90159 v1 Report The Limits and Possibilities of Prepaid Water in Urban Africa: Lessons from the Field Chris Heymans, Kathy Eales and Richard Franceys August 2014 This Report was written by Chris Heymans, Senior Urban Water and Sanitation Specialist, WSP; Kathy Eales, Independent Consultant, WSP; and Richard Franceys, Senior Lecturer, Cranfield Water Science Institute, School of Energy, Environment and Agrifood at Cranfield University, United Kingdom. The authors wish to thank the national policy makers and especially the management, staff and customers of service providers who have given us so much time for interviews, briefings and information sharing. The market research firm Infotrack added much depth through their work in Kampala, Lusaka and Mogale City. Special thanks to our World Bank Group colleagues working in Water (GWADR), who as peer reviewers provided valuable comments and feedback throughout the report’s development: Aldo Baietti, Lead Infrastructure Specialist; Charles Delfieux, Water Supply and Sanitation Specialist; Andreas Rohde, Senior Sanitary Engineer; and Michael John Webster, Senior Water and Sanitation Specialist. We also appreciate and recognize the contributions of the following World Bank Group managers who provided such clear guidance and strong support: Sari K. Soderstrom, Director, Urban, Rural and Social Development (GURDR); Alexander Bakalian, Manager, Water (GWADR); and Glenn Pearce-Oroz, Principal Regional Team Leader for Africa, WSP (GWASA). A particular word of thanks for the wider team of WSP colleagues: Dominick De Waal, Mouhamed Fadel Ndaw, Alexander Danilenko, Sam Mutono, Rosemary Rop, Max Hirn, Rose Jamhuri, and Jecinter Hezron. Unless otherwise noted, all photos published in this report were provided by Kathy Eales, and are copyrighted: Kathy Eales / © The World Bank. 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, Denmark, Finland, France, the Bill & Melinda Gates Foundation, 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 authors 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 material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to worldbankwater@worldbank.org. WSP encourages the dissemination of its work and will normally grant permission promptly. For more information, please visit www.wsp.org. For more information, please contact the authors at worldbankwater@worldbank.org or visit www.wsp.org. © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org The Limits and Possibilities of Prepaid Water in Urban Africa: Lessons from the Field Chris Heymans, Kathy Eales and Richard Franceys August 2014 Contents Foreword ..................................................................................viii Executive Summary.................................................................. ix I. Introduction ............................................................................... 1 1.1 A Growing Interest in Prepaid Water Meters ...................... 1 1.2 Methodology ..................................................................... 2 1.3 Separating Prepayment Impacts Can Be Difficult ............... 4 1.4 Outline and Structure ........................................................ 4 II. Prepayment Systems for Water: Key Aspects ......................... 5 2.1 Prepaid Water in a Global Context ..................................... 5 2.2 What Prepaid Water Entails ............................................... 6 III. What Does Prepayment for Water Mean for Customers? ..... 10 3.1 How Customers Experience Prepayment ........................ 10 3.2 Does Prepayment Compromise Customers’ Rights? ....... 17 3.3 Summary ........................................................................ 20 IV. Prepaid Water in Practice ....................................................... 21 4.1 Why Service Providers Opt for Prepaid Water: Key Drivers ...................................................................... 21 4.2 Most Service Providers Underestimate What Prepayment Entails ............................................................................. 22 4.3 Three Core Challenges .................................................... 26 4.4 Summary ........................................................................ 36 V. Is Prepaid Water Cost-Effective?............................................ 38 5.1 Basic Costs in Perspective .............................................. 38 5.2 Cost Effectiveness Varies across the Three Applications .. 40 5.3 Beyond the Finances : Broader Economic and Societal Considerations ................................................................ 45 5.4 Summary ........................................................................ 48 VI. The Way Forward: Can Prepaid Systems Be Made to Serve the Poor?................................................................... 49 6.1 Be Clear about the Priority: Reaching People without Their Own Connections ...................................... 49 6.2 Recognize That Prepayment Technology Is Not Intrinsically Anti-Poor ....................................................... 49 6.3 Prepayment Does Not Equate to the Commodification of Water .......................................................................... 50 6.4 Introduce Targeted Social Safeguards to Secure Access to Services for the Poor ...................................... 50 iv Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Contents 6.5 Recognize the Cost Challenges of Prepaid Systems to Service Providers ............................................................ 50 6.6 Get Regulators to Take Prepayment More Seriously ........ 51 6.7 Think Big about the Technology ...................................... 53 6.8. Shift the Focus from Metering to Service Delivery and Governance ................................................................... 53 6.9 Summary ........................................................................ 53 Boxes 1: Water User, Consumer, or Customer? ................................. 2 2: Case Study Sites................................................................. 3 3: South Africa, Probably the Biggest User of Prepaid Water Meters ...................................................................... 5 4: How Prepaid Metering and Credit Loading Works ............... 7 5: Nakuru, Kenya: Cheaper Water for Tenants, Whenever They Want It ...................................................................... 13 6: Windhoek, Namibia: Less Conflict, Fairer Payment with Prepaid Standpipes ........................................................... 14 7: Urban Legends about Prepaid Water Meters ..................... 19 8: Some Reasons Service Providers Give for Introducing Prepayment....................................................................... 21 9: Why Prepaid Water Lags Behind Prepaid Electricity .......... 23 10: Prepayment Does Not Guarantee Lower Nonrevenue Water ............................................................ 24 11: Prepaid Meters Do Not Cope Well with Water Supply Interruptions ...................................................................... 27 12: Too Cold for Comfort: Winter Challenges for Prepaid Meters in Maseru .............................................................. 28 13: Some Performance Data on Prepaid Standpipes .............. 29 14: Regular Monitoring Is Essential to Minimize Nonrevenue Water ................................................................................ 31 15: Turnkey Management Contracts Offer a One-Stop Shop Option, at a Price ..................................................... 32 16: Standard Transfer System: A Game Changer for Prepaid Water? .............................................................................. 34 17: Community Engagement and Customer Safeguards in Mzuzu, Malawi .................................................................. 36 18: “Free-Pay” Metering in Mogale City, South Africa .............. 37 19: Notes on the Financial Model ............................................ 41 20: Prepayment for Institutional Customers Consuming Large Volumes Helps Manage Demand and Risk, and Is Cost-Effective ......................................................... 43 21: Why Are Service Providers Pursuing Prepayment If Returns Are Limited and Costs High? ............................... 46 www.wsp.org v The Limits and Possibilities of Prepaid Water in Urban Africa Contents 22: Lessons from Setting Standards for Solar Lighting ............ 52 23: Agenda for Further Work on Prepaid Systems ................... 54 Figures 1: Many Residents of African Cities Still Lack Access to Improved Water Sources ..................................................... 1 2: Components of a Prepaid System ....................................... 6 3: A Prepaid Meter on a Shared Public Stand Post.................. 8 4: A Prepaid Meter on an Individual Domestic Connection ......................................................................... 9 5: Prepaid Meter on an Institutional Customer’s Connection ......................................................................... 9 6: Prepaid Meters in Kagiso, Mogale City, South Africa.......... 11 7: Prepaid Meters Have Been in Use in Jericho, a Low-Income Council Housing Estate in Nairobi, Since 2011 .................. 11 8: The Affordability of Prepaid Water Makes Smaller, More Frequent Loads of Laundry Possible ................................ 12 9: A Water Vendor Uses His Bicycle to Deliver Water Containers Filled at a Water Kiosk in Katembwo, Nakuru .............................................................................. 15 10: Prepaid Meters Are Popular with Children ......................... 16 11: Targeting Affluent Households to Avoid Stigma ................. 18 12: Managers of Prepayment Systems Often Face an Unfamiliar Set of Challenges.............................................. 24 13: Ongoing Interaction with Customers Is Essential ............... 25 14: Status of 1,223 Meters in February 2014 .......................... 29 15: Analysis of Prepaid Meter Faults on Windhoek Standpipes Requiring Replacement Parts over a 10-Month Period, 2012–2013 ....................................................................... 29 16: Collins Ouma, a Self-Taught Meter Repairman in Nakuru, Kenya, Repairs a Leaking Seal with a Makeshift Plastic Gasket................................................................................ 30 17: In Kampala, National Water Sells Credit through a Network of 23 Small Businesses ....................................... 33 18: Installation Cost Breakdown for a 1,246-Unit Prepayment System for Individual Connections, 2013 .......................... 39 19: Installation Cost Breakdown for a 20,000-Unit Prepayment System for Individual Connections, 2013 .......................... 39 20: When Prepaid Standpipes Are Introduced, Water Vendors Often Experience Decreased Revenue. ............................. 48 vi Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Contents Tables 1: Prepaid Individual Connections: Some Customers’ Perspectives ....................................................................... 10 2: Prepaid Standpipes: Some Customers’ Perspectives.......... 10 3: Summary of Tariff Approaches for Prepaid Metering in the Eight Case Study Cities ....................................................... 40 4: Indicative Assessment of Costs and Revenue Income at Different Levels of Consumption on Piped Connections with Conventional and Prepaid Meters ................................ 44 5: Indicative Assessment of Costs and Revenue Income, Comparing Prepaid Standpipes with Conventional Standpipes and Vendors ..................................................... 44 Appendixes Appendix A: Decision-Support Tool When Considering a Prepaid Water System......................................... 57 Appendix B: Overview of the Case Studies ............................. 58 NOTE: Full case studies for the eight cities summarized in Appendix B can be accessed online: http://wsp.org/prepaidwater. www.wsp.org vii Foreword On average, cities and towns in Africa are growing at By offering a tour of real-life cases in eight very different 5  percent per annum—faster than anywhere else in the African cities: Kampala, Lusaka, Maputo, Maseru, Mogale world. Water service providers face considerable challenges City, Nakuru, Nairobi, and Windhoek, this analysis aims to meet this growing demand, and most lack the resources to convey that far more is involved than prepaid meters. to do so. The current revenue flows of most also fall far Service providers need to consider the broader system, from short of requirements to fund investments and run services technical challenges such as replacement of parts to the effectively for these rapidly growing populations. commercial aspects of making payment tokens and vendors accessible to consumers. They have to take on integration Meeting the demand, especially in the rapidly expanding of revenue management systems, data systems, and IT, unserved poor settlements, requires new thinking and and dramatically improve communication and strengthen innovation. This is one reason why there has been a surge in accountability to customers who have already paid for the interest among sub-Saharan African water service providers service. in prepaid water systems. Their track record so far has been mixed. Some have not been unable to sustain these The report aims to be both frank and objective in its systems, but others are delivering results that are sufficiently message that prepaid systems do not offer a miracle cure promising to mitigate potential risks. and that unless utilities do careful assessments and get effective management systems in place, they may well Prepaid water remains controversial, however. Proponents find themselves swapping one set of problems for another. see it as a way to improve customer relations, revenue, Because the technology is relatively expensive, it does not and access to services; critics complain about technical absolve service providers from sound financial choices unreliability, high capital and maintenance costs, and a and management, such as charging economic tariffs, or system they see as penalizing poor customers. policymakers from thinking seriously about how to finance subsidies for the poor. It demands robust regulation beyond Through this evidence-based study, the Water and the current tendency of regulators to treat it as something Sanitation Program hopes to contribute to the ongoing experimental and marginal. dialogue in several ways. The present work aims to transcend the existing literature, going beyond technical and Perhaps most powerful of all is the message that prepaid technological issues as well as the philosophical issues on water is ultimately a technology: it is not intrinsically pro- or the implications of prepaid systems for the right to water. It anti-poor, and it is not a substitute for sound management. presents a systematic body of research on the opportunities, limits, costs, and benefits of different experiences of prepaid Glenn Pearce-Oroz systems and their equity implications. Moreover, it provides Principal Regional Team Leader for Africa a refreshing emphasis on what customers actually think Water and Sanitation Program, The World Bank Group (especially poor customers). viii Targeting the Urban Poor and Improving Services in Small Towns Executive Summary Background Key Messages This study explores the potential of prepaid meters for Prepaid water systems are not a technical magical wand serving urban poor communities. It provides urban utilities, to fix underlying management issues in the delivery of oversight agencies, and other stakeholders in Africa with a urban water supply. A service provider that falls short on basis for decision-making on the suitability, introduction, effective management, governance, and sound customer and management of such meters. The need for the assessment relations is likely to take on far more than it can deal with emerged from prepaid meters increasingly being utilized by resorting to prepaid systems. by water and sanitation utilities in developing countries, including World Bank clients. The technologies adopted The notion of prepayment metering obscures the have expanded over this period, but there has been a lack complementary components of an integrated prepayment of consolidated data and analysis that capture the service system: delivery, operational efficiency, and access to services aspects • Technically, the system comprises metering, of such systems across utilities and regions systematically. dispensing, and credit-loading components. • Credit vending is central and requires functional and The review initially aimed to research experiences in six accessible purchase points that are close to where the African countries from the perspective of their communities, customers are, easy to use at flexible hours, and reliable. as well as from water sector bodies, governments, and other • Operationally, the system needs close monitoring investors. The number of case studies was increased to eight and rapid response capability to identify and with the addition of Windhoek in Namibia and Nakuru in resolve problems quickly. Regular meter reading is Kenya, as it became apparent that they may offer additional essential to tracking real-time consumption against lessons. Windhoek, for example, is one of the prepaid prepaid sales and flag exceptions, with a database water pioneers in Africa. The study specifically canvased recording meter performance and customer sales and the perspectives of customers, including market research consumption. and opinion surveys on people’s experience and views of • A strong customer focus is essential, driven by prepaid water in practice. Women and children were well a service team geared to respect and respond to represented in many of these groups. customers’ service needs, and to act swiftly to remedy faults that affect the supply of water customers have The analysis aimed to be robustly investigative, deliberately already paid for. not advocating for prepaid systems in principle, or making firm recommendations, but rather offering balanced analysis Prepayment can benefit customers, and most seem to and assessment, and considerations to inform policymakers like this option. Customers are not primarily interested and sector leaders, as well as other stakeholders who may in the technology. They are looking for good services, face decisions or challenges on such systems. One of the key reliably delivered at affordable prices. Many customers say conceptual bases that the analysis identified was the need they also want more convenient access to credit-loading to differentiate between prepaid applications of prepaid sites, and a quick response when faults impede the flow system—for standpipes, individual connections, and of water they have paid for in advance. They like the fact institutional and commercial customers—each of which that prepaid systems make it possible for them to manage have different implications for their users, as well as for cost their accounts more directly, with clear information about effectiveness. Utilities must be able to justify the investment where they stand all the time, something that particularly in a prepayment system and its opportunity costs specific benefits women who manage household budgets. This to the application they choose, and relative to alternative contrasts with conventional systems that carry the risk of means of improving services. inaccurate and high bills and an unpleasant surprise long www.wsp.org ix The Limits and Possibilities of Prepaid Water in Urban Africa Executive Summary after consumption, leaving them in debt. Disconnection The affordability and financial viability of prepaid water from postpaid systems left them reliant on water vendors is a major challenge. The benefits of prepaid meters must and other intermediaries who mark up their prices and offer be balanced with an understanding of the likely increased water only at particular times. Prepaid systems may take costs—due to significantly increased capital expenditure on different forms: metering devices; recurrent costs such as the cost of vending • Prepaid standpipes offer more equitable access for and ongoing repairs and monitoring; selling more water at people without their own connections. Customers subsidized lifeline tariffs rather than full tariffs; etc. The with their own account and credit token can buy resulting challenge to utility finances has to be planned for, water at the utility tariff, without an intermediary’s both for an appropriate level of cross-subsidies within the markup and without access being dependent on an customer base and, quite likely, for subsidies supported by intermediary’s hours of business. Most said they taxation from a wider revenue base. Service providers would preferred prepayment, but there were concerns about be well-advised to assess the cost and revenue effects of faulty meters, delayed repairs, too few convenient introducing prepaid meters carefully, right at the beginning, vending points, and difficulty replacing credit keys. and to compare these meters’ impact to the alternatives. • Prepaid individual domestic connections help manage When the utility chooses prepayment as a vehicle for the risk to customers of consuming more water than delivering water directly to low-income households at a they can afford, disconnection, and debt, and the social tariff, it may also be necessary to consult economic risk to service providers of bad debt. Customers used regulators or higher-level decision-makers upfront about to a continuous household connection are more how best to recover the costs of this approach. sensitive to the inconvenience of supply stoppages when credit is exhausted than those used to fetching Prepaid metering should not be seen as a way to avoid and carrying water from shared taps. high billing and collection inefficiencies. It is difficult to • Prepaid meters on institutional customers consuming justify financially spending a substantial amount to achieve large volumes help manage demand and debt risk. a relatively small percentage improvement in revenue, The combination of high-volume consumption, when a significant reason that utilities struggle financially low transaction costs relative to purchases, and cost- is that their tariffs do not adequately reflect their costs. The reflective tariffs facilitate improved revenue flows, viability of prepaid systems—like most other aspects of a which can be used to support cross-subsidization to service provider’s business—hinges on the tariff regime. poor customers. If a service provider, for whatever reason, charges below cost (e.g., through lifeline blocks), it is unclear whether Prepaid systems can also assist service providers. For it can find added financial benefit from using a relatively service providers, prepaid systems are a means to meet more expensive charging mechanism. customers’ service demands, an incentive to extend services to poor people in areas where previously they had no revenue Of the three applications, prepaid public standpipes prospects, and a means to improve revenue collection. This seem most likely to enable water utilities to serve poor offers the prospect of healthier cash flows, more revenue households better and offset investment and running to fund expansion, and more resources to help weather costs. This capability is contingent on a distribution network the prevailing reluctance to increase tariffs at all. Cost- with adequate pressure, the existence of convenient credit effectiveness of prepayment varies significantly across purchase points, and a strong customer service component applications. Better collection from large-volume consumers to address faults promptly. can improve revenue to help subsidize services in low-income areas. But revenue income will meet or exceed prepayment The performance of the technology is still inconsis- costs only at comparatively high consumption volumes, tent. The potential of many prepayment systems is and the volume of sales required will be determined largely being compromised by unreliable performance, which is by how cost-reflective the tariff is. inconvenient and frustrating for customers and onerous and x Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Executive Summary costly for utilities. Most utilities and customers complained neither private nor publicly owned corporate agencies, but about meters breaking down, and it would appear that the municipal water departments concerned with providing necessarily skills and spares are not always readily available services that meet the needs of the people they serve. to deal with faults. Introduce well-targeted social safeguards to secure Meters that are initially inexpensive to purchase can prove access to services for the poor. Safeguards to mitigate costly if they fail early and cannot be repaired. If the prepaid hardship may address concerns around the possible impacts industry is to grow, it is important to ensure that meters of prepayment on people’s right to water. If it is done well, can be repaired locally and that the supplier can offer good prepaid technology could also be instrumental in tackling after-sales service and spares. the big policy issues around subsidies and tariffs. This is important, because in many countries general subsidies to existing users mean that unconnected poor people often do The Way Forward not receive the subsidies at all. This report identifies and discusses key areas in which policy reform, improved regulation, and innovative Recognize the challenge of prepaid systems to service operational practice could help make the use of prepaid providers. The tenuous financial basis of prepaid systems, water systems conducive to serving poor people. Key especially their high initial outlay, requires planning for suggestions about the way forward include: their deployment. Where their primary purpose is to make water available more affordably and equitably to Be clear about the priority: Reaching people without low-income residents, cross-subsidies or external subsidies their own connections. Prepaid systems’ core potential may be needed to ensure that prepayment does not divert is in addressing the fact that many urban Africans still do funds from other needs. Service providers would be well- not have their own water connections and remain outside advised to assess the cost and revenue effects of introducing the reach of subsidy regimes. Prepayment does not offer prepaid meters carefully, right at the beginning, and to an obvious answer to these challenges, but some of these compare their impact to the alternatives in consultation systems’ attributes may provide a tool for addressing them with economic regulators and higher-level decision-makers. in certain circumstances. Think big about the technology. If prepaid water systems Recognize that prepayment technology is not are to be applied more widely, some important