WATER P-NOTES ISSUE 31 aprIl 2009 47930 Guiding principles for Successful reforms of Urban Water Supply and Sanitation Sectors O ne of the Millennium Development Goals well, when local aquifers are depleted or polluted (MDG) is to halve, by 2015, the proportion of by customers who have to develop and operate people who did not have sustainable access to substitutes to complement a deficient piped WSS safe drinking water and basic sanitation in 1990. service. Or service could even be unaffordable by The UNICEF/WHO Joint Monitoring Program (JMP) low income groups, despite tariff levels and struc- reports good progress on access to drinking water tures intended to protect them, when insufficient in urban areas, although the proportion of the revenues translate into a piped WSS service of poor population with direct access to piped water through quality and force the poor to revert to expensive individual connections has decreased between 1990 and unsafe substitutes. and 2004 in Sub-Saharan Africa and Southern Asia. These two regions, together with South-Eastern Asia, Reforming urban WSS sectors is needed to are also off target for access to sanitation, in par- improve the reliability, sustainability and afford- ticular through connection to sewers. ability of the WSS service; there are good examples of countries in Latin America, Eastern Asia, Middle East and North Africa or Sub-Saharan Africa that Bridging the Gap between are on track for achieving this objective, and thus Infrastructure and Service the MDG, because they successfully reformed their urban WSS sectors. Obviously, there are no "one- The JMP data mostly measure access to water size-fits-all" solutions to the many problems of supply and sanitation (WSS) infrastructure. Infra- poorly performing urban WSS sectors. structure alone does not automatically translate While solutions have to be tailored to diverse into service if policies, incentives or institutional local circumstances, many of the issues to be arrangements are inadequate. Even if the WSS addressed are often similar. Consequently, this Note infrastructure is well developed, service could be proposes a structured methodology for engaging unreliable if the lack of incentives to comply with in urban WSS reforms, presents what is usually service standards results in piped water being avail- accepted as best practices, and discusses conditions able on an intermittent basis and thus of uncertain under which they have been successfully imple- quality. Service could also be financially unsus- mented. The Note focuses primarily on the provision tainable because pricing policies or commercial of official piped WSS service, but it also recognizes operations are inadequate, resulting in collected that when a central service provides limited cover- user charges insufficient to cover operation and age or poor performance it can forfeit its monopoly maintenance (O&M) and capital costs. Water sup- status, whereupon alternatives to the piped WSS plies could be environmentally unsustainable as service often play an important role. The following note summarizes key points of "Guiding Principles for Successful Reform of Urban Water Supply and Sanitation Sectors," by Alain R. Locussol and Matar Fall (World Bank Water Working Note 19, February 2008). Readers may download the complete paper from www.worldbank.org/water. WATER P-NOTES Understanding the reasons for a into a constructive dialogue with key stakeholders, poorly performing WSS Service in particular the likely losers in the reform process, and to address their valid concerns. The Note emphasizes the need to carry out a rigor- 2. Revisiting sector policies provides an ous diagnosis of the reliability, sustainability, and opportunity to consider options for sector restruc- affordability of the WSS Service using indicators such turing, such as decentralizing or aggregating as that developed by the International Benchmarking operations, splitting or combining drinking water Network for Water and Sanitation Utilities (IBNET). production, distribution and waste water collection In many countries, however, the lack of reliable data and disposal operations or splitting WSS operations on technical, commercial, and financial operations when combined with other network services, such is a major impediment. Designing and implementing as electricity distribution: thinking outside of the a program aimed at generating quality data is often box should be encouraged. Also, water resource one of the first issues to be addressed to help design management issues that affect the urban WSS ser- improved policies monitor progress and monitor vice should be clarified, such as the trading water progress. The Note again underscores the need for entitlements with other water users or applying properly documenting the role played by alternatives standards to effluent quality. The Note recommends to a deficient piped WSS service. that this exercise should also focus on how to The Note proposes a methodology for assess- provide WSS service for the poor, in particular ing the accountability framework of an urban WSS those living in informal settlements, and regulate sector that it defines as the set of actors, mandates, provision of substitutes to the piped WSS service. contractual arrangements between actors, and 3. Changing the culture of public WSS ser- instruments used by actors to implement their man- vice providers can be achieved through a cor- dates. The accountability framework focuses on the poratizing process advocated by the Note, building five key functions of the urban WSS sector that are on recent World Bank papers on the topic. It also policy formulation, asset management and infra- highlights the need for more transparent proce- structure development, service provision, financing dures for the selection and operation of boards of and regulation of the service. The Note recom- directors and management teams. The Note sug- mends that particular attention be paid to incen- gests enhancing accountability of the various actors tives, either productive or counterproductive, that by establishing contractual relations between: could influence the performance of the WSS service. public WSS service providers and the government It also suggests identifying vested interests likely responsible for this sector; boards of directors and to be affected by reforms, with a focus on those managers; and between managers and staff. The engaged in fraud and corruption, as they could Note also stresses the need for identifying weak actively lobby against reforms which, if successfully links of the accountability framework as they could implemented, would affect their revenues. encourage fraud or corruption. 