 2010. National Development Plan (2010-11-2014-15). Kampala: Republic of Uganda. Ministry of Water and Environment. 2009. Strategic Sector Investment Plan for the Water and Sanitation Sector in WIN-S, WSP and Transparency International. 2009. Uganda. Kampala: Republic of Uganda. Baseline Survey on Integrity in the Uganda Water Supply and Sanitation Sector. 30 Sustainable Services Through Domestic Private Sector Participation Appendix A: Understanding Uganda’s Decentralized Political Structure Uganda’s decentralized administrative structure is the Local government councils are directly elected body context within which small-town water supply — including corporates with powerful legislative and executive functions. its private sector aspects — is organized and regulated. To The local governments initiate and formulate policy, understand the current water supply system’s strengths and monitor and oversee the implementation of policies and weaknesses, it is thus necessary to have a clear comprehension programs, can sue and be sued, and so on. According to the of Uganda’s administrative structure. Local Government Act, local goverments have the right and obligation to “formulate, approve and execute their budgets The fundamental characteristic of Uganda’s government and plans provided the budgets shall be balanced” (Section today is its relatively decentralized administrative structure, 77). While there are considerable transfers from the federal even as the president retains overarching powers granted down to the local government, for example, the DWSCGs, by the constitution and reinforced by patronage networks. the local governments may also “levy, charge and collect fees Upon seizing power in 1986, the National Resistance and taxes” and where it collects “fees or taxes on behalf of the Movement (NRM) consciously broke with the highly Government as its agent… a portion of the funds collected centralized administration established by Idi Amin shall be retained by the local government as may be agreed after 1971. This started with the establishment of local upon between the two parties” while “any extra obligation “resistance councils” in 1986-87, which were portrayed as a transferred to a local government by the Government shall step towards the realization of the first point of the NRM’s be fully financed by the Government” (Section 80). Ten Point Programme — the restoration of democracy. By contrast, the administrative councils are not corporate Falling back on locally constituted resistance councils for bodies, and have a more passive supervisory role, limited to basic administration and services was largely a necessity advise the local governments, to resolve disputes, to monitor given the human capacity constraints of the NRM service delivery, and to assist in the maintenance of law, immediately after finding itself in power in a country order and security. Administrative councils are not elected devastated by the long bush war. Even after the initial but generally staffed by members of the next corresponding post-war emergency phase, however, the decentralization local government unit.54 policy was systematically pursued. District administrations were strengthened, and the early 1990s saw a gradual but In terms of local government units, the next level below continuous empowerment of local resistance councils. The the district councils are the municipal counties (in Local Government Act of 1997 then established the current municipalities), the town councils (in smaller towns) and administrative structure. the sub-county councils (in rural areas). Within Kampala, the equivalent local government unit is the city division Currently, the basic administrative division of Uganda is council. As will be outlined in greater detail below, in the into 111 district councils and in addition Kampala City context of private small-town water supply, the crucial local Council, the capital having equivalent status to a district. government unit is the town council, which the Ministry To understand the further political division, one must of Water and Environment appoints as a water authority, realize that there are two separate types of divisions with and which then typically hires a private operator (PO). In distinct roles: on the one hand there are “local government” rural sub-counties, a different system is in place and private councils, and on the other hand “administrative” councils. 54 Mugabi, E. 2004. Uganda’s Decentralisation Policy, Legal Framework, Local Government Structure and Service Delivery. Paper prepared for the First Conference of Regional Assemblies of Africa and Europe. www.wsp.org 31 Private Sector Participation in the Ugandan Water Sector A Review of 10 Years of Private Management of Small Town Water Systems operators do not exist, whereas in Kampala city and all but “county councils” do not exist at all, and the equivalent of one municipality, water supply is provided by the national the local government subcounty council is called either a utility NWSC. municipal council or a town council. The decentralized Ugandan system is a complex construct Finally, there are two frequently referred to planning in which the names of equivalent councils differ between units which fall into neither the “local government” nor rural and urban areas. Moreover, administrative and local administrative council category — these are the so called government units can have names that imply a clear “town boards” and the smaller, more marginal “rural growth hierarchy, which may not exist in practice due to their very centers”. Neither of these is an independent body corporate, different roles and responsibilities. For instance, in rural areas instead both are gazetted planning areas with a rural sub- counties with “county councils” are an administrative unit, county i.e. under the responsibility of a sub-county council. whereas sub-counties with their “subcounty councils” are a Town boards are usually small rural towns of up to 5,000 local government unit. The former have few direct powers inhabitants, whereas rural growth centers are smaller rural over the latter, which are the real executive government conglomerations.55 organs. In urban areas, the administrative counties and their Figure A1: Uganda’s Decentralized Political Structure Government of Uganda District Councils Kampala City Council Rural Areas Urban Areas City Council Subcounty Councils Municipal Councils Town Councils City Division Councils Municipal Division Councils LEGEND: Parish Council Ward Council Local Government Administrative Village Council Hierachical Equivalence 55 The term “local council” is a collective term for all local government and administrative councils. The term “urban council” is a collective term for all urban local government councils including city council, municipal council, city and municipal division councils and town council. See Local Government Act 1997, Part I, 1 (h), (s) 32 Sustainable Services Through Domestic Private Sector Participation December 2013 PHOTO CREDITS: Front cover: © WSP Design and Layout by Eric Lugaka WSP The World Bank Hill Park Building Upper Hill Road PO Box 30577 - 00100 Nairobi, Kenya Phone: +254 20 293-6334 Fax: +254 20 293-6386 E-mail: wspaf@worldbank.org Web site: www.wsp.org Sustainable Services Through Domestic Private Sector Participation