technological intrinsically anti-poor. Some critics equate prepaid water issues must be addressed. There is a general need to improve with exclusion of the poor from services, without recourse. the robustness and reliability of prepayment systems, in They fear that prepaid systems make it too easy for service part as a matter for national regulators, but also, if they providers to close off water supplies where people cannot are to go to scale, a more regional or even global initiative afford advance payment, and when credit is exhausted. may be required. The most critical game changers are The technology is a tool of policy, and subordinate the increasing use of information and communication to it. Governments, regulators, and service providers technologies (ICT) to eliminate cumbersome token usage should manage the system’s deployment, putting in place and link prepaid meters to mobile phones and vendors, appropriate policy and regulatory frameworks, and working and the entry of Standard Transfer System (STS) compliant closely with customers in rolling out the technology. technology for loading credit and paying for water across a common platform shared with prepaid electricity. STS Recognize that prepayment does not equate to the is also essential to escape the exclusivity of proprietary “commodification” of water. It has been implied that technologies and promote greater compatibility between prepaid meters typify the commoditization of water, or even different brands through adherence to global specifications. privatization. Significantly, of the eight service providers This can be achieved through a combination of regulation covered in the case studies, two of the pace setters were and demand from service providers for components that www.wsp.org xi The Limits and Possibilities of Prepaid Water in Urban Africa Executive Summary they can combine across brands to get the best mix of price, no longer be treated as essentially experimental. Prepaid quality, and innovation. water needs to be taken far more seriously in water sector policies and regulatory frameworks and in scaled-up Summary technical support to optimize the opportunities they offer Prepaid water is not a miracle cure. It is not obviously cost- and the risks they pose. effective for the provider; it has not been consistently reliable; and it comes with substantial demands on management. NOTE: Full case studies for the eight cities summarized However, many utilities believe that the benefits outweigh in Appendix B can be accessed online: http://wsp.org/ the costs. Its growing profile requires that prepaid systems prepaidwater. xii Targeting the Urban Poor and Improving Services in Small Towns I. Introduction 1.1 A Growing Interest in Prepaid Water FIGURE 1: MANY RESIDENTS OF AFRICAN CITIES Meters STILL LACK ACCESS TO IMPROVED WATER SOURCES Too many people across sub-Saharan Africa still lack access to affordable safe water. In low-income urban areas with few individual connections, residents source their water from a mix of public water points and private water vendors. They often walk far and queue for free water from unsafe wells or streams, or pay water vendors for the same water nearer their homes (Figure 1). Buying treated water from shared standpipes often involves conflict over shared payments, while yard taps and standpipes stand idle when the service provider has disconnected the supply because of nonpayment. The promise of access or improved coverage is eroded when service points are disconnected and where intermediaries inflate the price of treated water. Service providers, meanwhile, face daunting challenges. One of the most pressing is the difficulty of meeting the ongoing costs of delivering safe, affordable water to rapidly growing urban populations. Although a growing number of people need services, many cannot afford them, and some do not want to pay. The senior managers of service providers often fear political fallout if they raise tariffs to the level required to cover the costs of operations and reasonable capital maintenance. In response, a growing number of urban service providers in Africa have adopted prepaid water systems since the late 1990s. Prepayment holds the promise of remedying low collection rates and inadequate income to meet service expectations. There is no risk of arrears or debt, because meters symbolize the “commodification” of water, and they customers pay in advance for a specified amount of water. associate these meters with the exclusion from services of There is the prospect of healthier cash flows, more revenue those who cannot pay (see Box 1). Others say the large to fund wider coverage, and the resources to reverse or investment required to run a prepayment system could be preempt a downward spiral that makes tariff increases better spent elsewhere to expand and upgrade services. unlikely, however necessary they might be. This rapid assessment explores the potential and the Prepaid water systems are controversial, however. Many limits of prepaid water meters in serving urban customers, of those opposed to prepaid meters say they compromise particularly the poor. The issues are complex, and the people’s right to water if they cannot afford advance payment decision to invest in a prepaid system requires informed and close off water supplies when credit is exhausted, judgment and a careful assessment of prepayment as one without scope for appeal or negotiation. For some, prepaid option to improve revenue and service outcomes. The www.wsp.org 1 The Limits and Possibilities of Prepaid Water in Urban Africa Introduction BOX 1: WATER USER, CONSUMER, OR CUSTOMER? Water service providers render a service—treatment and delivery of potable water—that must be paid for. The recipients of that water can be called users, consumers, or customers. In this report, they are called customers, not because of a desire to commoditize water or emphasize the need for payment, but to emphasize that this is a relationship of reciprocal accountability. Service providers expect payment, and in return customers expect good service. Categorizing them purely as users or consumers suggests a one-way relationship (the service provider provides, the recipient receives), and one-dimensional (the recipient’s only role is to use or consume the product, rather than inform the terms of use or the quality of what is offered). The word “customer” is used here to suggest an entitlement to good service and respect from the service provider. analysis therefore aims to inform decision-making by urban vendors. These interviews included discussions with service providers, oversight agencies, and other stakeholders service providers and civil society activists known for on the suitability, fairness, introduction, and management their skepticism about prepaid water. of prepaid water meters. It investigates the experiences of • Public surveys and market research to gain providers and customers, and the lessons that emerge for the perspectives of customers. Where possible, others considering prepaid water. customers’ experience of prepayment was compared to that of other payment options, including postpaid 1.2 Methodology volumetric and nonvolumetric tariffs, and payments The methodology of this assessment had four elements: to water vendors. With the help of a professional • A review of the available literature to identify market research team, household surveys and focus research themes and select sites where prepaid water group discussions were undertaken in three of the meters have been installed. case study cities: • Case studies in eight African cities where prepaid 0 Kampala: 388 adults using public standpipes; and water meters have been in use for some time, eight focus groups with men, women, children, mostly five years or more (see the map in Box 2). landlords, and water vendors, most using prepaid These sites were selected largely on the basis of their standpipes. longevity to explore learning over a few years. Thus, 0 Lusaka: 395 adults with individual prepaid some failed projects are not discussed here. For the connections; and 11 focus group discussions with purposes of this assignment, it seemed more relevant men, women, children, tenants and landlords, to extract lessons learned from the hard grind of using standpipes and individual connections, initiatives with a longer history. The case studies respectively. describe the difficult issues, processes, stops, and 0 Mogale City: 397 adults with individual prepaid starts as the attempted rollouts unfolded. Field connections; and eight focus group discussions research took place between July 2013 and April with men and women from different income 2014, and involved interviews with service provider strata, including tenants and landlords. staff, local authorities, sector regulators, government • The customer analysis was triangulated with sales and representatives, nongovernmental organizations consumption data from Kampala, Lusaka, Mogale (NGOs), funding agencies, customers, and token City, and Windhoek. Secondary data was drawn 2 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Introduction BOX 2: CASE STUDY SITES Kampala, Uganda. About Nakuru, Kenya, is the country’s 4th 70 percent of the population largest urban settlement, with a fast lives in informal settlements growing population. In poor areas, and poor quality housing households who rent rooms in 25–40 and relies on communal room compounds share a single tap standpipes, water vendors controlled by a landlord. In mid-2012 and public wells. The city’s water utility first 95 prepaid standpipes were installed introduced prepaid standpipes in 2007 to improve in compounds. Tenants can now access cheaper water, revenue collection and deliver water directly to 24/7. Nakuru Water aims to install over a thousand more. users at a social tariff. Currently over 1,600 prepaid standposts serve about 200,000 people, with a further Nairobi, Kenya, has had 620 3,000 planned by 2017. In 2014, the utility introduced prepaid meters on individual prepaid meters for institutional customers. connections in middle and low income housing estates and apartment blocks since 2008. In late 2013, Nairobi Water began installing prepaid standpipes in informal settle- ments to improve payment levels and reduce the cost of water to those without their own connections. Windhoek, Namibia, first introduced prepaid Lusaka, Zambia is installing prepaid meters on a large scale— standpipes in 1998 to 38 standpipes, over 14,000 individual supply rapidly growing domestic and 203 institutional informal settlements in an connections in four centers by early arid region The city aims 2014. The utility envisages 40,000 by to manage demand and the end of 2015 and a total of over wastage, avoid high water 69,000 by 2018. Sophisticated vending prices rising further and and monitoring avert conflict at shared systems are being water points. About 582 developed to improve prepaid standpipes serve services, payments approximately 80,000 and demand management. people, with more units being added to serve further people. Maputo, Mozambique. Tap attendants take responsibility Maseru, Lesotho, Mogale City, South Africa, for selling water from 220 introduced prepaid pioneered installation at prepaid standpipes; meters on individual scale from 1999, with 30,000 prepaid metering helps them connections from individual prepaid meters stay out of debt and avoid 2008 to improve in rich and poor areas by disconnection. payments by civil 2002, supported by 6 kls servants. There of free basic water to each are now 3,500 household. It is currently prepaid meters on prepaid individual upgrading and installing 39,000 prepaid meters connections, plus 180 prepaid with a turnkey supply, install, maintain and standpipes serving tenants in peri- monitor contract and aims to provide prepaid as urban settlements. the default to all 80,000 metered connections. www.wsp.org 3 The Limits and Possibilities of Prepaid Water in Urban Africa Introduction from other studies to put the experience of these nonpayment when the local tap attendant does not turn African cities in a wider perspective. Preliminary over funds collected from users. Consequently, National findings were discussed (a) case by case with service Water in Kampala regards prepaid standpipes as a promising providers and other stakeholders; (b) in a workshop technology for improving coverage in low-income areas, with senior managers of the service providers covered and intends to install 3,000 more standpipe meters by in the case studies; (c) at the 2014 African  Water 2016, in addition to the current 1,613. Association (AfWA) conference in Abidjan; (d)  at roundtable discussions in the World Bank; and Lusaka Water does not doubt that the introduction of (e) with regional and national water leadership at the prepaid water is a big reason it can now extend the hours of Zimbabwe Water Forum. supply in four urban centers. The introduction of prepaid meters exposed leaks and network problems that required 1.3 Separating Prepayment Impacts urgent interventions. Major pipe replacements then Can Be Difficult followed—so although prepaid metering was the trigger Customers’ experiences with prepayment are often shaped and catalyst, the reason for the improved supply is actually by wider changes in their service environment, and isolating the upgraded network. Plus prepaid meters provide an what is specific to prepayment can be difficult. Prepaid incentive to customers to not neglect leaks—because then standpipes, for example, might be introduced as part of a their credit will be exhausted and they won’t have water. wider service improvement program, and customers may Average water consumption has fallen, because customers associate prepayment with more water points, shorter with prepaid house connections now pay a volumetric tariff queues, closer access, and cleaner water. None of these before using any water, and are more conscious of their attributes is intrinsic to prepaid water. consumption. They also have a greater incentive to close taps and fix leaks. However, there is a gray area around what can and cannot be credited to prepayment. In some instances— 1.4 Outline and Structure notably Kampala—the proven benefits of prepayment seem Section 2 begins the analysis with a discussion and to have spurred service providers to provide additional clarification of some of the key features of prepaid systems. standpipes, because they are now more confident that the Section 3 reports key findings on customer perspectives, intended benefits will be attained. The main driver is not before turning to the operational practicalities of deploying increased income per se but that residents without their prepayment systems, including the financial challenges. own connections can buy water from prepaid standpipes Section 4 draws out key lessons and their implications for at a social tariff directly from the service provider, without policy choices, operational decisions and approaches, and intermediaries capturing the tariff benefit and then charging service delivery generally. Section 5 reviews some financial a markup. The utility in Kampala now receives that income implications of prepaid water metering, and Section 6 and does not resort to disconnecting shared taps for reaches some conclusions and suggests a way forward. 4 Targeting the Urban Poor and Improving Services in Small Towns II. Prepayment Systems for Water: Key Aspects 2.1 Prepaid Water in a Global Context and match systems across suppliers, potentially offering A growing number of African water service providers greater reliability, more competition, more vending options, have introduced prepaid water meters (PPMs) since the and lower prices. Chinese, South African, and Turkish late 1990s, when the technology first emerged in South manufacturers dominate the production of prepayment Africa (see Box 3). Many more introduced prepaid meters systems on global markets. on a pilot basis initially, but moved on to other options because prepayment proved expensive, demanding, and Today, prepayment water systems are in use in more than often unreliable. Others persisted and contributed to the 20 African countries, and in locations such as Turkey, parts evolution of the technology and marked performance of the Balkans and Azerbaijan, and Colombia. Their scale improvements. of use is ramping up rapidly. The Botswana Water Utilities Corporation, for example, is reported to be planning to install There have been significant technological advances, 300,000 prepaid water meters in the near future, beyond particularly beginning in 2011, when the first prepaid the existing small-scale installations. Prepaid meters are water meters were certified for compliance with the attracting widespread interest as service providers seek ways global prepayment standard for vending, security, and to improve revenue collection to meet the costs of service interoperability. This certification has the potential to provision and to minimize water loss and/or water demand. free service providers from being locked into proprietary Prepaid meters are a specific permutation of smart meters. hardware and software systems, and opens the way to mix There are already signs of convergence in these markets, with BOX 3: SOUTH AFRICA, PROBABLY THE BIGGEST USER OF PREPAID WATER METERS Prepaid meters were first developed in South Africa in the mid-1990s, and are used extensively in low-income areas in conjunction with the national policy of free basic water. Nearly all poor households get the first 6 m3 of water free each month. Prepaid meters are programmed to treat this allocation as the first block in a rising block tariff, with a zero tariff. Capital and operating costs are subsidized heavily by the national government. Prepaid water is contentious in South Africa. In mid-2006, a coalition of social justice activists challenged the City of Johannesburg and its water utility, in what became known as the Mazibuko court case, over the implementation of prepaid water meters in Phiri, Soweto. They argued that they were discriminatory and contradicted the constitutional right of access to water. A High Court judge ruled in their favor, but the Constitutional Court subsequently overturned this decision, saying the meters were neither unfair nor discriminatory, and that the free basic water allocation mitigated hardship for poor households. The Constitutional Court judge drew a clear distinction between disconnection following persistent nonpayment, and the temporary cessation of supply that happens when a prepaid user runs out of credit. The City of Johannesburg continues to use prepaid meters in Soweto and elsewhere and plans to extend their use more widely. These meters are used widely in other parts of the country, although many municipalities now prefer flow-limiting devices, which supply water up to an agreed threshold, as a more cost-effective and robust alternative. www.wsp.org 5 The Limits and Possibilities of Prepaid Water in Urban Africa Prepayment Systems for Water: Key Aspects prepayment being an add-on modular option for some smart consumption, and ongoing engagement with customers meters currently being installed in several African countries. (Box 4). A network of credit vendors is needed to sell prepaid credit or “top-ups” to customers (or, increasingly 2.2 What Prepaid Water Entails likely in the near future, a mobile phone payment system, It is important to understand two key aspects of prepaid also incurring charges). Integration with postpaid revenue water: first, it is about a prepayment system, not meters management is vital, supported by a database of meters and alone; and second, the three major applications of customers with records of consumption, credit purchases, prepayment technology have different characteristics, and performance. This integration is more difficult and impacts, and challenges. costly in terms of investment required (staffing and/or computer billing upgrades) or efficiencies foregone, than 2.2.1 Prepaid Water Is Not about Meters Alone, but is often assumed. Regular monitoring is required to track about a Prepayment System faults, exceptions, and real-time consumption against Discussion of prepayment metering often deflects attention prepaid sales. Finally, making meters work and ensuring away from the complementary components of an integrated their acceptability requires ongoing interaction with prepayment system (see Figure 2). customers. A prepayment system comprises the prepaid dispensing A prepayment system differs significantly from conventional devices, the technology required to load and transfer credit, systems in that success is contingent on having, first, an a database recording customer purchases and metered effective vending system that allows customers to buy credit FIGURE 2: COMPONENTS OF A PREPAID SYSTEM Device use, management and Customer maintenance engagement Water services provision Monitoring and data management Credit vending Integration with postpaid revenue management 6 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepayment Systems for Water: Key Aspects conveniently; and second, an ability to respond rapidly 2.2.2 All Prepaid Applications Are Not the Same when faults affect the supply of water to customers who The review found three distinct applications of prepayment have paid in advance. These two legs require the support systems: of a multidisciplinary team equipped to negotiate the • Shared standpipes serving customers without their introduction, siting, and installation of new meters, explain own connection how to load credit, check balances and understand tariffs • Individual connections serving residential customers and charges, replace credit tokens, and mediate possible • Connections serving institutional or commercial conflicts over access to shared facilities. customers BOX 4: HOW PREPAID METERING AND CREDIT LOADING WORKS Most prepaid water meters use a mechanical water meter, coupled to an electronics module with a credit meter and a water control valve. When water flows, pulses are generated by a probe connected to the mechanical meter. These pulses are converted into credits that are subtracted from the total credits loaded by the customer. The valve closes when credit is exhausted or if there is tampering with the components. Many prepayment systems use rotating piston and multijet water meters. The accuracy of both meters can be affected by grit, sand, and air; and frequent supply interruptions raise the risk of malfunction. This is a significant vulnerability for prepayment metering systems used in many African cities, where there are aging networks, discontinuous supply, and low pressure fluctuations. Two alternatives that are better suited to networks with supply interruptions are electromagnetic and ultrasonic meters. These are highly accurate; resilient to pressure changes, air, and grit; and have no moving parts. At current prices—70 percent higher, but falling—they are not a cost-effective option for domestic meters. Customers load credit bought from designated vendors using a programmed metal key, a smartcard, or a keypad. Dallas keys, or iButtons, are currently the most widely used, and consist of a computer chip mounted in a stainless steel container that looks like a large watch battery. Programmed keys and smartcards allow for a two-way exchange of data. A credit vendor loads credit onto the customer’s Dallas key using a point-of-sale device, and uploads consumption data from the customer’s prepaid meter for analysis later. This data can be used to track consumption trends and flag exceptions (unusually high or low consumption) or for follow-up. Numerical tokens and keypads are one-way only, and require separate data collection to track consumption. A growing number of utilities now acknowledge that regular monthly meter reading is essential to collect consumption data to calculate their water balance, reconcile sales, and monitor nonrevenue water (NRW). Some now use automatic meter reading (AMR) systems to collect consumption data from individual meters. Some utilities now insist that each prepaid device includes a conventional mechanical meter, if necessary, in addition to an electronic meter. If the prepaid unit fails for any reason, the mechanical meter can still be read and supports conventional billing and payment. www.wsp.org 7 The Limits and Possibilities of Prepaid Water in Urban Africa Prepayment Systems for Water: Key Aspects FIGURE 3: A PREPAID METER ON A SHARED PUBLIC STAND POST Each has distinctive features that shape the customer’s own costs of distribution; access to a yard tap on terms and experience and the cost-effectiveness to the service provider. prices set by a landlord or reseller; unimproved sources, such as springs, wells, or boreholes; and public stand posts The rest of this review focuses mainly on the first two (Figure 3), where the cost of the water is shared among a applications, and gives primacy to the perspectives and pool of users, but where disconnection is common if the experiences of the people using them, as well as the service provider does not receive payment. These options service providers who have deployed them. A few initial entail higher costs than house connections but lower- observations are presented here. income households bear them—queuing, carrying, paying intermediaries’ charges, and rarely benefiting from any PREPAID PUBLIC STANDPIPES lifeline tariff system. How they work. Typically, 20 to 50 households share a standpipe and they all have their own credit tag, key, or This raises the question: Could prepaid water systems on smartcard that they press against a sensor on the dispenser standpipes offer a cheaper service to customers and a better each time they draw water. alternative for poor households as a transitional step toward piped services for all? Considerations. Service options for those without their own connection to service provider supply networks are PREPAID INDIVIDUAL DOMESTIC CONNECTIONS currently fairly limited. They include water kiosks and How they work. Customers have their own prepaid meters, vendors, who mark up service provider prices to cover their and load credit using a tag, smartcard, or keypad. The tag, 8 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepayment Systems for Water: Key Aspects FIGURE 4: A PREPAID METER ON AN INDIVIDUAL FIGURE 5: PREPAID METER ON AN INSTITUTIONAL DOMESTIC CONNECTION CUSTOMER’S CONNECTION card, or code can only be used on the specific meter for designed for far higher volumes than domestic meters and which it is programmed (Figure 4). Once the credit is far greater accuracy, given the volumes (Figure 5). loaded into the meter’s memory, customers do not have to use the key each time they draw water. Considerations. The large volumes of water sold to commercial and institutional customers comprise a significant Considerations. Beyond communal standpipes, a growing source of income for water service providers in African number of