4. Optimizing infrastructure development addressing Nine Key Issues to is one aspect that needs special attention as sig- Successfully Design and Implement nificant inefficiencies could result from inadequate demand assessment, planning, design, procure- reforms ment and project implementation procedures, as well as the diversion of public funds through fraud The methodology considers nine key issues to build and corruption. The Note recommends that the a sustainable and effective effort at WSS reform: responsibility for WSS infrastructure development 1. Involving stakeholders in the design of the be vested with corporatized entities that own and reform agenda is essential to build a broad consen- maintain WSS assets and are responsible for servic- sus. Reforming a non-performing urban WSS sec- ing the debt attached to their expansion as a way tor often leads to an emotional debate that could for ensuring that development plans meet customer rapidly get out of control if not properly framed. A demands and can be afforded by sales revenues. rigorous diagnostic analysis of the current situation 5. Outsourcing of non-core functions is should help develop rational arguments to engage recommended by the Note when improving WSS 2 ISSUE 31 · APRIL 2009 Figure 1. Example of Accountability Framework ­ Actors, Mandates, Contracts and Instruments Mandate Unserved Central Local Public Consumers Government Mandate Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge ariffT Rights erformanceP Monitoring Water Resource/ Environment Private Allocation Agencies Operator Regulator Mandate Source: Developed by the authors service provision through internally developed pro- and financial management procedures should be grams is the preferred option. Enhancing techni- independently audited; addressing the qualifications cal operations usually requires a special focus on of audit reports should form the basis of financial reducing non-revenue water (NRW) and energy management improvement programs. consumption, streamlining procurement proce- dures, and increasing staff productivity. Improving 6. Improving the quality of the WSS service commercial operations normally necessitates an and efficiency of operations through pub- overhaul of customer relations, metering, and bill- lic-private partnerships as part of the reform ing and collection procedures. Financial statements process. PPPs have been the subject of several World Bank Toolkits. The Note discusses key steps 3 WATER P-NOTES for designing and implementing successful PPPs, could provide a bad quality service and charge the limits of PPPs for raising commercial financing, price above costs to increase their profits or cover the optimum allocation of risks and responsibilities their inefficiencies. The Note clarifies that public between public and private parties, the develop- WSS service providers should be regulated as ment of institutions to manage PPPs, and adequate should private ones. Building on recent World Bank procedures for selecting private operators. papers, it presents options available for regulating 7. Financing WSS operations in a sustain- public and private WSS service providers. It also able and affordable manner often requires discusses the pros and cons of regulation by con- moving an urban WSS sector from a loss making tract and regulation by regulator and reminds the situation, where user charges are insufficient to key operating principles of a regulator, if created. cover O&M costs, to a sustainable cost recovery The Note finally summarizes best practice for set- situation where user charges allow coverage of ting WSS tariff levels and structures and for design- O&M costs, depreciation of assets on a revalued ing subsidies that reach those who need them. basis, a return on capital sufficient to finance inter- 9. Prioritizing issues to be addressed est on debt and remunerate the equity invested, and when it comes to implementing reforms, a proper mitigation of the foreign exchange risk. the Note stresses, is a key task. It suggests placing Building on several World Bank papers on the topic, particular attention on improving the WSS sector the Note discusses ways to ease this transition and financial situation and on building the autonomy points out that mitigating the foreign exchange risk of WSS service providers to move them away from usually requires local capital markets to be able to short-term political agendas. It also emphasizes provide debt in local currency on terms compatible the importance of transferring responsibility for with a sector whose assets are depreciated over developing the WSS infrastructure to autonomous long periods, an issue that cannot be addressed service providers and for increasing accountability solely by improving urban WSS policies. of actors through enforceable contracts. Finally, 8. Regulating the service, i.e., setting, moni- the Note underscores the need for maintaining the toring, enforcing and changing the allowed tariffs stakeholder consultation process active through- and service standards, is required to avoid the out implementation of the reform, in particular to monopoly abuse of WSS service providers that manage expectations; poorly performing urban WSS sectors cannot be fixed overnight. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. P-Notes are available online at www.worldbank.org/water. P-Notes are a synopsis of larger World Bank documents in the water sector. 4 THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org