African water service providers are introducing cities and towns. However, most experience difficulty with prepaid water systems on individual metered connections misreading of meters and getting government departments to improve payment levels and their overall financial and other institutions (police and army barracks, hospitals, position. This review focuses on the impacts on customers, schools, and prisons) to pay their service charges. Late especially those who are poor. When households progress payment of substantial bills squeezes service providers’ cash from communal taps to their own house connections, their flows and writing off bad debt deprives the service provider water consumption and spending on water typically rise. of budgeted income, including funding to improve services to the urban poor. The service provider reforms required to Two questions arise. Can prepaid metering help customers serve neglected low-income settlements extend well beyond better manage the costs of an individual connection, which prepaid metering, but improved collection from large-volume is more convenient to them but also more expensive? Can customers is essential to fund the borrowing, cross-subsidies, the relatively limited increase in revenue collected justify and stable cash flows required to serve all customers better. the service provider making such high-cost investments in This makes prepayment by commercial and institutional prepaid metering, particularly where there is often too little customers an attractive option for service providers. water available to sell in the first place? In practice, a critical question is, do governments provide PREPAID BULK METERS FOR COMMERCIAL AND the political backing needed to compel payment upfront, INSTITUTIONAL CUSTOMERS and how best can utilities mitigate the impact on those How they work. A representative of the customer loads affected—notably in hospitals, schools, and prisons—when credit using a tag, smartcard, or keypad. The meter is the credit runs out and the water shuts off? www.wsp.org 9 III. What Does Prepayment for Water Mean for Customers? There are few “typical” customers, beyond broad generalities, water services. What matters most to them are convenience, and their perspectives on prepaid water are shaped price, and reliability. Where, on balance, prepayment profoundly by their context, needs, and alternatives. This provides the most benefit, most customers are likely to section is concerned primarily with two broad categories of support it. These findings have important implications for water users in low-income urban settlements: those who have reframing discussion of prepaid water systems. their own water connection, and those who do not. There are substantial differences between them and the benefits 3.1 How Customers Experience Prepayment and drawbacks of prepayment impact them differently. There are marked differences in the experiences and perspectives of customers using prepaid standpipes and This review gathered information on customers’ experience prepaid individual connections, respectively. Tables 1 and 2 of and perspectives on prepayment from different angles: summarize the key likes and dislikes of people using prepaid direct observation, discussion with a wide range of standpipes and individual connections, and highlight the informants, household surveys with almost 1,200 prepaying distinctiveness of their experience. This grounds broader customers across three cities, 27 focus group discussions, discussion of how the different prepayment applications affect and a review of the relevant literature. The findings suggest customers, with common themes (notably disconnection) that very few customers are interested in the technology of explored further in a subsequent section. TABLE 1: PREPAID INDIVIDUAL CONNECTIONS: SOME CUSTOMERS’ PERSPECTIVES Likes Dislikes “It’s easy to control your budget—you decide how much “Water is a need, but money is not always available.” you want to pay and how long it must last you.” “The water can stop any time if you are not watching how much “You can get water with even a small payment. It’s better you have used.” than trying to pay a big bill.” Inadequate consultation before the prepaid meter was installed “You use only what you have paid for, so you only use what Inadequate explanation of tariffs and charges you can afford.” Inadequate demonstration of how to use the meter No debt, no disconnection “Postpaid gives you more time to find the money.” No bills you don’t trust and can’t pay Water is more expensive than with a fixed tariff “You spend less on water because you are more aware and Having to travel to purchase credit when you run out you use less.” Some people don’t share water anymore “You are in charge. You can decide when the water stops, and you can put it on again. No penalty.” Slow responses when a fault is reported TABLE 2: PREPAID STANDPIPES: SOME CUSTOMERS’ PERSPECTIVES Likes Dislikes Cheaper water Paying money but not being able to get water Being able to afford more water Meters that don’t work, and having to walk further to get water Being able to budget for water because the price is always Not having money to buy water the same Not enough places to buy credit close by Being able to get water whenever you want it Problems buying credit when the vendor is absent, has no credit Being in control, with your own token left to sell, or there is a power outage Not being disconnected when others don’t pay what they Tokens that don’t work or get lost or stolen owe 10 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? 3.1.1 Prepaid Individual Connections 10 m3 and more for poor families) and there was widespread The default for households with their own formal opposition to prepayment. Similarly, in the low-income connections is a continuous supply of water (barring township of Jericho in Nairobi, Kenya, where residents rent service interruptions), with payment after consumption. housing from the city council (Figure 7), customers resisted The attitudes of people with individual prepaid water the shift from not having to pay for water to prepayment. connections (Figure  6) are profoundly shaped by how, or This occurred in a context of limited public engagement, whether, they previously paid for water. and most meters were bypassed or vandalized within months. Does prepayment represent a loss or a gain? Those who like it often cite their greater ability to monitor their water In Lusaka, Zambia, and Mogale City, South Africa, consumption and the flow of household expenses as a major customer reactions to prepaid metering correlate strongly advantage. It helps them to live within their means, and with whether they were previously paying a fixed, reduces the risk of running into debt due to unexpectedly nonvolumetric tariff, and whether they now pay more or high bills. less. When consumption is modest, customers like to pay only for what they use, rather than a fixed tariff irrespective In areas where people were not previously obliged to pay of consumption. Prepayment is harder for large consumers for water, or where there were previously few sanctions for used to unlimited consumption, and they are likely to nonpayment, the introduction of prepaid water meters is spend more than before. As one Lusaka respondent put it, frequently experienced as harsh and punitive. “If you have a small family, prepaid is best. If you have a big family and tenants, the fixed tariff is better.” This distinction accounts for much of the opposition to prepaid water meters in Soweto, South Africa, where the Prepayment allows customers with their own connection collection rate on water bills in the early 2000s remained to manage their consumption within limits they can below 10 percent, long after a boycott of service payments afford, without the risk of arrears, disconnection, or as protest against apartheid in the 1980s had achieved its unexpected debt. This is a significant consideration for goals. When prepaid meters were introduced in Soweto in low-income households moving up from carried water to 2004, payment for water was no longer negotiable beyond their own connection or wanting flush toilets. Women the free basic water allocation (6 m3, subsequently raised to often manage household budgets, so this greater certainty FIGURE 6: PREPAID METERS IN KAGISO, MOGALE FIGURE 7: PREPAID METERS HAVE BEEN IN USE IN CITY, SOUTH AFRICA JERICHO, A LOW-INCOME COUNCIL HOUSING ESTATE IN NAIROBI, SINCE 2011 www.wsp.org 11 The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? benefits them. Some said they prefer postpayment because it gives them more time to raise money to pay for the water FIGURE 8: THE AFFORDABILITY OF PREPAID WATER MAKES SMALLER, MORE FREQUENT LOADS OF they used. Having to pay before consumption can cause LAUNDRY POSSIBLE hardship for those without money to buy more credit. This critical issue is considered in more depth below. In surveys and focus groups, those who like prepayment said they felt more in control of their consumption and were no longer anxious about receiving bills they could not pay. Many see prepayment as offering a more transparent and trusted way of being charged for water than erratic bills and estimates. The gender impacts of prepaid systems seem fairly indirect, and more attributable to improved water supply than specifically to prepaid meters. In many focus groups it was evident that important concerns of women have been addressed because improved and more continuous water supply benefited household hygiene and streamlined budget management because people know what they consume and spend (Figure 8). It has also benefited women and children in making the fetching of water more flexible due to the longer hours of supply, and all have benefitted from access to safer water. One area of perhaps greater specificity has been where women have taken up opportunities as credit when credit is exhausted than those who fetch and carry vendors, often in addition to their existing roles, in informal water regularly. Many complained that credit vending and formal small businesses. sites should be located closer to where they lived, and have longer operating hours. Even so, well over 90  percent of Prepayment enables recovery of arrears. Prepayment is those surveyed said they preferred prepayment and would used widely (although in none of the cases studied here) recommend it to others. for involuntary credit management. Customers who are in arrears or who have been disconnected are connected to a Prepayment heightens awareness of consumption and prepaid meter, and a portion of their arrears is deducted usually results in lower consumption. Most households from each credit purchase. In the four cities with prepaid become more conscious of how they use water and how individual connections reviewed here, only one—Lusaka—is much they consume. Particularly for those not used to currently recovering arrears through prepayment, primarily a volumetric tariff, prepayment requires considerable because the others have had prepaid meters long enough adjustment. A widely echoed comment was, “We know that for debts from postpaid systems to have been settled. Many if we don’t close the taps, we will find it finished. We have Lusaka customers said they felt that a top-sliced deduction become very responsible users of water.” A majority said of 40 percent for arrears was harsh. they spend less on water with prepayment because they are more conscious of their consumption and regulate it better. Customers used to a continuous connection are more sensitive to supply stoppages. Customers used to the Rising block tariffs can cause discontent. In the cases convenience of a continuous connection at their own homes studied here, prepaid customers pay the same tariff or less are more sensitive to the inconvenience of supply stoppages than postpaid customers, and all pay a rising block tariff. 12 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? Prepaying customers are, however, much more aware of in advance how much water they can buy with a particular what they pay and what they get for what they pay. Most sum of money, without the amount being determined by buy more than once a month. They are keenly aware of the the volume they have already consumed that month. impact of rising block tariffs within a monthly billing cycle, yet few understand why the same amount of money might 3.1.2 Prepaid Standpipes buy different amounts of water. “The cost per unit is not Households without their own connections fetch and carry consistent,” said a woman from Lusaka. “You find that today water from a variety of sources: standpipes, neighbors, a you buy for K100 and they give you this number of units. landlord’s tap, kiosks, water vendors, or various unimproved When you go next time, they give you less for the same sources such as wells or springs. They make their own K100.” Zambia’s regulator recommends a uniform tariff for arrangements to ensure continuity of supply, for example, prepayment, not a rising block tariff, so customers know keeping one or more containers of water in reserve (Box 5). BOX 5: NAKURU, KENYA: CHEAPER WATER FOR TENANTS, WHENEVER THEY WANT IT In Nakuru, northwest of Nairobi, 95 prepaid standpipes have been installed in high-density housing compounds. There is generally one tap serving a compound of 25 to 40 households; and in compounds without prepaid meters, the landlord controls access closely to limit the risk of a high utility bill. It is not unusual to find the single tap in a compound locked except for a few hours a day, three or four days a week. Even then, many compound taps are disconnected because the landlord has not paid the bill, although tenants generally pay rent of about 1,300 KSH a month (US$15.00), which includes about 300 KSH for water. Tenants’ main alternative is to buy from a water vendor, at a cost of 6 to 10 Kenyan shillings per 20 liter jerrycan (US$0.067 to US$0.11). The nearest water kiosks are some distance away and although they sell water relatively cheaply for 2 KSH per jerrycan, the water is only available when the kiosk operator is working. Some tenants and landlords were resistant when Nakuru Water first proposed installing prepaid meters in 2012. Some tenants objected to having to pay for water, not realizing that they were already paying their landlord for little, if any, water. Some landlords were concerned they would lose their income stream from selling water. Once the prepaid standpipes were installed, compound residents had access 24/7 for just 1.2 KSH (US$0.01) per jerrycan. Tenants had a far better service for a fraction of the price they had paid previously, and landlords found they could rent their rooms more readily, often for a better price, with minimal conflict over water and no risk of disconnection. Since prepaid stand posts were introduced, tenants living in Nakuru housing compounds have gained access to far cheaper water, at any time of day. www.wsp.org 13 The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? Payment arrangements cover a wide spectrum. They lifeline tariff benefits for themselves (Box 6). This marks range from no payment for water from unimproved or a significant difference from what happens in many unauthorized sources, to payments before consumption to low-income settlements, where there are too few standpipes tap attendants, kiosks, and water vendors. In some cases, and service providers pass on the costs of local distribution there is also payment after consumption from shared and payment collection to vendors, who recover these costs standpipes, neighbors, or vendors who provide a regular from their customers by charging several times the service delivery service. For most people without their own provider’s tariff (Figure 9). With prepaid standpipes, service connection, prepayment for water is nothing new. providers carry the cost of collecting payment, and recover it across their wider customer base (just as they recover the Prepaid standpipes impact customers in more diverse, cost of bad debt across all customers). complex, and potentially positive ways than prepaid individual connections, and merit closer consideration. Prepaid standpipes allow customers to get water whenever it suits them, outside the limits set by landlords and well beyond Cheaper water any time, because prepaid standpipes the hours when vendors and tap attendants work. This is a bypass intermediaries. Prepaid standpipes enable service major advance for people who leave home early or return late. providers to sell water directly to customers with their It also distributes collection times more evenly throughout own prepayment tokens, without tap or kiosk attendants the day, which eases queuing times, especially for women and or other intermediaries adding a markup or capturing children who have primary responsibility for fetching water. BOX 6: WINDHOEK, NAMIBIA: LESS CONFLICT, FAIRER PAYMENT WITH PREPAID STANDPIPES In Windhoek, Namibia, prepaid standpipes have reduced conflict around shared payment and disconnection. The cost of safeguarding adequate water in this semi-desert terrain is high, and water tariffs average close to US$2.00 per m3 for domestic users. In informal settlements where residents share a conventional connection or standpipe, the onus is on users to agree how to collect payment to cover their shared water bill. If the full bill is not paid, the water may be disconnected, and so the poor frequently subsidize the nonpaying poor. This often leads to conflict, particularly where those living close to the standpipe are perceived to be using more water than those who must fetch and carry from further away. With prepaid standpipes, this source of conflict Drawing water from a prepaid standpipe, Okuryangava, falls away, and residents are not penalized by Windhoek disconnection if others do not pay. They pay US$0.04 per jerrycan, which works out at about half of what it costs those who share a bill. The City Council faces strong demand from residents for more prepaid meters in informal settlements. 14 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? FIGURE 9: A WATER VENDOR USES HIS BICYCLE TO DELIVER WATER CONTAINERS FILLED AT A WATER KIOSK IN KATEMBWO, NAKURU The credit tokens are programmed to be usable at any prepaid Among those surveyed, virtually all prepaid customers said standpipe, at any time of night or day. “Wherever you go as they now spend less on water, and most now use more water long as you have your key, you can just put it inside,” said one because it was much more affordable. From discussions in user. “It does not have any specific time.” focus groups, it was evident that lower water costs have reduced stresses for women who depend on their husbands Subsidies reach their intended beneficiaries directly. As or partners to provide money for food and water, as they in Nakuru, prepaid standpipes in Kampala and Nairobi can now afford to buy more of the water they need without have resulted in a sharp drop in what people without their having to compromise on food. own connections pay for water. Customers now get more water for less money, because they receive the benefit of a Consistent pricing and more control over expenditure. A lifeline tariff directly. The cost of a jerrycan of water from a frequent theme in focus group discussions in Kampala was prepaid standpipe in City Carton, Nairobi, is half a Kenyan that customers like knowing what they will pay per jerrycan, shilling (less than US$0.01), compared to 2 to 5 shillings and feeling more in control of what they spend on water. from a water vendor or kiosk. In Kampala, a 20-liter Water vendors’ prices vary by season and often by time of day jerrycan costs just under 25 Ugandan shillings (US$0.01) but prepaid water prices are consistent and residents can stick from a prepaid standpipe. This works out to be 55 percent to a budget. One resident said, “Those token meters are good. of the cost from a house connection, substantially less than It’s not going to give me a hard time, like with those taps. I the 200 to 500 Ugandan shillings and more that water earn very little, so it helps me if I know I have recharged with vendors and resellers charge. 2,000 shillings (US$0.79), then I can budget for the month.” www.wsp.org 15 The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? Customers without their own connections have the benefit of their own service provider account. With a FIGURE 10: PREPAID METERS ARE POPULAR WITH CHILDREN credit key or smartcard issued to each individual customer, a prepayment system enables people with no prospect of having a connection of their own to have their own independent account and relationship with the service provider as full customers. One immediate benefit for standpipe users is that they are responsible only for paying for their own consumption, and are not impacted by added costs or disconnection if others do not pay. Advance payment means the water supply stops when the credit is finished. An obvious disadvantage of prepaid meters is that the water supply stops when the credit runs out. Surprisingly few interviewees raised this as a concern, perhaps because they are accustomed to paying for water before they use it and have well-established coping mechanisms for when they cannot buy water. They said they generally shared water with a neighbor or used someone else’s token until they had cash and could repay what they had used, or they fetched water from a well. The critical importance of mitigating affordability constraints is discussed further below. Many children are enthusiastic users of prepaid meters because they are easy to use, plentiful (reducing queuing time) and conveniently located (reducing Faulty meters can cause the whole water point to walking distance) dysfunction, and lengthen queues elsewhere. The reliability of prepaid meters varies widely by type, and so do service providers’ response times when faults are reported. Physical tokens are expensive to buy and replace, and raise Customer responses reflect this, with some very satisfied with the cost of services. Users of nearly all prepaid standpipes their experience with prepaid standpipes, and others bitterly currently need to use a physical credit token (iButton, unhappy. “Me, I do not like the prepaid meter, because I smartcard, or credit key) to get water from a prepaid may pay, only to go to the machine and find it is faulty or standpipe. Physical tokens get lost, damaged, or stolen, and the water fails to flow,” said one Kampala customer. “So I cost customers upward of US$12 to replace. (The service prefer using first, then paying what I have to pay.” Others providers in this review subsidize or issue the first token per benefit from meter faults: “Those machines jam a lot, and customer free.) The option of a numerical token and keypad we end up getting a lot of free water when it spills over.” exists, but has not yet been implemented at scale. When prepaid standpipes do not deliver water, customers Prepaid standpipe users had much more to say than those have to fetch and carry further from alternative water points with their own prepaid connection about credit tokens (Figure 10). This occurs in Lusaka, where rapid growth getting lost, stolen, or damaged, because they use the in the peri-urban areas has put the city’s existing public token every time they fill a container at a multi-user meter. standpipes under acute pressure. Low water pressure and Without a working credit key of their own, they have to interrupted supply compounds reliability problems with rely on others to get water and might pay more. Conversely, some of the prepaid standpipes. When they fail, the queues those with a prepaid house connection typically use their at the alternative standpipes grow even longer. credit keys only two or three times a month when they go 16 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? to buy credit and load it on to their own prepaid meter, and example, by puncturing the valve. If customers believe they evidently have fewer problems with their credit keys. can get away with it, some will try. The intermediary problem can persist if there are too few Credit purchase is not always easy. Inconvenient credit credit keys. If customers do not know where to go to get purchase is one of the most significant areas of customer a replacement, or cannot afford one, they revert to relying dissatisfaction: vendors need to be located centrally, and on an intermediary for water, and may have to pay extra. open after hours and on weekends. In five of the study sites, Conversely, the combination of an undersupply of credit there were three or fewer places where customers could keys in some parts of Kampala and shared appreciation of go to recharge credit, and these were open only during cheap water has led to increased solidarity—and pride in regular office hours. Customers had to plan their purchases this solidarity—among some residents who share keys or and consumption to ensure they had enough water to supply water to each other at no extra cost. get through evenings and weekends. They complained of having to spend money on transport to get to a vending site, Rent-seeking gatekeepers can take ownership of prepaid and many said they wanted to be able to buy credit using standpipes. Prepaid meters are no less prone to “capture” their mobile phones, like they do for prepaid electricity. than any other valuable resource. In Kampala, some landlords deny prepaid customers access to “their” meters 3.2 Does Prepayment Compromise unless they pay a premium, despite the agreement they Customers’ Rights? sign with National Water that commits them to allow any Prepaid standpipes are not a panacea to the challenges customer access to the meter installed on or adjacent to of serving low-income settlements. The technology is their property. Some landlords insist on selling the water expensive, still maturing, and prone to faults, and there themselves, marking it up to 100 shillings per jerrycan. is still much to be done to offer customers a dependable “Some insist that you buy from them, even if you have your and convenient service. In particular, better safeguards are own token,” said one tenant. Another said, “Landlords take needed to mitigate inconvenience when people run out of charge and chase away those they don’t like. If you are on credit, and hardship when people cannot pay. But it is not poor terms with your landlord, they won’t let you get water necessarily helpful to dismiss prepaid water as a technology from that prepaid meter.” that intrinsically violates human rights, as some critics do. 3.1.3 Two Cross-Cutting Issues There is substantial critical literature concerned with the Customers’ ability to take advantage of the benefits of commodification of water and the impacts of an emphasis prepayment presupposes that the prepaid meters function on cost recovery on poor households. For some, prepaid properly, and that customers can buy credit relatively easily. water meters exemplify neo-liberal thinking, and are seen as compromising basic human rights by making access Unreliable meters invite vandalism, bypassing, and to water contingent on advance payment. Prepaid meters tampering. Customers who have paid in advance for their are seen by many as being punitive to the poor, because water have a legitimate expectation that it will be available the poorest households have generally been targeted for and that any faults will be repaired swiftly. Some types of prepayment and are most negatively affected by the need to prepaid meters are more reliable than others, and service pay in advance for all water. providers vary in their ability to respond quickly to call-outs and resolve them, for reasons explored in the next section. All In areas where customers have their own connection, service were aware that slow response times and limited monitoring providers implementing prepayment are increasingly targeting invite vandalism or bypassing. Some prepaid users were quite the nonpoor—middle- and upper-income households and candid about colluding with service provider staff and others large institutional users (Figure 11). Prepaid meters are to get free water. Prepaid meters, especially on individual expensive and it makes little financial sense to install costly connections, are not difficult to bypass or tamper with, for devices where the revenue collected per meter is low. www.wsp.org 17 The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? FIGURE 11: TARGETING AFFLUENT HOUSEHOLDS TO AVOID STIGMA Since 1999, affluent households in Mogale City, South Africa, have been targeted for prepaid metering to avoid the “poor-only” stigma of prepayment Most low-income prepaid customers surveyed for this connections had been disconnected. “You get a bill you review were mainly positive about prepayment, despite can’t pay, and then you’re disconnected, and still you owe its drawbacks. A key benefit for standpipe users is cheaper them,” said one Lusaka woman, who was emphatic that the water (through direct access to utility tariffs, often at lifeline benefits of prepayment far outweighed its downsides. levels) and more autonomy. For those with a prepaid connection, better risk management is a big advantage: they Few prepaid users surveyed for this review seemed to perceive cannot run up bills they cannot afford or get disconnected the supply shutdown that happens when they run out of for nonpayment. credit as a disconnection. They simply run out of credit and need to buy more. This is not just a semantic distinction. It Disconnection of postpaying low-income households for goes to the heart of a difference that surfaced repeatedly in nonpayment is widespread. Service providers in seven of focus group discussions: Prepaid users feel they are more in the eight cities reviewed here disconnect their postpayment control of their consumption and expenditure (see Box 7). customers for arrears beyond a certain threshold. (The Users with their own connection say they are no longer at exception is Mogale City, South Africa, where access the receiving end of bills they do not trust and cannot pay, to water is a constitutional right, and poor households, and they are not punished for nonpayment. They feel that defined very broadly, get at least 6 m3 of free water per they have more control over their spending on water. month. Here, the flow of water can only be restricted, not stopped.) In Kampala, 84 percent of prepaid standpipe For me [prepaid meters] are OK, because I don’t have users surveyed said they had experienced disconnection of the Council coming and disconnecting the water. I use taps they relied on, whether a neighbor’s tap or a public what I buy. If I buy for K20 and it runs out, it is me standpipe. In Lusaka, 36 percent of those with their own that will go and buy again. With postpaid, when you are 18 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? BOX 7: URBAN LEGENDS ABOUT PREPAID WATER METERS Only the poor have prepaid water meters. Zambia’s President uses a prepaid water meter, one of four installed at the State House in Lusaka. Water utilities in Zambia, Uganda, and Malawi have introduced prepaid water meters for institutional customers (government buildings and police and army barracks), who are often their biggest debtors. Prepaid water systems have been installed in high-income housing estates since 1999 in South Africa and elsewhere. Several cities (Lusaka, Mogale City, Johannesburg, and others) aim to make prepaid metering the default on all metered connections. Conversely, in Mzuzu, Malawi, the utility plans to target all areas except low-income settlements, to avoid any possible hardship and because the costs outweigh the benefits. Prepaid meters solve cost recovery problems. The cost-recovery potential of prepaid meters is not as straightforward as many of their protagonists assume. Prepaid meters bring their own set of problems: the high cost of installation; the fact that meters can develop faults that deliver free water or can be bypassed or vandalized when monitoring and follow-up action are neglected, which opens the way for high NRW losses; technical shortcomings, including inaccurate readings when water pressure is variable; and so on. In addition, the opportunity cost of big investments is high, as the real working life of prepaid meters is only about 5–7 years, compared to the estimated 15 to 20 years for conventional meters. People using prepaid meters spend more and consume less. Households in Lusaka and Mogale City with prepaid house connections tend to be more conscious of their water consumption and use less, and consequently spend less on water. In Kampala, most households using prepaid public standpipes say they spend less and use more because water from standpipes is substantially cheaper than from third-party sellers. This review found no evidence that prepaid users pay a higher tariff than other utility customers. The costs of prepaid metering are spread across the total customer base, just as the costs of credit management and bad debt are borne by all customers. disconnected, they close the meter. It will be up to you to they borrow cash or water from neighbors, reciprocally. follow them to come and reopen after you have paid. But In focus groups, users with their own connection who with prepaid, if water runs out you buy and put yourself had previously had the option of “use now, pay later” back on. [Lusaka resident] were most likely to find prepayment inconvenient or compromising. They were used to a continuous flow and Some criticize prepaid meters for making access to postpayment, rather than discrete advance purchases, and water contingent on upfront payment. In most parts felt keenly the inconvenience of having to fetch water in of most cities, where people rely on water vendors, a container. “The disadvantage with prepaid is that your kiosks, and neighbors who resell, they often already pay dignity suffers when you have to go and borrow some for water before they use it and they are familiar with water,” said one man from Mogale City. “You carry a the consequences of not having cash to buy water, and bucket up and down, and people see you. They will say, the vast majority have coping strategies—for example, ‘He doesn’t have the money to buy water.’” www.wsp.org 19 The Limits and Possibilities of Prepaid Water in Urban Africa What Does Prepayment for Water Mean for Customers? A defining feature of prepayment is that the water supply 3.3 Summary stops when the credit is exhausted. Service providers need Prepayment systems have the potential to offer customers to give considerably more attention to measures that some significant benefits: for standpipe users, access to minimize the inconvenience and potential hardship this can lifeline tariffs, more autonomy, and their own account cause. These include tariff subsidies, including a possible with the service provider; for those with a prepaid zero tariffs for a lifeline amount, and a reserve allowance connection, better risk management and more control over loaded onto a customer’s credit token or meter, like a consumption are big advantages. Most low-income prepaid reserve tank on a motorcycle that a customer must activate customers surveyed for this review were mainly positive deliberately. Some make allowances for credit running out about prepayment, despite its drawbacks. They flagged when vendor top-up options are unavailable (overnight, three broad areas warranting closer attention: for example). There is also a form of overdraft facility that • Improved technical performance and reliability allows customers to access water in an emergency, with the • More convenient vending option of repayment being waived on appeal (see Box 18 • Better safeguards against inconvenience and hardship on Mzuzu, Malawi). Underpinning all of these, the service provider must be prepared to respond rapidly when faults The next section looks at improving the overall management are reported to keep water outages to a minimum. of prepayment. 20 Targeting the Urban Poor and Improving Services in Small Towns IV. Prepaid Water in Practice The evidence from this review suggests that most domestic 4.1 Why Service Providers Opt for Prepaid customers actively prefer the benefits that prepayment Water: Key Drivers confers over postpayment. To secure and sustain such Many service providers believe that prepaid water meters benefits, a service provider must be able to manage the can help them address some of the service challenges they operational challenges that a prepayment system presents, face: limited funding to serve rapidly growing settlements, and the prepayment system must be cost-effective. This demand for water outpacing the available supply, aging section explores what it takes to introduce and run a networks, high nonrevenue water (NRW), poor payment prepayment system so it delivers the benefits envisaged. levels, and so on (see Box 8). As section 5.3 points out, BOX 8: SOME REASONS SERVICE PROVIDERS GIVE FOR INTRODUCING PREPAYMENT Improve revenue • Raise payment levels, improve cash flows, and avoid arrears and bad debt: Prepaid meters make payment unavoidable (unless customers bypass or tamper with their meters). • Maximize collection: Stop staff from colluding with customers to alter their credit records, delete debt, understate meter readings, and so on. Manage water demand • Promote greater water conservation and reduced wastage: Prepayment raises awareness of consumption, and incentivizes customers to close taps and repair leaks on their properties. Improve equity • Sell water more equitably to poor customers using standpipes by cutting out intermediaries and supplying water at the same tariff or less than the provider charges customers with their own connections. • Extend access beyond the hours that water vendors and tap attendants work. Reduce the cost of doing business • Reduce billing queries: Estimates, human error, and disputed bills can annoy customers, create extra work for utility staff and delay payment. • Avoid disconnections, which are unpleasant both for customers and the staff who execute them. • Streamline revenue administration: Reduce the number of staff required for meter reading, issuing bills, responding to billing queries, following up arrears, and disconnecting supplies; redeploy some of them to tracking leaks and following up anomalies revealed through analyzing purchase and consumption data. Respond to explicit customer demand • Give water users the benefits they currently enjoy with prepaid electricity, such as more control over consumption, more credible metering, no questionable bills, no debt or arrears, and various top-up options. • Enable customers to pay only for the water they consume, rather than sharing bills and subsidizing nonpayment by others. www.wsp.org 21 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice those who support prepaid approaches believe that the is more demanding than conventional meters and billing, financial costs of the systems are in many ways outweighed with interdependent electronic, mechanical, and software by the benefits they can deliver for customers (see Box 21). components to manage, and more to go wrong. Their governments expect prepayment systems to be Beyond the daily challenges of maintaining a reliable supply commercially viable and self-funding. Some are even of safe water, a prepayment system has interdependent expected to serve as “cash cows” for other sectors. Yet many electronic, mechanical, and software components to of those same governments prefer to hold down tariffs at manage and maintain at each connection site and vending subeconomic levels, and offer meager subsidies, if they point. It requires a network of credit vendors selling prepaid offer subsidies at all. Prepayment holds the promise of a water that must be equipped, serviced, and managed. A remedy for low collection rates. Customers pay in advance credit transfer device is needed—either a physical token for a specified amount of water from a shared or individual or smartcard, (which can get lost, stolen, or broken) or a connection. There is no risk of arrears or debt, and, for the numerical credit key, printed on paper or sent by mobile service provider, there is the prospect of healthier cash flows, phone, and entered via a keypad that must communicate more revenue to fund upgrades and wider coverage, and the reliably with the device. Most importantly, at the heart of resources to reverse or preempt the kind of downward spiral prepayment are customers whose trust in the new system that makes tariff increases unlikely, however necessary they must be earned and sustained. A fault on a prepaid meter might be. can shut down the supply of water that customers have already paid for, or provide free water. Regular monitoring Some service providers see prepaid standpipes as their best and data collection is essential to track performance and option for providing more equitable services in low-income consumption. areas, but acknowledge that revenue income will not meet the costs unless cross-subsidies are in place. Most service providers said they had focused on the potential to optimize collection and minimize debt, without taking Another set of drivers is the buzz and prestige associated into account the degree of back-office integration necessary. with technological advances, such as smart metering Especially challenging has been the additional maintenance and advanced metering infrastructures, as well as the required, and the importance of equipping staff to engage increasing prevalence of prepaid systems for electricity and effectively with customers around prepayment. Managers mobile phones. Upfront payment for services is a widely found themselves exchanging one set of challenges (around adopted practice. Despite political controversy about payment) for another, with which they were less familiar using prepaid systems for water—with access enshrined (Figure 12). as a basic right in some constitutions and international declarations—there is growing demand from customers for This may be a particular challenge for small-town the benefits they believe prepayment offers (see Box 9). municipalities and the small private providers they often contract. The experience of a pilot project in Koboku, 4.2 Most Service Providers Underestimate northern Uganda, from 2011 showed that small towns What Prepayment Entails relying on private operators may struggle to implement 4.2.1 Managing Prepayment Is More Demanding than and sustain a prepaid water system. In particular, Koboku’s Conventional Meters and Billing small operator struggled with procurement and cash flow All of the service providers reviewed found that they had requirements needed to source stock and spares, and was underestimated what it takes to run an effective prepayment dependent on external technical support, travelling from system sustainably, and just how much maintenance, another country, to set up the management system and support, and monitoring it requires. Managing prepayment address faults. 22 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 9: WHY PREPAID WATER LAGS BEHIND PREPAID ELECTRICITY Successful implementation of prepaid electricity in many African countries is spurring demand for prepaid water. Many customers have experienced the benefits of prepayment for electricity and mobile phones, and now want to manage their water purchases in the same way. But prepayment technologies for water lag far behind those for electricity. Three main issues explain this. • Prepaid water meters face physical stresses that do not apply to electricity. There are more moving parts, most subjected to fluctuating pressures and flows, and wear, fatigue, and abrasion increase the likelihood of malfunction. Grit, debris, and air affect water metering in ways that are not relevant to electricity. Any moisture can cause malfunctioning in the electronic circuitry. Plus, prepaid water meters need their own individual energy source, and finite battery life limits what they can do. Dealing with battery failure and battery replacement is a central part of managing prepaid meters. All of these issues make prepaid water a less reliable technology than prepaid electricity. • The electricity sector is much less fragmented than the water sector, and has far greater clout to direct what manufacturers supply. For more than two decades, manufacturers of prepaid electricity equipment that want to serve particular markets have had to conform to standards and specifications that allow utilities to mix and match components, without being locked into a particular proprietary hardware and software system. This has driven competition, with price and quality improvements. Conversely, proprietary systems still dominate the prepaid water market. • Prepaid water is often seen as controversial. Payment for the supply of electricity is accepted more widely than payment for water, and access to electricity is not regarded a basic human right. There are no substitutes, such as candles or charcoal, for households that run out of water and cannot buy more. Fear of controversy has deterred some big manufacturing role players from entering this market. Prepaid water systems are now catching up with developments in other sectors. Several suppliers of prepaid water systems now offer nonproprietary options, which permit mix-and-match and allow prepaid water and electricity utilities to share the same vending infrastructure, with big cost savings and benefits for customers. The real breakthrough will be when nonmechanical water meters become more affordable, because this will lessen prepaid water meters’ vulnerability to debris in the network. Adapting to prepayment requires a significant shift in prepayment department, which has led the development of the way service providers organize their operations. streamlined operating procedures to speed-up call-outs and Customers who have paid in advance for water have a right accelerate resolution of queries. to expect a prompt response in case of a service problem. Yet few service providers have revised their operational Developing an integrated post- and prepayment management systems to support quick response times and revenue management system can be challenging. Service speedy resolution of likely problems. Lusaka Water is an providers’ revenue management systems are configured for exception, as it is aiming to make prepayment the default postpayment, where the relationship between consumption across the city. For this purpose, it established a dedicated and sales is straightforward. With prepayment, consumption www.wsp.org 23 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice follows sales. Credit might be used over more than a FIGURE 12: MANAGERS OF PREPAYMENT SYSTEMS month, and the relationship between credit purchased OFTEN FACE AN UNFAMILIAR SET OF CHALLENGES and volume sold may be affected by the impact of a rising block tariff (if used over one month, it buys less water than if the same amount of credit was used over two months or more). Regular meter reading is needed to track real- time consumption and calculate water balances and NRW accurately (Box 10). Effective operational management of prepayment may need more staff, not less. Several heads of service providers said they anticipated human resources savings from prepaid meters—primarily because they will need fewer meter readers and billing and credit-management staff. The overall staff numbers required might not be fewer, if a reduction in billing and credit-management staff is offset by additional customer engagement and technical support staff. This may be the case particularly in areas served by communal water points. Beyond interacting with local administrations and leaders, community liaison staff is kept busy building acceptance and understanding of prepayment, and helping to deal with software errors and token faults. Vending management entails a range of new relationships and support needs, with special effort required to support integration of prepayment with the existing revenue management function. Meter readers are redeployed from meter reading for billing to meter reading for monitoring, because consumption data must be collected to track NRW. Finally, because more can go wrong with prepaid meters, additional technical staff may be required to respond quickly to faults. BOX 10: PREPAYMENT DOES NOT GUARANTEE LOWER NONREVENUE WATER Prepayment metering can improve or worsen NRW, depending on how well the system is managed. Volumetric tariffs and more accurate metering will reduce NRW, and prepayment cuts out a range of administrative losses arising from data capture errors, wrong tariff codes, and incorrect addresses for billing. NRW will increase where reduced consumption raises water pressure and the leakage ratio, and where faults, tampering, and bypassing provide free water. 24 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice When a service provider signs up prepaid customers who rather than on interacting with people who are already use a shared tap and issues them an iButton or smartcard, it serviced. Yet the value of vast investment in physical signs up a substantial number of new customers with whom infrastructure can be compromised if customers feel they it has a direct service relationship, even though the number were consulted inadequately before installation, do not of connected water points barely changes. This calls for a understand the tariffs and charges, or are not confident reassessment of staffing ratios, service norms, and desirable using the meter. indicators to assess the effectiveness of service provision, in contexts beyond postpaid individual connections. Proactive communication is essential for helping customers understand the reasons for the service 4.2.2 Prepayment Raises Expectations: A Customer provider’s change in payment strategy and how it may Focus Remains Imperative impact them. When individual prepaid meters replace Improved payment levels are about more than the aging conventional meters, education programs need to technology of payment and collection. Technical approaches alert customers that their metered consumption may be that assume that customers will accept prepayment with higher than they are used to, because the older meters may minimal consultation or engagement may invite bypassing have been under-reading. Equally, large households on and vandalism, and will fail to address the underlying fixed tariffs may pay more when paying a volumetric tariff, reasons for poor payment. especially if there are unnoticed leaks. House-to-house visits and local public meetings are essential to develop a Nearly all African water service providers face a tough direct engagement with the customer (Figure 13); media dilemma. Without improved collection rates, they will campaigns and publicity are not likely to be enough. In struggle to fund service improvements, but without service Kampala, the value of augmenting the National Water improvements, customers have little incentive to pay team with social science expertise has been demonstrated promptly. Opting for prepayment meters to resolve low through enhancing the organization’s understanding of its collection rates before attending to service deficiencies is customers’ needs and those of specific subgroups, notably likely to prove contentious. women and children, and its capability to engage with them. “Customer care remains key,” said a Mogale City technician. “If you put [PPMs] in and forget about them, you can forget about your money too.” If anything, prepayment requires even greater interaction with customers: building acceptance for paying for water among people who have FIGURE 13: ONGOING INTERACTION WITH CUSTOMERS IS ESSENTIAL not previously paid; developing trust in prepayment; negotiating installation; explaining charges and issuing tokens; showing customers how to use the prepaid meter; and following through with regular monitoring, maintenance, and interaction. In addition, the introduction of prepaid meters on communal meters offers service providers the opportunity to establish direct relationships for the first time with a vast new base of customers who were previously served, often poorly, through intermediaries. The way prepayment meters are introduced is decisive. Some managers argue that available funds are better spent maximizing the extension of services to new areas, www.wsp.org 25 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice 4.2.3 Demand Management: A Different Business savings accrued from pumping lower volumes of water Case for Prepayment (Olivier and Fouche 2007). Prepaid meters on individual connections promote greater awareness of consumption and waste than conventional 4.3 Three Core Challenges meters, because the relationship between payment and 4.3.1 Improved Technical Performance and Reliability consumption is more direct. Customers say they no longer Prepaid water metering can support service improvements leave taps running and notice leaks sooner, and have an by improving revenue collection to extend coverage, increase immediate incentive to attend to repairs because they can connections, and fund improvements, and through better see their credit drain rapidly if they do not. demand management that can make more water available to raise pressure, extend supply hours, or serve other areas. For customers, lower consumption translates to lower spending But it can worsen access to water where the technology is on water. For service providers, lower consumption means less unreliable and response times are inadequate. revenue for the service provider, while fixed overhead costs remain the same. Leak repairs on large institutional customers Prepayment technologies are improving, but even the (notably big government housing estates or army barracks) best systems are more vulnerable to faults and failure than can reduce consumption by two thirds. conventional metering systems. They are more complicated, and have higher maintenance costs and a shorter average life But reduced consumption also means more water in the cycle (seven years is generally the outer limit, which is half that network, higher pressure, and potentially higher leakage of conventional meters). Batteries fail, valve diaphragms and and NRW. In Kafue, Zambia, reduced consumption and seals wear, moisture disrupts the circuitry, and communication higher water pressure raised the leakage ratio to the extent errors between the credit token reader and meter can affect that Lusaka Water was obliged to halt the installation of supply. A common cause of faults is worn seals or diaphragms prepaid meters and allocate resources to repair and replace that cause the valve to lock, cutting off the supply entirely, or sections of the network. Once the upgraded network was stay open so that water flows continuously. repaired, at significant cost, the combination of reduced consumption and fewer leaks meant that the hours of supply Prepaid metering can magnify the impact of network increased from less than 15 hours to a continuous 24/7. deficiencies. A critical vulnerability is that mechanical Lusaka Water has moved from a significant supply deficit in meters are prone to errors caused by air and grit in the Kafue to having sufficient water to extend coverage to new water network. This fault is common across all metering areas, with lower NRW. applications, but the impacts are more serious in a prepaid meter. Air in the system after a supply interruption can In Mogale City, South Africa, water officials found that the spin the counters and erode credit, and grit can jam the business case for saving water was very different from that meter. Low water pressure can shut down water meters; for recovering the cost of supply. Mogale City moved from irrespective of whether customers have credit remaining low payment of a fixed tariff irrespective of consumption, (see Box  11). Most meters require a minimum pressure of to prepaid metering with a volumetric tariff.  The gains 1 bar (a head of water of 10 m) to register flow and read with prepayment were substantial, but not primarily from accurately, although some can be set to cope with pressure revenue collection. Purchases by low-income customers as low as 0.2 bar. But water pressure is likely to increase beyond the free basic allocation were modest. The real when prepaying customers reduce their consumption, and benefit was lower NRW and lower bulk water purchases. with that, leaks and NRW may rise. Average monthly household consumption dropped by nearly two thirds, from more than 29.9 m3 to 11.2 m3 over The performance and reliability of prepaid meters vary 21 months from early 2006, as part of a focused demand markedly. Water managers in the eight case study cities management intervention that tracked 677 households have had experience with 10 makes of prepaid meters new to prepayment and a metered tariff. Significant energy between them (see, for example, Box 12). One manufacturer 26 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 11: PREPAID METERS DO NOT COPE WELL WITH WATER SUPPLY INTERRUPTIONS Twenty-four/seven water supply should be considered a minimum requirement when installing prepaid meters, because air and grit can get sucked into the network after a supply interruption and cause the prepaid meter to malfunction. Grit can jam the valve open (free water) or closed (no water), and air can spin the counters in the mechanical meter and exhaust the remaining credit without supplying any water. This vulnerability makes prepaid metering an unsuitable choice for cities with regular supply interruptions that may be looking to prepayment to improve collection rates. Water utilities are learning to focus their prepaid meter installations in areas with 24/7 supply and water pressures levels that the meters can tolerate. In areas where service interruptions are likely, the service provider may have to pursue other technologies, or budget extra to upgrade the network, street by street. Without this, service quality for customers will deteriorate and prepayment metering will be associated with more frequent supply interruptions. But service interruptions contribute to low payment rates. “If you don’t sort out your network, you’ll never get decent collection rates,” said one technical manager. Bypassed prepaid standpipe meters because of low water pressure in Kanyama, Lusaka. The utility has now installed a conventional meter and tap ahead of each prepaid standpipe, and tap attendants sell the water per container for cash, bypassing the disabled prepaid device. currently dominates the market for prepaid standpipes, but provider said 20 percent of installed units failed in the first there is more competition among suppliers of individual six months; another described this type as “just an expensive meters. One recent entrant in particular shows promise of tap,” and removed them all within 18 months. much improved reliability where the supply is 24/7 and the pressure relatively constant. Pricing varies significantly, but all service providers who bought on the basis of the lowest price have been Some brands perform comparatively well, while others disappointed. Inexpensive devices can prove costly when are notorious. Among the worst performers, one service they fail within a year or two and when reparability, access www.wsp.org 27 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 12: TOO COLD FOR COMFORT: WINTER CHALLENGES FOR PREPAID METERS IN MASERU Lesotho is known as the mountain kingdom, and has very cold weather in winter. This raises the maintenance load significantly for WASCO staff when the prepaid meters ice up inside and shut down. In the cold months, there are up to 60 call-outs a day in subzero temperatures, against a total of about 3 500 prepaid meters. Learning from these experiences, WASCO technical staff prepares refurbished meters in advance to swap in and out within five minutes to minimize the inconvenience to customers. The utility bears the full cost of all maintenance. In 2011, the utility introduced 300 meters of a different type that were designed to cope with subzero temperatures. Programming the software on the new meters to meet WASCO’s needs presented challenges that could not be resolved. WASCO wanted to be able to track whether customers were buying credit each month, as a way of identifying possible tampering or bypasses, but instead the meters cut-off supply entirely if no credit was bought within a 30-day period. This inconvenienced customers and created extra work for utility staff. After 18 months they were all removed, and replaced with more of the frost-sensitive type. Mounting the meter units inside a robust plastic container below ground has reduced their vulnerability to low temperatures. Although the managing director believes that prepaid meters help improve revenue collection, and that customers really want prepaid meters because they feel in control and can manage their consumption in line with what they pay upfront, there are also concerns in senior management that prepaid meters remain unreliable and require high maintenance, particularly in winter. to spares, and aftercare is poor. The realistic working life of call-outs and repair costs, and can only give anecdotal the device before replacement is a critical cost consideration, accounts of call-outs, service failures, and maintenance particularly with proprietary systems that do not allow requirements. This constrains sober assessment and service providers to mix and match components. Price alone awareness by service providers, beyond maintenance units, is not an indicator of performance, as even some mid-range of what it takes to keep prepaid meters working. meters have proved unreliable, unrepairable, and poorly supported. Analysis of the data that service providers do collect gives some indication of performance. Box 13 provides two useful Two trends are evident among suppliers of prepaid meters: snapshots of the performance of prepaid standpipes. Both a growing number of suppliers are entering the market with use the same make of prepaid meter that is used widely on the aim of competing on price, while more sophisticated standpipes. high-end models that aim for robust reliability are being developed. If the performance of prepaid meters improves These findings flag the importance of service providers and demand increases, perhaps large production runs and developing the capability in-house to respond swiftly to scale economies will allow the benefits of more reliable call-outs and undertake repairs themselves, rather than technologies to be shared more widely at lower prices. paying suppliers or their agents. Yet every technical team interviewed said they were under-resourced: Limited record-keeping constrains management’s They needed additional personnel, more vehicles, and awareness of the high maintenance burden. Most service the budget and procurement support to carry a larger providers do not keep detailed records of prepaid meter inventory of spares. 28 Targeting the Urban Poor and Improving Services in Small Towns BOX 13: SOME PERFORMANCE DATA ON PREPAID STANDPIPES In Kampala, National Water reads FIGURE 14: STATUS OF 1,223 METERS IN FEBRUARY 2014 every standpipe meter monthly 0.4% and records basic performance Disconnected because of plot 0.3% data. Figure 14 shows the status ownership Disconnected of 1,223 prepaid standpipes on the changes because of unauthorized day they were visited in February 2.8% Meter connection removed 2014. Three quarters (74.9 percent) 9.6% No water 0.1% Meter supply vandalized were working well on the day their meters were read in February 12.7% Meter 2014. faulty 74.9% Working Technical faults with the prepaid Well meter accounted for half the number not delivering water; more general service problems explained the lack of water at the remaining 12.4 percent of sites. Performance was Source: Data provided by NWSC markedly worse at meters that were more than three years old, with almost half not working. Average FIGURE 15: ANALYSIS OF PREPAID METER FAULTS ON consumption per meter from a sample of 455 WINDHOEK STANDPIPES REQUIRING REPLACEMENT PARTS for which data was available over a six-month OVER A 10-MONTH PERIOD, 2012–2013 period was 34.6 m3 per month. Reed Windhoek City Council files records of all Elbow call-outs but does not collate or analyze the PC board data. Call-outs are most commonly the result Ballvalve of customers reporting that they cannot get Valve seal the water they have paid for. About 20 percent Meter of calls report water running nonstop from Battery the meter. Records from a 10-month period Tag reader in 2012–2013 show 1,135 call-outs from 582 Valve Diaphragm meters (Figure 15). Most prepaid standpipes are three years old or newer. This represents 0 5 10 15 20 25 30 35 40 45 just over two call-outs per meter per year, in Percent a context of 24/7 water supply and adequate Source: Data provided by Windhoek City Council water pressure. The most common problems were software errors, valve faults, and low battery power. Two thirds of call-outs required replacement of parts; of those, 63 percent involved the valve—a seal, a diaphragm, or the entire latch valve. Replacement of the parts shown in the graph cost the city just less than US$30,000. Per meter, this averages nearly 10 percent per year of the US$550 purchase price of each standpipe device. In addition, Windhoek replaces the batteries proactively every 18 months, and more frequently where individual batteries fail before this. Each battery costs about US$42. In areas of dense settlement and intensive use, batteries may fail after as little as three months. www.wsp.org 29 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice FIGURE 16: COLLINS OUMA, A SELF-TAUGHT METER REPAIRMAN IN NAKURU, KENYA, REPAIRS A LEAKING SEAL WITH A MAKESHIFT PLASTIC GASKET Reparability and ready availability of spares is critical Regular monitoring is essential to track real-time for optimizing turnaround times. Some types of prepaid consumption. Meter reading is just as important for prepaid meters cannot be repaired locally because of how the meters as for regular meters, because service providers need components are assembled and they have to be returned to consumption data to monitor demand and NRW. Equally, the supplier (Figure 16). Service provider staff in Kampala, faults, bypassing, and tampering can result in high NRW Maseru, Nakuru, and Windhoek has built up the skill losses (see Box 14). Customers are likely to report faulty and experience to repair their meters themselves. All use meters that do not dispense water. Users of prepaid meters the same type of prepaid meter, and its reparability is an on communal standpipes are as likely to report “no water” important reason why many service providers prefer it. as water that flows continuously, where it inconveniences But difficulties in sourcing spares and delays in delivering them. But customers with their own connections might them can mean that shared water points designed to serve not notice and are less likely to report meters that dispense more than a hundred people may stand unusable for water for free. months, and put pressure on other water points. Where meters are not reparable, service providers routinely swap Data collected using automatic meter reading (AMR) out faulty meters on individual connections and replace can help flag free water swiftly, but AMR is seldom cost- them with new meters, or install an unmetered “straight- effective for low-volume consumption. Regular proactive through” connection that supplies free water, or revert to a visual inspection remains essential, even with AMR, to spot conventional meter. ground disturbance and evidence of pierced valves. 30 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 14: REGULAR MONITORING IS ESSENTIAL TO MINIMIZE NONREVENUE WATER In 2012, Mogale City municipality commissioned a performance audit of 10,000 prepaid meters—nearly a third of the total—after adverse comments by the Auditor General about high NRW figures in its annual financial statements. The results were sobering. Eight years after installation, more than 90 percent of the meters were found to be faulty. The vast majority was delivering free water, either because the valves were jammed open, or because customers had bypassed or tampered with them. These findings prompted a far-reaching change in strategy, with a new emphasis on regular monitoring and swift follow-up on exceptions. Tampering (left) and bypassing (right) have fallen sharply in Mogale City since the municipality appointed a service provider to do regular visual monitoring, meter reading, and exception reporting. Few service providers are using the data capabilities municipality finance and water department (see Box  15). of prepaid systems to track consumption trends and The data is useful for tracking seasonal consumption respond to exceptions. With some exceptions, service trends, calculating water balances, identifying households providers are not yet fully exploiting the data capabilities consuming more water than they buy or bypassing their they have invested in. In their defense, most are using meters, and so on. Another is Lusaka Water, which is fairly dated proprietary software that is slow, unwieldy, and collecting data fortnightly with drive-by automatic meter inflexible once it has been configured. It is also expensive, reading to pick up faults and problems early on in its new which is a deterrent to regular upgrades and customization. prepayment systems. Two exceptions are Mogale City and Lusaka. Mogale One supplier suggests that the costs of prepaid systems could City has service providers doing visual inspections and be lowered, and the overall management could be streamlined, a combination of manual and automatic meter reading if service providers kept their data demands simpler, and to collect data, analyze it, follow up on exceptions, and used the data available to them already. According to him, do maintenance across a growing proportion of the city’s “Service providers are demanding more and more bells and 35,000 prepaid meters, and report on their findings to the whistles on their systems which they never use.” www.wsp.org 31 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 15: TURNKEY MANAGEMENT CONTRACTS OFFER A ONE-STOP SHOP OPTION, AT A PRICE Athi River, Kenya: One manufacturer has developed a standalone prepaid system for a shared water point outside of the utility supply area, with a full-service contract. It has a solar-powered borehole and solar-powered prepaid water dispenser that provides water to customers at the same price as local water vendors, but more reliably. Forty of these systems have been have been installed in East Africa since 2008, and the approach seems to be working well. The capital and installation cost is very high, but the system is robust and supported by a prompt and efficient back-up team. The system is monitored constantly via an Internet link, and a maintenance crew is dispatched in response to automated alerts. Users say supply interruptions are rare. A local community-based organization (the “Ten Sisters and Fifteen Brothers Self Help Group”) manages the system day to day, and receives the balance of funds once costs are covered; the CBO’s main source of income is from selling water at a markup to customers who do not have their own credit token. The CBO employs an attendant and security guard. A committee member fills his container. Customers top-up their credit using their mobile phones, and receive a token number by mobile phone. They enter this number and top-up their Dallas key on the dispenser itself. The mobile phone operator charges no fee for this service, as it benefits by locking customers into its network. The phone company pays the service provider, which deducts its service fees and pays the balance to the CBO. In 2014 the manufacturer will introduce a new prepayment system and service package that is priced more competitively. Mogale City, South Africa: The municipal water department first adopted prepaid water in 1998, and after trying different permutations of in-house and external installation and management, has now opted for a full turnkey contract to supply, install, maintain, and monitor 39,000 prepaid meters. It first piloted this approach by replacing aging prepaid meters in a 1,026-unit installation at an upmarket housing estate. It quadrupled sales in the first month with the new meters, and sales now average more than three times what they were because of regular visual monitoring and firm action against those who bypass or tamper with their meters. This approach was then scaled up to cover 4,600 units. A new expanded contract will serve 39,000 meters, with a drive-by automatic meter reading component. Some visual inspection will be retained to remind customers that bypassing and tampering will be noted. 32 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice 4.3.2. Improve the Convenience to Customers of still piloting prepayment or trialing a particular make, and Credit Top-Ups are often slow to expand later. Most prepaid water systems For a management system that is premised on advance payment, use proprietary hardware and software, and service providers a surprising finding is how inadequate most credit vending may find themselves locked into a technology that is arrangements are. Most service provider’s planning emphasizes relatively inflexible and expensive to maintain and change. physical installation of prepaid meter units and their associated Service providers that are unhappy with the performance reticulation and plumbing, not the development of a wide of their systems are often reluctant to invest in additional network of conveniently located credit vendors (Figure 17). vending sites. They might then move on to try another make of prepaid meter in a new area, and set up a new Easy credit purchase is one of the most critical success proprietary vending system to serve new customers there, factors for a prepayment system. Making payment easy, leaving their existing customers no better off, and with no pleasant, and convenient for customers is one of the most prospect of improved credit-loading options. Customers basic requirements for raising payment levels, yet this is one expressed great frustration with the inconvenience and cost of the weakest links in the prepayment service cycle. of travelling to distant top-up points. The comparatively high perceived cost of vending Where water service providers stipulate that their suppliers infrastructure limits the number of top-up sites. A point must comply with the nonproprietary Standard Transfer of sales device on its own can cost as much as US$2,000, System (STS) specifications developed for prepaid with the vending software a further US$15,000 or more. electricity (see Box 16), there is scope to reduce the cost of vending infrastructure substantially and offer customers Service providers are usually cautious about the number of the convenience they want. STS is an open standard credit-loading devices they purchase initially, while they are FIGURE 17: IN KAMPALA, NATIONAL WATER SELLS CREDIT THROUGH A NETWORK OF 23 SMALL BUSINESSES Vendors purchase credit in bulk from NWSC and sell it to customers, using a point of sales machine that loads credit onto the customer’s credit token. The credit vendors earn 10 percent commission on sales. This vendor’s main business is a clothes and dress-making boutique, where she earns about US$150/month selling water credit. www.wsp.org 33 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 16: STANDARD TRANSFER SYSTEM: A GAME CHANGER FOR PREPAID WATER? South Africa’s national electricity supplier, Eskom, led the development of prepaid electricity, and was large enough to require meter manufacturers to conform to common standards and design protocols. Proprietary hardware and software benefits its suppliers by locking customers into exclusive products. Eskom turned this around, and from 1993 required the suppliers of prepayment systems to design for compatibility. The initial focus was on developing security and encryption capabilities for numerical prepayment credit tokens, so that third parties, such as supermarkets, could sell prepaid electricity credit on commission. This would give customers the convenience of a wide range of pay points for buying prepaid electricity, and allow the electricity service provider to stay focused on its core business. A number of specialist vending management companies have subsequently emerged to handle bulk credit sales and cash handling, and to provide support for a large number of vendors. Those third-party vendors sell prepaid electricity primarily to increase foot traffic to their own businesses, in return for a small commission of about 3 percent. This encryption standard was called the Standard Transfer System (STS). The specifications were subsequently expanded to define the requirements for interoperability, allowing service providers to mix and match compatible components from different suppliers. This had the effect of spurring competition in addition to price and quality improvements in prepaid electricity metering. In 2007, STS was adopted by the Geneva-based International Electrotechnical Commission as the international specification for vending and credit token encryption for prepaid service providers, and now straddles electricity, water, and gas. It is used in 84 countries with about 130 suppliers certified as compliant. The latest specification, released in May 2014, is contained in IEC 62055-41 and is available on the Internet. More and more water service providers are asking for STS compliance, and suppliers are under pressure to offer compliant meters. By mid-2014, three manufacturers serving the water sector have been certified as STS compliant, and this number is expected to rise rapidly. This signals the start of a big shake-up in the prepaid water market. Key benefits of STS compliance include: • Compatibility. The common specification allows service providers to mix and match components, and opens the way for greater competition around price and quality. • A common vending platform. A common platform allows the service provider to share the cost of providing vending infrastructure with others already in the market. A water service provider will be able to sell prepaid water credit from the same places and devices that sell prepaid electricity and even mobile phone “air time.” The comparatively high cost of proprietary vending devices has been a key constraint on providing more vending sites. • Customer convenience. STS compliance gives customers the option of buying prepaid water from more places, 24/7, by mobile phone or over A credit purchase receipt, showing the Internet. the 20-digit numerical token 34 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice that defines encryption protocols for credit transfer, and Mitigate inconvenience with a reserve supply of decoding protocols for prepaid meters so that the credit credit. Prepaid meters on individual connections can data is interpreted correctly and the meter functions as be programmed to hold a specified amount of credit in required. STS-compliant prepayment systems allow water reserve. Customers can access this reserve if they run out service providers to piggyback on vending systems set up of credit after hours, or at any time. A portion of their next for prepaid electricity, and means prepaid water credit can credit purchase is allocated to top-up their reserve. Box 17 be sold by a wider range of retailers or via mobile phones describes how this is implemented in Mzuzu, Malawi. and the Internet 24/7. STS-compliant credit tokens can be loaded using smartcards, Dallas keys, or with a keypad Mitigate hardship with an emergency supply of water. using a 20-digit code delivered by SMS or on paper. Two of In several cities where the prepaid meters have been the case study cities (Mogale City and Lusaka) are currently programmed to support it, customers can activate an introducing STS-compliant systems. emergency supply of water (usually three or four cubic meters) beyond any remaining credit or reserve. This The increasing use of ICT in Africa may help make amounts to a form of water overdraft, and the deficit is prepaid systems more effective, eliminating cumbersome returned to zero at the next credit purchase, or later by token usage and vendors. Mobile phones are an obvious arrangement. vehicle for loading credit and paying for water. Most poor families have a mobile phone, and the vending infrastructure Preempt hardship with special measures to ensure for “air time” is extensive and well developed. At least two households are not denied access to prepaid water manufacturers of prepaid standpipes currently support because they cannot afford to pay. Prepaid metering credit recharge via SMS, but the credit still needs to be provides a precise, effective mechanism for targeting loaded onto a physical token, and their proprietary systems subsidies to poor and vulnerable households. The subsidy are not widely used. Many current vending challenges can be accessed in different ways, depending on how it is could be resolved using an STS-compliant SMS-based targeted: system capable of supporting multiple users at a standpipe • Service level targeting, for example, a lifeline tariff that does not require a physical token. The challenge is for all customers using a prepaid standpipe. to develop a system that is robust enough to withstand • Spatial targeting, for example, a lifeline tariff or intensive use outdoors in all weather. other measures for all households living within a defined area. 4.3.3. Provide Better Safeguards against • Individual targeting in cases of special need, as a Inconvenience and Hardship for Customers standalone support measure or in addition to benefits Water is both a human right and a commodity. Both provided through service level or spatial targeting. characteristics need to be taken into account to safeguard sustainable access to water for all. Prepayment offers The subsidy mechanism can be programmed on the many benefits, but better safeguards are needed to buffer prepaid meter itself, with the option of providing additional customers against inconvenience and hardship when their measures or concessions through a customer’s individual water supply runs out. This section has already flagged credit token. This allows measures that target the intended the need for quick response times to remedy inevitable beneficiaries even if they do not have a connection of their technology faults, and more convenient vending options to own. This represents a significant advance on subsidies that make top-ups easier. But what happens when credit runs are at risk of capture by intermediaries, without the benefits out and all vendors are closed, or the user has no cash to being passed on. buy credit? www.wsp.org 35 The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 17: COMMUNITY ENGAGEMENT AND CUSTOMER SAFEGUARDS IN MZUZU, MALAWI In Mzuzu, Northern Malawi, the Northern Region Water Board (NRWB) is introducing prepaid meters in low- and medium-density settlements, and for institutional and some commercial customers. It is not targeting high- density settlements or areas served by standpipes, because the costs of installation exceed the likely income and because it wants to avoid any possible hardship to low-income families. NRWB’s approach was informed by close interaction from 2008 with service providers using prepaid meters in Lesotho, Uganda, Zambia, and South Africa. As part of its due diligence, the company seconded three members of staff to work in two utilities to learn more about the practical management of prepayment. Among others, its application of two lessons from these exchanges seems particularly pertinent. The first lesson concerned the importance of not imposing prepayment, but rather engaging with customers through letters, house visits, and public meetings, and offering prepayment as a choice. Another lesson was the need for safeguards to minimize inconvenience or hardship. Implementation began in early 2013. In Mzuzu, prepaying customers can avoid running out of water afterhours or on weekends when credit top-up facilities are closed by accessing a programmed reserve. Their prepaid meter stores a certain number of purchased units (usually 3 m3) in reserve, where they remain available for use when the regular credit runs out. Customers can activate this reserve at any time and access enough water to supply them for a few days while they make arrangements to buy more credit. If this reserve is exhausted, there is an emergency “fire mode.” If activated, customers can access an emergency supply even when there is no remaining credit. This “overdraft” is paid off the next time the customer buys credit. NRWB says there have been cases where this emergency credit has been accessed in cases of hardship, and where it has waived payment or made special arrangements for the amount to be paid off over time. NRWB is open to negotiation in special cases, and has supplied water on credit to both domestic and institutional customers, where the customer negotiates payment by an agreed date. This has proved important for some institutional customers as it provides an uninterrupted supply for when the available credit is exhausted, before the next round of monthly funding by Treasury. Most of the service providers in this review provide a by taxpayers through the national government (Box 18). lifeline tariff to customers using prepaid standpipes, and a Prepaid meters make the administration of this benefit rising block tariff for those with an individual connection; relatively straightforward. the first block set at social tariff. The benefits of a simple, fixed, predictable tariff that is easier for customers to 4.4 Summary understand than a rising block tariff need to be weighed Water services are replete with examples of good service against the relief that a rising block tariff can offer poor delivery technologies that are marred by unhappy customers customers. South African municipalities take the principle and conflicts between users. Yet the evidence suggests that of a rising block tariff further by providing the first 6 m3 the converse is true for prepaid water metering: Most free to poor households each month, with the cost funded customers are comparatively happy with prepaid water 36 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Prepaid Water in Practice BOX 18: “FREE-PAY” METERING IN MOGALE CITY, SOUTH AFRICA Mogale City provides the first 6 m3 of water monthly to all its domestic customers for free. The free basic allocation is allocated automatically on the first day of each month, and prepaid meters in that municipality are programmed to treat the first 6 m3 as the first increment of a rising block tariff, with the tariff set at zero. Analysis of consumption data from a sample of 4,500 prepaid customers in Mogale City shows that roughly half of those living in Kagiso, a low-income township, are able to keep their consumption within the 6 m3 threshold, and pay nothing at all for their water. Municipal billing data shows that average consumption of postpaid customers in Kagiso is markedly higher, averaging about 20 m3 per month. meters, but the technology still lags behind what reliable institutions. Yet, this type of contextual response will prove service delivery requires. The contexts in which they are critical as prepayment unfolds. On its own, the technology used calls for particular resilience. cannot resolve many of the major issues that face water services in African cities and towns. Its adoption must be Service providers need to gear up to manage their matched by appropriate institutional reform and action, prepayment systems more comprehensively, with a greater business planning that considers different options, and emphasis on monitoring and maintenance. The challenge to careful scrutiny and redress of the seemingly perennial manufacturers is to raise their game by offering more reliable underpricing of water. The next section of the report turns products that can cope with the operating environments in to the latter issue. which they are used. Reference There are also several enabling environment issues to Olivier, F. and E. Fourie. 2007. “Prepayment Water Meter address, such as social safeguards to ensure that poor as a Revenue Enhancement Tool.” Paper presented by people do not get excluded from services. In many African Francois Olivier at the annual conference on Metering, countries and cities this remains a challenge. South Africa’s Billing and CRM Africa, Cape Town, South Africa, Free Basic Water facility may provide one way to deal May 16. http://www.metering.com/prepayment-water- with the challenge, but it may not be affordable to many meter-as-a-revenue-enhancement-tool. www.wsp.org 37 V. Is Prepaid Water Cost-Effective? The financial costs of the three applications of prepaid cost of the same device can vary considerably from supplier metering are substantial, and for many service providers they to supplier. The most commonly used prepaid stand post may prove prohibitive. This requires serious consideration, device costs between US$540 and 616, excluding the cost because service providers need to decide whether they can of the concrete apron. justify using scarce financial resources for such an expensive revenue collection mechanism rather than on other pressing Beyond the device are all of the other components of the needs, such as additional bulk water delivery. prepayment system that must be purchased upfront: management hardware and software, vending hardware and software, point of Considering the benefits that prepayment could deliver, sales devices (US$800 to 2,200, depending on type), and credit it would be unwise to advise service providers blankly tokens at US$10 each and more. The costs mount swiftly once against exploring this option. Nonetheless, given the staff training, integration with the postpayment system, and a strategic decisions required, service providers considering basic inventory of spares are added in. prepayment would be well advised to address the costs and revenue effects of introducing prepaid meters from the start Figures 18 and 19 give an indicative breakdown of the cost in their business planning. They may also find it useful to of two prepayment systems, costed in 2013. Figure 18, weigh prepayment against alternative means of achieving based on information provided by the senior manager of similar benefits—for example, by improving billing the utility concerned, shows the utility’s expenditure on a management, strengthening interaction with customers, large pilot installation. Figure 19 summarizes costs from a and managing tap attendants differently. 2013 tender submission. This section discusses some of the key financial issues around Figure 18 shows a breakdown of costs for a prepayment prepayment. It starts with a review of some basic costs, system for 1,246 meters totaling US$476,500. This before a more strategic analysis of the wider implications includes about 1,100 domestic meters with 15-mm gauge, for service delivery finances, including tariffs. at a cost of US$223 each, including their plastic casing. The rest were bulk meters for institutional and commercial 5.1 Basic Costs in Perspective customers, with meter gauges ranging from 15 mm to When discussing costs with service providers, the review 100  mm, and costs varying by size. The cost of vending team was told on several occasions that “prepaid meters cost hardware in this example includes smartcards. about four times more than a conventional meter.” This is based on the typical cost of a prepaid metering device for an Figure 19 shows a substantially bigger installation of 20,000 individual domestic connection, about US$210, compared domestic meters, with a total cost of US$5,702,362. The to typical conventional mechanical meter, about US$50. cost per meter, including installation but excluding system A brief review of the typical costs of a prepayment system costs, was US$285. Credit tokens cost US$9.84 each. shows that the full cost is considerably more. Management hardware and software costs were similar at Based on prices quoted by suppliers and figures provided the two sites. Figure 19 shows that nonmeter costs are a by service providers in the different case study cities, small proportion of the total cost in a large installation. the price of a prepaid meter for an individual domestic One implication of these charts is that the cost of vending connection ranges from about US$100 for a basic device infrastructure is a small proportion of the total cost. with questionable longevity, to about US$180 to 270 for a Limiting the number of point of sales devices is therefore more robust device with a lifespan of about seven years. The false economy relative to the cost of dissatisfied customers. 38 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? FIGURE 18: INSTALLATION COST BREAKDOWN FOR A 1,246-UNIT PREPAYMENT SYSTEM FOR INDIVIDUAL CONNECTIONS, 2013 5.5% Vending hardware 4.5% Software 2.2% IT hardware 80.3% Meters and installation 0.9% Maintenance kit 6.6% Staff training Even the best systems currently available have a realistic life FIGURE 19: INSTALLATION COST BREAKDOWN FOR A of about seven years. 20,000-UNIT PREPAYMENT SYSTEM FOR INDIVIDUAL CONNECTIONS, 2013 Most installations to date have had significant funding 0.1% Management support. Most installations to date were funded with software 0.3% Vending hardware substantial external support, and service providers have 96.2% Meters and 3.4% Credit tokens not had to fund the full capital project or cost of capital installations themselves. More and more are now using commercial or concessionary loans from private banks or international finance agencies. South Africa is an exception in providing substantial grant funding to support the cost of providing water services, including prepaid metering, in low-income settlements. At least 70 percent of the capital cost of prepayment systems in Mogale City, for example, is funded by the national fiscus. Most service providers do not require a contribution from customers to the installation cost. With one exception, customers have not been required to contribute directly to the cost of the prepaid water meters in any of These high costs flag the need to consider the realistic the cities reviewed (see Table 3). Lusaka customers with working life of the prepayment devices. Prepaid meters individual connections are charged a monthly rent of 8 that fail and need replacement within the first year or two Kwacha (US$1.22) per meter, which is the same amount are not uncommon, and add considerably to system costs. charged to customers with conventional meters. www.wsp.org 39 The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? TABLE 3: SUMMARY OF TARIFF APPROACHES FOR PREPAID METERING IN THE EIGHT CASE STUDY CITIES City Tariff approach for prepaid meters Kampala The prepaid standpipe tariff is by far the lowest utility tariff Lusaka Prepaid standpipe users are charged a tariff roughly equivalent to individual customers, taking into account the additional monthly meter rent charged to those with their own meters. The tariff for prepaid and postpaid customers with their own metered connections is the same. Maputo Only tap attendants have a smartcard for the prepaid standpipe or ablution block tap. The utility charges them a special vendors’ tariff, and they are allowed to charge a substantial regulated markup when selling to their customers. Maseru The prepaid stand post tariff is the lowest utility tariff. Customers with individual prepaid or conventional meters pay the same rising block tariff. Mogale City Prepaid and postpaid users pay the same rising block tariff. All get the first 6 m3 free. Nairobi Prepaid meter tariffs are less than those for conventional meters, and the prepaid standpipe tariff is the lowest. Nakuru Customers pay slightly more than the regular tariff for individual customers, but less than the wholesale kiosk tariff. Windhoek Prepaid standpipe users are charged a fixed tariff that is lower than the tariff for individual connections up to 3.8 m3 but pay as much or more than those with their own piped connection beyond that because of the way standing charges are calculated. Most service providers are absorbing the higher capital 5.2 Cost Effectiveness Varies across the and operating costs of prepaid meters into their general Three Applications expenses. Prepaying customers are generally tariffed at Although the costs and benefits of prepayment systems need the same volumetric rate or less than those who pay after to be considered in a wider economic and social context that consumption. is not only confined to the financial aspects, it is necessary to look at some of the key financial issues in their own right. This Several service providers have struggled to find an equitable is important not only to address obvious costs such as those tariff formula for customers with their own prepaid meter discussed in this report, but also because recovery of real costs that ensures parity with the regular standing charge may require significant tariff adjustments. This would require plus consumption tariff approach for customers with approval from the relevant authorities or economic regulator. conventional meters. Difficulties in programming the software of some meters to accommodate a rising block The indicative financial model (Box 19) considers the likely tariff compounds this, and Lusaka and Nairobi’s utilities costs and benefits of prepaid metering in different scenarios, are considering a fixed tariff. and compares them with conventional meters. 40 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? BOX 19: NOTES ON THE FINANCIAL MODEL This financial model’s analysis is based on the costs of a generic fictitious service provider. It uses realistic generic data on costs, tariffs, and consumption for different categories of customers. Its purpose is to assess the financial consequences of using an expensive technology to sell different volumes of water at low water tariffs. It places no economic value on the preference that customers expressed for prepaid meters in household surveys and focus groups. Nor does it account for the economic cost of local water vendors’ earnings being “exported” to foreign manufacturers. Using a simple regulatory accounting approach, the model considers capital and operating expenditures, likely capital maintenance expenditures and a notional cost of capital. This approach has the same components as present value or internal rate of return analysis, but constructs the model in a way that is more comparable to consumer and service provider expenditures and accounting patterns. It looks at the costs incurred by consumers through different approaches as well as by the service provider, both for household prepaid meters and through stand posts. The model uses averages. The model is indicative, populated with information that reflects averages of information from service providers during the fieldwork stage. The purpose has been to gain insights into likely overall costs and financial benefits, rather than assess the impact on a specific service provider based on any specific manufacturer’s costs. It allows for an average mix of 6,000 household and 300 stand pipe prepaid meters, which offers economies of scale in management, software, and maintenance support. Prepaid systems are presumed to deliver 100 percent bill collection efficiency compared to 80 percent for postpaid meters. The model allows for cash flow benefits from earlier tariff payments and reduced supply-side leakage, reported when consumers monitor flow more carefully. It was not possible to determine any indicative costs of reconfiguring service provider billing, banking, and accounting procedures to make best use of electronic prepaid billing systems. An overly generous assumption of zero cost was used for this. The model tests different sensitivities. The sensitivity of the indicative results has been investigated by considering “best evidence” assumptions for the stand post service, bracketed by “challenging” or “optimistic” assumptions for consumption, meter cost, and meter life. Costs and consumption for individual domestic prepaid meter connections were investigated, using a range of consumption levels linked to broad income. Costs and volumes typical for large institutional/commercial customers were also modelled. These findings were compared with conventional metering approaches, using an assumption of 25 percent NRW and 80 percent bill collection efficiencies. www.wsp.org 41 The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? The findings are indicative. The model uses a broad brush question. The modeling results indicate high sensitivity to approach, and aims to give a sense of the implications of the underlying price charged for water. The average tariff this technology and its possible role in conventional service charged by the service providers reviewed here is US$ 0.66 provider operations. Each service provider is different, of per m3. The findings are influenced particularly by the course, with varying cost structures related to bulk water, lifeline tariff, which averages US$ 0.27 per m3, using the NRW, and cost reflectively of tariffs. These differences data provided to this study. at the service provider level may affect the validity of the findings presented here. The results are equally sensitive to the size of the lifeline block, modeled here at 5 m3 per month), relative to the Prepayment shows a net revenue loss across most likely bulk water cost (assumed as US$0.25 per m3 based on applications. The financial analysis found that a typical service analysis of one service provider’s bulk water cost). provider in sub-Saharan Africa would make a net revenue loss on all prepaid metering approaches at present tariffs, except for Tables 4 and 5 summarize the findings of the model. large institutional/commercial consumers (Box 20). The values used are well-founded, but indicative only. Their details can be debated, but the larger point is clear: Using the same assumptions, conventional postpaid Prepayment for water is an expensive approach, and only metered households and vendor-run stand posts make a cost-effective at high consumption volumes. small but positive margin, even allowing for reduced bill collection efficiency for stand posts compared to domestic Table 5 assesses costs for standpipes, with three scenarios for connections. This is primarily because of higher sales prepaid standpipes differentiated mainly by the cost of the income. Customers with their own postpaid connections prepaid meter. typically use more water than those with prepaid meters, and tap attendants and vendors do not buy water at a The model shows that prepaid standpipes are more cost- lifeline tariff. effective than prepayment for individual connections with low or moderate consumption, because they aggregate the The findings indicate that prepaid meters on individual consumption of multiple households. But it also indicates connections are not cost-effective, except at high average that the combination of an expensive technology and lifeline household consumption levels. Prepayment for large tariffs may yield negative revenues from prepaid standpipes institutional customers, conversely, is very cost-effective. where tariffs and sales volumes are low. The high cost of prepaid metering rules it out as a cost- With a one-third increase in tariff above the present average effective remedy for billing and collection inefficiencies, of US$ 0.66 per m3, prepaid meters are viable for high- except at high consumption volumes. The investment and and middle-income consumers, institutional users, and maintenance costs are high, and much higher than current stand post users, but not for low-income households with tariffs are designed to accommodate. This does not mean individual connections, who are likely to be accessing water that prepaid meters are necessarily a wrong choice, but that at the lifeline tariff. The findings suggest that the cost of their cost and revenue implications must be investigated the prepaid system is presently too high to be supported and managed. financially through the sale of a low-priced product. A key underlying issue is the pricing of water. The viability of Costs absorbed across all consumers deliver a substantial prepaid systems (like most other aspects of a service provider’s benefit to people otherwise dependent on intermediaries. business) hinges on the tariff regime. If a service provider, for The model takes into account the significant finding that the whatever reason, charges below cost (for example, through additional cost of prepaid meters for standpipe customers lifeline blocks), the added financial benefit to be gained from is absorbed into the general costs of the service provider. using a relatively expensive charging mechanism is an open This enables the lowest-income consumers to access water 42 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? BOX 20: PREPAYMENT FOR INSTITUTIONAL CUSTOMERS CONSUMING LARGE VOLUMES HELPS MANAGE DEMAND AND RISK, AND IS COST-EFFECTIVE Large institutional consumers (police and army barracks, prisons, hospitals, schools, and government housing estates) are often the biggest payment defaulters, and erratic payments and bad debt affect service provider cash flows profoundly. Ministries of Finance routinely allocate funds for water to each ministry, department, or entity, but the funds are often diverted to other purposes. The ministry then allocates additional funds to settle some portion of the bill, while arrears continue to mount. With the backing of their respective finance ministries, from 2013 service providers in Malawi, Uganda, and Zambia began introducing prepayment for institutional customers. In Zambia, installation of prepaid meters began at the president’s residence. Prepayment provides institutional customers with a strong incentive to manage consumption better and fix leaks, and offers the service provider smoother cash flows without the risk of bad debt. The combination of high-volume consumption, low transaction costs relative to purchases, and tariffs that are more likely to be cost-reflective, yields attractive revenue flows. Improved income through prepayment for large volume customers can help fund service improvements and subsidies in low-income areas, including, potentially, subsidies for low-income households using prepaid technologies. Implementation has raised a number of unanticipated challenges. In Lusaka, for example, low water pressure initially compromised the performance of some prepaid meters, but once those leaks were repaired, consumption at some sites fell by two thirds; this, in turn, increased network pressure and resulted in a higher network leakage ratio. Long-term neglect of maintenance at many sites has given rise to extensive internal leaks, such that even large purchases of prepaid credit can be exhausted within days. This problem is particularly evident at army and police barracks, college residences, and apartment blocks, and flags unresolved questions about where exactly responsibility lies for the cost of repairs. Prepayment for schools and prisons is particularly controversial if it jeopardizes the continuity of water supply. At issue is that those who suffer the consequences of cut-offs are seldom those responsible for payment. Service providers in Lusaka and Mzuzu now make provision for special short-term credit advances for large prepaid customers, including schools, to safeguard continuity of supply. www.wsp.org 43 The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? TABLE 4: INDICATIVE ASSESSMENT OF COSTS AND REVENUE INCOME AT DIFFERENT LEVELS OF CONSUMPTION ON PIPED CONNECTIONS WITH CONVENTIONAL AND PREPAID METERS Individual Domestic and Institutional Connections Piped Distribution with Individual Prepaid Meters Piped Distribution with High-Income Middle-Income Conventional Meters Institutional HHs HHs Low-Income HHs Annual water 164.5 1,825 246.4 147.8 78.8 consumption (m3) Results with Average Tariff = US$0.66 per m3 Lifeline Tariff = US$0.27 m3 Total annual costs to US$133.8 US$1,297.3 US$177.9 US$112.9 US$73.1 consumer per household or connection Net annual revenue to utility US$2.3 US$393.7 US$1.2 US$26.9 US$42.7 per household or institution Results with Average Tariff = US$0.99 m3 Lifeline Tariff = US$0.41 m3 Total annual costs to US$176.3 US$1,922.9 US$247.5 US$150.0 US$90.3 consumer per household or connection Net annual revenue to utility US$27.1 US$878.6 US$52.8 US$1.8 US$29.3 per household or institution TABLE 5: INDICATIVE ASSESSMENT OF COSTS AND REVENUE INCOME, COMPARING PREPAID STANDPIPES WITH CONVENTIONAL STANDPIPES AND VENDORS Shared Standpipe Serving 35 Households Prepaid Meter on Shared Standpipe Standpipe Pay on Use/Individual Optimistic Best Evidence Challenging Private Vendor/Operators/Suppliers Assumptions Assumptions Assumptions Annual water 41.1 49.3 54.3 49.3 3 consumption (m ) 113 l/hh/d 135 l/hh/d 150 l/hh/d 135 l/hh/d Results with Lifeline Tariff = US$0.27 m3 Total annual costs to US$111.9 US$19.1 US$20.6 US$19.1 consumer per household Net annual revenue to US$3.3 US$6.1 US$9.2 US$11.9 utility per household Results with Lifeline Tariff = US$0.41 m3 Total annual costs to US$156.6 US$25.8 US$28 US$25.8 consumer per household Net annual revenue to US$11.4 US$–0.6 US$–3.1 US$–6.4 utility per household 44 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? at the lifeline tariff, rather than buying water at a vendor’s Expensive meters of any sort add to the base cost of already markup. This is a significant benefit to those consumers. financially challenged service providers. A particular On average, the costs for postpaid metered standpipes challenge of prepaid meters is their short effective life as are transferred directly to the lowest-income consumers compared with conventional meters. One implication is that through increased user charges (over and above standard service providers will face the challenge of renewing their rates). The analysis indicates that the use of prepaid meters prepaid meters much sooner than with conventional meters. might be beneficial to such consumers by a factor of six. Sourcing additional funds for replacement after a relatively This would mean that low-income customers could reduce short interval may prove onerous, particularly for those who their water costs by as much as 80 percent. funded the initial installation with generous external support. A move to prepaid communal supplies affects service Involve economic regulators or tariff approvers in provider revenue flows in different ways. Service provider planning early on. Managers are advised to be aware of business managers need to be aware that a move to prepaid these costs, and to ensure they are minimized to the extent communal supplies has four likely effects on revenue flows: possible. Managers should also be certain that the benefits • More water is likely to be sold at subsidized lifeline derived in their particular situation do justify the added rates (as opposed to the typical average rates when expenditure and its opportunity costs. Involvement of vendors have to pay for much of their consumption economic regulators or tariff approvers should be involved above the lifeline block). at an early stage so that the evident societal benefits of • Vending costs will be absorbed by the service provider prepaid meters are understood and accepted and the rather than through the private vendor passing them resulting costs recognized and provided for through sound on directly to the customer. business planning. • There could be an additional charge to revenue of between 5 and 10 percent for vending costs and 5.3 Beyond the Finances: Broader Economic commission. and Societal Considerations • If service providers have been absorbing vendor Service providers and their financers, as well as customers, costs, it is likely that “robot” vendors (prepaid water could benefit markedly from systematic economic cost-benefit meters) will be more expensive than human vendors assessments whenever they consider prepayment options, but until the technology improves and becomes more there are also other potential impacts. Although a detailed robust and cheaper. quantitative analysis of the economic costs and benefits of prepaid water is beyond the scope of this study, consideration Greater cost-effectiveness would require a combination of economic costs and benefits brought to the fore interesting of a reduction in meter costs and an increase in tariffs. examples of potential elements to keep in mind (see Box 21). The results are not particularly sensitive to meter cost or meter life or to software or electronic vending charges. The At prepaid stand posts, potential demand-side benefits include: key driver of cost-effectiveness is the tariff, which was not designed to accommodate the real costs of prepayment. In Cheaper water than from intermediaries. Buying water this model, a tariff increase of one third, off a low base, directly from the service provider at the same tariff (or less) would require only a 10 percent reduction in meter cost as those with their own water connection offers a way out with a 15 percent increase in effective meter life for prepaid of the excessive surcharges typical of intermediaries like meters to become financially viable for middle-income vendors or tap attendants. As cited earlier, in Kampala for households as well. Alternatively, a 10 percent tariff increase instance, water from a prepaid standpipe costs at least a would require a 35 percent reduction in meter cost and a fifth, and often a twentieth, of what it costs from water 35 percent increase in effective life. vendors and resellers. www.wsp.org 45 The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? BOX 21: WHY ARE SERVICE PROVIDERS PURSUING PREPAYMENT IF RETURNS ARE LIMITED AND COSTS HIGH? A combination of hope and optimism, and a cost-benefit assessment that goes beyond finance—rather than robust examination of key cost, service, and performance indicators—seems to drive service providers in pursuing prepayment. “We believe there are more benefits than disadvantages,” said one utility head. “If we don’t take this bold leap, nothing is going to change. With prepaid meters, there is a prospect of getting into an upward performance spiral.” The costs and benefits are not viewed as purely financial. All service providers analyzed said they had underestimated what prepayment would take, and all acknowledge that it is expensive. Most appeared committed to making their prepayment systems work, because they believed it was in the best interests of customers, directly and indirectly, and because their customers demanded it. When discussing the human rights dimensions of prepaid metering, one utility CEO said, “Which is the worse evil—to allow the utility to collapse, or to enable it to survive and meet the challenges?” Co-funding softens the impact of high costs. Kampala, Windhoek, and Mogale City received significant external contributions for capital investment, and Mogale City receives significant operating subsidies from national government. This reduces the costs they must recover directly through prepayment. Phased implementation means that costs are staggered over time and ease the squeeze. Among the eight services providers reviewed here, three phases of engagement with prepaid metering are evident: • Start-up. Lusaka, Kampala, and Maputo began small-scale pilots in 2007–2008, and Lusaka and Kampala are scaling up. Maputo’s utility is in no rush to follow them, as it has been disappointed in the performance of its meters and has other funding priorities. • Scale-up. Nairobi and Nakuru are much more recent adopters, and both are keen to scale up prepaid standpipes, but not prepaid individual connections. • Consolidation. Only three—Windhoek, Mogale City and Maseru‘s WASCO—can be said to be in a consolidation phase after a decade of experience. WASCO is ambivalent about continuing with prepayment. Instead it is exploring a demand management device that limits flow within a preset cap, and has the option of prepayment as an add-on module. Windhoek and Mogale City service providers view prepayment as their best available option for providing services that poor households can afford, and for optimizing collection. Revenue from prepayment is often a relatively small component of overall income. Apart from Mogale City, revenue collected through prepayment is still a small proportion of overall income among the cases studied, and the extent of under-recovery from low-volume customers might not be apparent. Conversely, prepayment for institutional customers was introduced in 2013 in Lusaka and Mzuzu, and in 2014 in Kampala. This takes prepayment in a new direction, with conspicuous revenue benefits, provided that the necessary political support can be mobilized. In Kampala’s case, improved collection from high-volume institutional customers will offset poor cost-recovery from prepaid standpipes. National Water’s managers say they know prepaid standpipes are not cost-effective in financial terms, but they believe they offer an important vehicle for providing more equitable services to the urban poor, and have the means to recover any shortfall elsewhere. 46 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? Access to lifeline tariffs. As direct customers of the service Heightened awareness of the costs of consumption usually provider, the users of public stand posts can access lifeline results in reduced consumption. Customers say they no tariffs in line with the service provider’s tariff structure. In longer leave taps running, they notice leaks sooner, and they parts of Nairobi, for example, access to the service provider’s have stronger incentives to attend to repairs because they can lifeline tariff means spending between 20 and 50 percent see their credit drain if they do not get the leakages fixed. less than on water from a water vendor or kiosk. Less waste means more water in the network to provide longer hours of supply and potentially service new areas. More productive time. With access to water whenever it suits them at unattended prepaid standpipes, customers In the case of institutional customers, the combination of have shorter queuing times and more time for productive high-volume consumption, low transaction costs relative purposes and possible income generation. to purchases, and cost-reflective tariffs facilitate improved revenue flows for the service provider, which open Social benefits. There is a range of potentially positive social opportunities for cross-subsidization of poor customers. impacts for people once they switch to prepaid systems at public stand posts. This includes women being able to avoid It would be inaccurate to suggest that these putative benefits possible harassment by male vendors at stand posts, and being apply equally and consistently wherever prepaid water is used. able to collect water when other members of the household return from work and can assist at home. Children—often No transaction costs can be mitigated fully by prepaid tasked to fetch and carry water—may benefit from increased technology. Prepaid standpipes, like all shared water hours of supply due to prepaid standpipes because it means delivery points, may still incur costs due to time lost they waste less time in queues, miss less school, and have while queuing, or when carrying water. Even at their most more time for recreational activities. The experience in functional, prepaid stand posts cannot completely undo Windhoek shows that tensions within a community may those costs to communities and households. also be mitigated when residents are no longer penalized by disconnection if others do not pay, as often happens when The high frequency of technical faults adds further risk. payment occurs after the water had been used. Valve failures especially can cause continuous, costly flows, which local residents cannot stop. The benefits mentioned Across prepaid standpipes and individual connections, previously may therefore apply to many communities and prepaid meters assist households in cash management. The customers, but the customer analysis demonstrates the focus group discussions in three cities reiterated the fact that frustration and costs that follow interrupted services. customers feel more in control of what they spend on water with prepaid metering. They can monitor and adjust their Substantial opportunity costs. By subsidizing prepaid consumption, budget more accurately, and do not have to users, service providers divert resources from somewhere fear unexpectedly excessive bills after they have used the water. else. This could mean less is available for direct funding This effect is even stronger when service providers offer reserve for connections that cost less than prepaid ones, or for allowances, such as in Mzuzu, Malawi, where the prepaid customers that have not been connected before at all. In meters hold a certain quantity of purchased units in reserve, or such cases, the benefits of an investment in an expensive allow emergency supplies when regular credit runs out. technology such as prepaid systems may not be justifiable. For customers with prepaid meters on household or Exporting jobs. It can be argued that prepayment leads to institutional connections, prepaid meters preempt the risk exporting jobs to a distant country that manufacturers and of debt shocks from bills they cannot pay. They are not supplies prepaid meters, eroding the benefits of water vendor liable for payment for more water than they have already incomes within the local economy (Figure 20). However, bought, and potential losses from unnoticed leaks are given that water vendors’ incomes are funded mostly by the capped by what they have paid already. poorest users through overly high payments, the negative www.wsp.org 47 The Limits and Possibilities of Prepaid Water in Urban Africa Is Prepaid Water Cost-Effective? impact may not be very significant overall. Although there have been cases of vendors losing income when prepaid FIGURE 20: WHEN PREPAID STANDPIPES ARE INTRODUCED, WATER VENDORS OFTEN EXPERIENCE meters were introduced, the poorest households have DECREASED REVENUE. benefitted though reduced spending on water and lower transaction costs due to flexible and longer hours of supply as well as not having to deal with intermediaries. 5.4 Summary The core message of the financial analysis is that prepaid metering on its own cannot resolve a service provider’s financial woes. It may even make things worse, at least in the short to medium term. It may help improve revenue and also meet customers’ needs for all the reasons discussed earlier, but it should not be viewed automatically as a cost-effective way to resolve high billing and collection inefficiencies except for large volume customers. After watching revenue drop by 50 percent, many water vendors in Kampala now encourage business by offering lower prices and home delivery to regular Using data from the case study cities, the results of financial customers modeling suggest that a substantial investment in a prepayment system to achieve a relatively small percentage improvement in revenue collection is difficult to justify in purely financial terms, except when the volume of sales per Prepayment for medium and high-volume residential metering unit is comparatively high. It makes little financial customers with their own connections can make financial sense to spend vast amounts of money on a technology that sense for the service provider if tariffs reflect costs. The can affect improvement in revenue on the margins, while the low volumes typically consumed by poor households do underlying pricing of water remains unattended. Although not generate sufficient revenue to offset the high capital, prepayment is an interesting innovation with potential for operating, and maintenance costs of a prepayment system application under some conditions, it is unlikely to provide for individual house connections. a long-term answer to subeconomic pricing of water. Prepayment for institutional and commercial customers The evidence indicates that prepayment is potentially best consuming large water volumes meets this requirement, and is suited to poor households with volatile incomes, because highly cost-effective. Improved revenue here can help subsidize people can pay in line with what they can afford and also services in low-income areas. Prepayment for institutional access social tariffs. Safeguards to minimize inconvenience customers in particular offers service providers significant when people run out of credit and hardship for those who benefits in terms of improved cash flows and reduced bad cannot prepay can mitigate the downsides of prepayment debts from large customers who are often slow to pay. while offering positive benefits to the urban poor. Introducing prepayment for commercial customers with Prepaid public standpipes have the highest financial poor payment records also has merit, but service providers potential to be cost-effective, provided that the distribution are wary of introducing prepayment as the default for all network is capable of supporting 24/7 supply, a network of commercial customers. Their consumption may decline, credit vendors exists to provide convenient credit purchase and reduce revenue to the service provider, even though the points, and an effective service provider customer service water demand benefits may be attractive. team can address faults and queries promptly. 48 Targeting the Urban Poor and Improving Services in Small Towns VI. The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? How, if at all, can prepaid systems become an instrument to to support more equitable access (without time restrictions improve access and quality of water services to poor people and including access to any lifeline tariffs) for people without in African cities and towns? their own connection. Public standpipes in general—post- or prepaid—offer a means of serving people who do not have We phrase the question in this manner because many urban their own connections, but the incentives for utilities to Africans still do not have their own water connections, and introduce and maintain such facilities are weak when people mostly remain outside the reach of whatever subsidy regimes do not pay or when there is a disproportionate challenge in are in place. Prepayment does not offer an obvious answer ensuring vendor payment of utility bills. The equity impact to these challenges, but the evidence presented earlier shows may also get distorted when some customers pay and others that some attributes of prepayment may offer a tool for do not, leaving the poor to subsidize others who are poor or addressing some of them in certain circumstances. Despite face disconnection, and when intermediaries control access many challenges, prepaid systems are evolving; they are and add surcharges on shared access points. If service providers being offered by a growing range of suppliers; and a growing cut off supplies to standpipes where payment levels have been number of service providers have already deployed them or low (or the vendor has not passed on customer payments), are considering them as an instrument for broadening access. those who pay get penalized for others’ nonpayment. This is a common cause of resentment and conflict in poor areas. It makes sense then to explore how the risks of prepayment Prepaid systems offer a potential means to ensure fairer can best be mitigated, and its potential contributions payment. The technology supports targeted provision of social optimized. This section identifies and discusses a few key tariffs, allowing for a certain volume of water to be charged at a areas in which policy reform, improved regulation, and concessionary rate or (as in South Africa) a zero tariff. innovative operational practice could help make the use of prepaid water systems conducive to serving poor people. 6.2 Recognize That Prepayment Technology Is Not Intrinsically Anti-Poor 6.1 Be Clear about the Priority: Reaching Some critics equate prepaid water with exclusion of the People without Their Own Connections poor from services, without recourse. They maintain that Although all three prepaid applications have some relevance prepaid systems make it too easy for service providers to cut to the poor, the greatest need for a transformative system supply when people cannot afford advance payment, and is in increasing access to water for people who have no when credit is exhausted. connection at all. Service providers across the continent— and in developing countries globally—continue to find it These are risks indeed, but the earlier analysis has shown difficult to reach them through subsidies. In practice, most that neither the benefits nor the potential risks of prepaid subsidy regimes reach those with an individual connection, technology are inevitable, and they are often contingent on which excludes the significant proportion of the urban factors beyond the technology itself. The technology is a poor who rely on public or shared service points. Their tool of policy, and subordinate to it. How it is deployed payment is usually intermediated by vendors who must be can be managed by governments, regulators, and service recompensed for their time—a cost that service providers providers by putting in place appropriate policy and have generally assumed to be the responsibility of those regulatory frameworks, and working closely with customers direct customers. in rolling out the technology, as with any other technology. Among the limited delivery options currently available, Despite the high costs of implementing prepaid systems, prepayment on stand posts has perhaps the greatest potential services can be made affordable to customers through, for www.wsp.org 49 The Limits and Possibilities of Prepaid Water in Urban Africa The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? example, targeted subsidies. This can be done through officials believe prepayment helps people avoid debt and national programs targeted at poor people, such as South even remain within their free basic allocation and pay Africa’s Free Basic Services policy, but also in the way local nothing for water. Windhoek has worked hard to provide service providers approach the goal of universal service access. an alternative to stand post conflicts that arise from sharing Mogale City, for example, has used a combination of public stand post bills. In Kampala, Nairobi, and elsewhere, public education and technology to give people the tools to monitor water utilities believe prepayment offers the possibility of and manage their own consumption. As a result, around 50 greater equity to those without the prospect of their own percent of its prepaying customers in the relatively poor area connection, and provide subsidies to ensure cheaper water, of Kagiso manage their consumption to stay within the 6 m3 better access, and more autonomy. free basic water allowance per connection per month, which is subsidized by the central government. Several African 6.4 Introduce Targeted Social Safeguards to utilities have measures that allow customers to reach a limited Secure Access to Services for the Poor level of “water overdraft,” without their supply stopping Safeguards to mitigate hardship may address concerns when their credit runs out. There is nothing inevitable about around the possible impacts of prepayment on people’s prepaid systems disadvantaging poor people. right to water. If successful, prepaid technology could also be instrumental in tackling the big policy issues That said, there is a real risk that if national governments around subsides and tariffs. This is an important issue, and regulators do not provide firm guidance and support, because in many countries, “universal” subsidies mean many service providers in African cities and towns will not that unconnected poor people do not receive any subsidy be able to provide the necessary social safety nets. Changes at all. in technology cannot alone improve the sector. It depends on whether the relevant institutions develop policies and Again, however, the technology cannot achieve this change mechanisms to ensure that the poor are targeted through in isolation. It can at most assist in applying improved subsidies, and can access services that stay functional. policies and fiscal rules that require service providers to recover the full costs of service provision from consumers 6.3 Prepayment Does Not Equate to the who can afford to pay, while supporting the poor through Commodification of Water explicit subsidies. Prepayment for institutional customers A concern for some is that prepaid water meters exemplify may contribute to achieving this. the commodification of water, or even privatization. Of course, it is possible that a private sector provider may opt 6.5 Recognize the Cost Challenges of for a prepaid system, but there is no inevitable association. In Prepaid Systems to Service Providers fact, of the eight service providers covered in our case studies, Whatever the benefits of prepaid meters, both to customers two of the most committed pace setters (Mogale City and and through enhanced billing and collection by service Windhoek) have been neither private nor publicly owned providers, they must be balanced with an understanding of corporate agencies, but municipal water departments. likely increased costs. In adopting prepayment to make the service more viable Service providers face not only significantly increased capital through improved revenue collection, both Mogale City and expenditure on meters but also must incorporate the higher Windhoek have been further motivated by a commitment to recurrent costs into their overall revenue base. Whereas improving service delivery to poor customers in particular. previously the cost of vending has, by default, been passed Both have persisted, weathering poorly performing systems, on directly to the lowest-income consumers, the utility now because they believe they are the best option available for absorbs the equivalent of those vending costs itself. The meeting the service needs of the people they serve. Mogale cost of this vending function through a “robot” (prepaid 50 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? meter) will likely be higher for the service provider than wider systems for costing, management, and prevention of through a human vendor. Similarly, the cost of a network of water losses are in place. credit vendors to manage the token top-up process, taking 5–10 percent commission in some of the case studies, is an 6.6 Get Regulators to Take Prepayment More additional charge to revenue. Seriously Issues impacting a utility’s revenue base must be addressed Service providers face the challenge of recovering the costs by the economic regulator, with provision to rebalance of selling more water at subsidized lifeline tariffs. Previously tariffs and subsidies as necessary. Until now, most water vendor-managed stand posts, and single connections to regulators have shied away from prepayment. They seem compound housing, had caused such customers to pay at a to regard it as an experimental technology, outside the higher tariff band. mainstream of service delivery or the tariff-setting mandates of regulatory agencies. Among the case studies covered in Overall, because of increased awareness of costs and greater this assessment, only in Zambia has the national regulator attention paid to leakage and waste, prepaid meters may (NWASCO) begun to analyze prepayment carefully and lead to lower overall consumption of water. This has to be provide guidance to water service providers. NWASCO is beneficial in the long term, not least for energy savings. In concerned that utilities may be attracted by the allure of a the short term, the utility has to try to recover higher costs, new technology before considering its service requirements, typically 80–90 percent fixed, from a lower overall volume impacts, and costs fully. Other regulators have barely of consumption while a significant proportion of their engaged with prepayment. consumers are now accessing higher subsidies. Yet if prepaid water is to contribute effectively to the public The resulting challenge to utility finances has to be planned objectives of improved service delivery access, regulators for, both for an appropriate level of cross-subsidies within must give it closer attention. A number of areas stand out the customer base and, quite likely, for subsidies supported for such attention: by taxation from a wider revenue base • Cost-effectiveness overall. It may be necessary to ensure that prepaid systems do not destabilize service An inherent weakness in rising block tariff systems might delivery by absorbing scarce resources for limited be made more apparent through the use of prepaid systems. gain. The weakness is that if too many people use them, or are • Standards for technology. The performance tempted to restrict their demand to stay within the lifeline reliability issues raised earlier indicate an urgent need block, overall revenue for the utility will be insufficient. It for improved regulation of prepaid service norms and is not possible to cross-subsidize a high proportion of the standards. Service provider managers are the target customer base. External support may be necessary. of aggressive marketing by suppliers, and there is no formal guidance on the criteria and approaches for Some believe that the critical condition for effective cross- choosing between them. National standards authorities subsidization lies in ensuring that the average tariff, paid should specify standards relevant to local conditions by the majority of customers, is set to ensure the financial and require compliance. This could be enhanced at sustainability of the provider, whereas the range of tariffs a global level by building on progress in developing increase progressively as levels of water consumption standards for the use of STS technology in prepaid increase. There is an opposing view, articulated by the systems and for technical standards for prepaid water Zambian regulator, that stepped tariffs are not transparent systems more generally. The incentives for attaining for prepaying customers and are not understood. compliance to such standards seems to be an area Ultimately, prepaid systems only function effectively if the for particular consideration, where lessons from the www.wsp.org 51 The Limits and Possibilities of Prepaid Water in Urban Africa The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? International Finance Corporation (IFC) supported • Opportunity cost of deploying prepaid Lighting Africa initiative may be instructive. These technology. Regulation could help direct service lessons include providing concessions on the import providers’ priorities, and help them weigh the trade- duty of compliant devices and making information offs between prepayment and more immediate on compliance publicly accessible (see Box 22). challenges such as network upgrades. BOX 22: LESSONS FROM SETTING STANDARDS FOR SOLAR LIGHTING There are currently no standards covering the overall performance or reliability of prepaid water meters. Existing national and international standards for prepaid meters focus primarily on metrology (the accuracy of metering) and STS (the credit transfer protocols that support compatibility across different suppliers of vending and prepaid metering components). The experience of developing and incentivizing standards for solar lighting components may be relevant for prepaid meters. Lighting Africa, a joint initiative of the World Bank Group’s International Finance Corporation (IFC) and the International Bank for Reconstruction and Development, has been working since 2007 to improve access to affordable solar lighting products for home users in sub-Saharan Africa, by accelerating the development of markets for good quality products. The Lighting Africa team found that the influx into Africa of poor quality lighting products represented a key market threat that risked eroding confidence among consumers. In response, they worked closely with suppliers, stakeholder institutions, and sector industries to formulate standards for solar lighting products and provide incentives to manufacturers to meet minimum specifications. The resulting minimum quality standards served as the foundation for the global International Electro-technical Commission (IEC) technical specification. The quality standards set a baseline level of quality, durability, and truth- in-advertising to protect consumers. Suppliers wanting to participate in Lighting Global support programs and their incentive schemes must comply as a minimum requirement. Conformance is evaluated based on results from laboratory testing at an approved third-party test center using randomly procured samples. The certificate is valid for two years. Lighting Africa reports that the certification process is driving competition. Suppliers now try to maintain their competitive edge by exceeding the minimum requirements while keeping prices competitive. The Ethiopian Government was one of the first to use the standard to differentiate between different quality products, and it introduced a waiver on import duties for products that conformed to the specifications. Although dealing with a different innovation, service providers and regulators in the water sector with an interest in prepaid water meters could apply some of the lessons from this initiative. They could, for example, consider forming a working group to formulate which specifications they want their prepaid meters to conform to, to meet minimum quality and performance requirements. As such an initiative grows, it could become a platform for knowledge exchange and dialogue with suppliers generally, but also broaden to include other partners, such as financiers, strengthening their reach and impact to address the current absence of clear quality standards and benchmarks. 52 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? • Convenient credit purchase. At a time when proprietary credit tokens, to make credit top-ups easier mobile technology is opening many commercial and more convenient. A mobile phone-based system for opportunities in many sectors, regulatory buying and loading credit would be a game changer if guidance to promote STS compliance and mobile it freed utilities and households from dependence on technologies in prepaid systems could help enable physical credit tokens that are comparatively expensive far more accessible and customer-friendly vending and can be damaged or lost. Phone-based top-ups linked options (see section 6.7). to open standard vending technologies would offer • Safeguards to minimize inconvenience and customers 24/7 convenience, without the utility needing hardship. Prepayment should not be punitive. A to set up and manage its own network of credit vendors. minimum raft of safeguards should be available to Regulators and service providers should demand greater reduce the potential for inconvenience or hardship cooperation between manufacturers and service providers to customers. Sound regulatory guidance could to advance vending technologies and give customers the assist in developing recourse options where they are convenience and choices they expect. inadequate or neglected, with a process of appeal for special concessions or subsidies, and penalties when 6.8. Shift the Focus from Metering to Service these are ignored. Delivery and Governance Prepayment for water is an entry point for wider reforms It is probably necessary to assist regulators to acquire and in public service provision. It places greater accountability develop the knowledge required for this new role. This on the service provider, and demands a fresh look at what may be a role for development partners and public sector serving a customer actually means and requires and how and other training institutes to look into, together with the that can be operationalized. The technology involves more regulators and other interested parties. than metering. More significantly, prepayment goes well beyond technology. In fact, a service provider that falls short 6.7 Think Big about the Technology on effective management, governance, and sound customer If prepaid water systems are to be used more widely, relations is likely to take on far more than it can deal with technological issues demand attention. by resorting to prepaid systems. First, the incidence of faults remains unacceptably high. The starting point is for the service provider to redefine Improving the robustness and reliability of prepayment systems its relationship with the users of its services. Although it is a priority for both service providers and manufacturers. should be intrinsic to the mandate and obligations of a public service provider to offer its customers respect and Second, the prevalence of proprietary technologies is a good service, the fact that users have already paid for the major concern. These technologies lock utilities into systems service adds immediacy to that demand. If customers do that are incompatible with any others, limit development, not receive water, a breakdown of the relationship between and make credit top-ups more costly and inconvenient to service provider and customers is likely. customers. Both utilities and regulators should be more assertive in demanding greater compatibility and compliance A dedicated customer service team is needed to build trust with globally accepted standards and specifications, such as in and understanding of the new technology and to ensure IEC 62055-41 for STS compliance. communication, advice, follow up, and robust technical support. Third, the increasing use of ICT in Africa may help make prepaid systems more effective by offering wider 6.9 Summary vending options. Most poor families have mobile phones, The analysis here shows that prepaid water is not a miracle and there is surely scope to use this technology, not cure for the revenue challenges of urban water service www.wsp.org 53 The Limits and Possibilities of Prepaid Water in Urban Africa The Way Forward: Can Prepaid Systems Be Made to Serve the Poor? providers. It has the potential to deliver significant benefits, much more analysis, dialogue, and technical work to be but is not obviously cost-effective for the provider, has done to enable service providers, their clients, and potential not been consistently reliable, and comes with substantial financiers to make informed judgments about prepaid demands on management. Its growing profile requires, systems, mitigate the risks they pose, and optimize the however, that prepaid systems are no longer treated as opportunities they offer. And they should be taken far more essentially experimental. As Box 23 highlights, there is seriously in water sector policies and regulatory frameworks. BOX 23: AGENDA FOR FURTHER WORK ON PREPAID SYSTEMS The emergence of prepaid options has opened a new set of opportunities (as well as risks) for water service providers. In moving forward, service providers may benefit from applied information, guidance, and advice on a series of issues. Develop standards for prepaid systems and incentivize compliance. The performance reliability issues pose one of the greatest challenges to the relevance of prepaid water systems. National standards authorities should be core participants in any dialogue and should ensure that standards are appropriate in each local context. This could be strengthened at global level with the support of development partners and potential investors, and should aim to engage suppliers of prepaid devices. As demonstrated in the brief dialogues that informed the development of this study, there is a considerable appetite among service providers for knowledge exchange and joint efforts to understand and discuss issues, options, and practices. Develop indicative frameworks for deciding whether to use prepaid systems. The decision-support tool presented in Appendix B is indicative of the kind of questions to ask and the decisions that may be required. Answering each question adequately requires considerable analysis, based on credible data, relevant to each situation. Improve the financial assessment of prepaid options. Cost-benefit assessments prior to the introduction of prepaid systems are often inadequately robust even though the high costs of prepaid devices pose one of the greatest risks associated with their deployment. Service providers will benefit greatly from more robust cost modelling and business planning methods and enhanced skills to undertake assessments. Develop more robust economic analyses. Related to the financial assessment is a need for more in-depth assessment of the economic costs and benefits of prepaid water. This fell outside the scope of this particular study, but as governments and service providers consider their options in the future, an important area for due diligence will be stronger economic analysis that assesses prepaid water in a wider societal context. Develop tools and capacity support for monitoring and managing the performance of prepaid services. All the service providers consulted say that they underestimated what managing a prepayment system entailed. There seems to be a need for particular assistance in conceptualizing and deploying performance management systems. Generic guides and toolkits have marked limitations; context-specific practical master classes and direct technical assistance may prove more useful. 54 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Selected Bibliography Selected Bibliography Anti Privatisation Forum (APF) and Coalition Against Extension 4, Orange Farm, Johannesburg, South Africa. Water Privatisation (CAWP). 2007. Lessons from the Research report 16. Durban: Centre for Civil Society. 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Jakperuk, and B. Pallier. 2012. Guardian. May 12. http://mg.co.za/article/2008-05-12- ”Smart Metering and Smart Payment: The Global Po- water-wars-move-to-cape. tential.“ Global Water Policy and Management Project, Gerlach, Esther, and Richard Franceys. 2010. “‘Standpipes Cranfield, UK: Cranfield University. and Beyond’—A Universal Water Service Dynamic.” Coalition Against Water Privatisation (CAWP) and Anti Pri- Journal of International Development 22 (4): 455–469. vatisation Forum (APF). 2004. Nothing for Mahala. The Kumwenda, M. K. 2006. Pre-paid Water Metering: Social Forced Installation of Prepaid Water Meters in Stretford Experiences and Lessons Learned from Klipheuwel Pilot www.wsp.org 55 The Limits and Possibilities of Prepaid Water in Urban Africa Selected Bibliography Project, South Africa. M. Phil dissertation, University of Saes, L. 2012. Prepaid Water in Namibia: The Impact of the Western Cape. 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An Analysis of Service Delivery in Kampala’s The Engineering Economist 55 (4): 305–327. Informal Settlements. Washington, DC: World Bank. http://www.wsp.org/sites/wsp.org/files/publications/ Naidoo, P. 2008. “Eroding the Commons: Prepaid Water Kampala-Service-Delivery-Analysis-Water-PPP.pdf. Meters in Phiri, Soweto.” Public Citizen. http://www. citizen.org/cmep/article_redirect.cfm?ID=11991. 56 Targeting the Urban Poor and Improving Services in Small Towns Reliable sources? Continuous supply, or funds to achieve this Water? within targeted areas, perhaps street by street? www.wsp.org Adequate water pressure? Capacity to re-adjust pressure management once consumption dynamics change default settings? Have you included the likely increase in costs and decrease in revenue in your overall business plan? What is the problem, or problems, you Are you required to show a Return on Investment? hope to fix with p epaid meters? What assumptions will you use? What is the lifespan of the system you are considering? Money? Who is paying? What components are funded and not funded? What other remedies or options are you What is the opportunity cost of this project? What considering? other projects will be deferred or discarded? Is revenue from likely sales adequate, with scope for cross-subsidies? The Limits and Possibilities of Prepaid Water in Urban Africa Why are you choosing prepaid metering Do you have the resources to start as your preferred option? with enough customers to achieve critical mass—to offset management costs, Customers? create impetus for organizational shifts, and support enough vending points Do you have enough— for customers? Systems to monitor and manage performance? Do you have enough staff to support Determination to customers when introducing prepayment? Willingness to collect and act on feedback and make it work? make adjustments as required? From users: Can you build acceptance for prepayment? Where will you start? Able to provide good service beyond sales? Support? From the whole utility, at all levels, straddling Locally based, with the necessary expertise? Trusted suppliers? different functions and areas? From the Regulator and other key sector Able to support training and customization? partners Easy access, nearby, long hours? Adequate provisions for staff training? Mobile phone based options? Knowledgeable call centre staff? Response and repair Token top-up points? STS-compliant credit vending? Sufficient people with specialist skills capacity? Have you factored in agents’ Transport (small truck, motor-cycles)? commission? Inventory of spares? Considering a Prepaid Water System Equitable, pro-poor tariffs, with adequate for funding subsidies? Appendix A: Decision-Support Tool When Considering a Prepaid Water System Reserve credit for after-hours? Safeguards? Water overdraft for emergencies? Special credit measures? Appendix A: Decision-Support Tool When Special allocations? 57 The Limits and Possibilities of Prepaid Water in Urban Africa Appendix B: Overview of the Case Studies Appendix B: Overview of the Case Studies NOTE: Full case studies for the eight cities summarized in this overview can be accessed online: http://wsp.org/prepaidwater. APPENDIX B: OVERVIEW OF THE CASE STUDIES Why Prepaid Application of Number People City Meters? Prepaid Meters Installed Served Highlights & Problems Lessons Kampala, Provide cheap Public stand 1,613 170,000 Strong emphasis on Provide enough Uganda water 24/7 at a posts in dialogue and interaction accessible vending constant price low-income with low-income sites to minimize without markups slums and customers through inconvenience to by intermediaries informal a dedicated propoor customers wanting to Provide water settlements unit that drives top-up credit. at a social tariff Institutional prepayment installations, Make replacement of directly to those customers maintenance, and credit tokens easy or without their from mid-2014 ongoing support. those who lose theirs own connection Worked with local will revert to reliance development structures on intermediaries. to gain the support Useful to use and cooperation of social scientists landlords—sited meters for community on their land. Landlord engagement. benefits from less conflict Because prepaid over water with tenants, standpipes resolve and easier renting. payment to the Number of prepaid utility, the utility standpipes doubled in is more willing to 2013 to meet an output- install additional based aid deadline. Now water points, so issued credit tokens to prepaid meters can 29,500 households. enable closer, more convenient access and shorter queuing times. 58 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Appendix B: Overview of the Case Studies Why Prepaid Application of Number People City Meters? Prepaid Meters Installed Served Highlights & Problems Lessons Lusaka, Improve Public More than More than Zambia’s president was Interrupted supplies Zambia payment levels stand posts, 14,000, 50,000 one of the first to receive and low water to turn around individual including a prepaid meter, to show pressure increase rising debt and connections, 200 endorsement from the prepaid meter faults poor cash flows and large institutional top. and water outages and fund service institutional customers More conscious and increase the improvements customers consumption with maintenance and in the rapidly prepaid meters means repair. growing city lower water bills, and Upgrade the more water to extend network to support hours of supply and 24/7 supply before serve other areas. installing prepaid Prepaid meters for meters. institutions is helping Build understanding utility cash flows, but of tariffs and long-standing leaks may charges, and prepare need expensive repairs customers previously with uncertainty about paying a fixed tariff for who will fund this. possibly higher costs National regulator is with a volumetric developing guidelines to tariff. guide prepayment. Maputo, Improve Public 220 30,000 Tap attendants supply Inexpensive meters Mozambique payment to standpipes water from public can prove costly if the utility by and communal standpipes and they fail soon and can tap attendants sanitation communal sanitation only be replaced, not collecting blocks blocks, and sell at the repaired. Ensure that payments from regulated vendors’ tariff. support and spares shared water Water is no cheaper for are readily available. points customers, but the tap If the prepaid meter attendant is protected works, prepayment from running up bills they has the potential cannot pay, and the utility to safeguard the receives full payment. continuity of water supplies at standpipes run by tap attendants, by ensuring that the tap is not cut off if the utility does not receive payment. www.wsp.org 59 The Limits and Possibilities of Prepaid Water in Urban Africa Appendix B: Overview of the Case Studies APPENDIX B: CONTINUED Why Prepaid Application of Number People City Meters? Prepaid Meters Installed Served Highlights & Problems Lessons Maseru, Improve Individual 3,500 15,000 Ten years after first Ensure that the Lesotho payment connections in introducing prepaid prepaid meter can levels and help middle-income meters, WASCO cope with local customers avoid areas management is operating conditions. getting into debt Public 180 11,000 unresolved about Many of Maseru’s Reduce billing standpipes whether to continue with meters freeze up queries related in peri-urban prepayment. Customers in subzero winter to meter-reading areas like the benefits prepaid temperatures and errors and meters offer, but the malfunction, and add estimates utility says the cost to the maintenance and the maintenance load of utility staff. burden is high. It is now exploring flow-limiting devices, with a preset upper limit and automatic meter reading as a possible alternative to manage demand and the risk of bad debt. Mogale City, Change Individuals in 35,000 160,000 All customers get the first Prepaid meters South Africa consumption low-, middle-, 6 kls free each month. can shift customer behavior and upper- Prepaid meters help poor behaviour, improve and improve income areas households manage their demand management, payment consumption, with half and help poor levels after in a low-income area households avoid two decades managing to stay within debt, but they are of politically their free allocation and expensive and require motivated pay nothing for water at high maintenance. service payment all. Revenue generated boycotts Early adopter of prepaid, from low-income Help poor from 1999. Now busy sales is not enough customers stay with its third major to cover the costs of out of debt installation of meters, prepayment, without after a 2012 audit big capital and revealed that more than operating subsidies. 90 percent of 8-year-old Regular monitoring meters were supplying with exception free water because of reporting and rapid faults and bypasses. follow-up is essential. Bypasses and tampering are likely without ongoing visual monitoring. 60 Targeting the Urban Poor and Improving Services in Small Towns The Limits and Possibilities of Prepaid Water in Urban Africa Appendix B: Overview of the Case Studies Why Prepaid Application of Number People City Meters? Prepaid Meters Installed Served Highlights & Problems Lessons Nairobi, Improve demand Individual 650 2,500 The utility Build acceptance Kenya management connections underestimated what of the need for given acute in low- and prepayment entails and payment and improve supply shortages middle-income was not adequately service quality before Improve areas prepared with introducing prepaid payment levels Now beginning integrated management, meters in areas with and reduce staff with prepaid adequate monitoring, low payment levels, to costs standpipes in and maintenance avoid vandalism and informal areas capacity or vending bypasses. Provide better sites. Prepayment Provide enough access to cannot resolve low vending sites to make cheaper water payment levels without credit top-up easy for in informal better service quality, customers. settlements closer interaction Ensure that after sales with customers, and support and spares convenient payment are available to avoid options. having to replace meters that are not reparable. Nakuru, Provide tenants Public 95 12,000 Targeted housing Careful preparation Kenya with affordable standpipes compounds where 20–40 and building access to an households shared a acceptance among improved supply single tap with restricted tenants and landlords of water 24/7 access. Prepaid is essential. Funding partners standpipes supply Local residents can wanted to pilot water 24/7, far cheaper play a key role in the introduction than any other option maintaining prepaid of prepaid available. standpipes. standpipes in The meters require The more users Kenya intensive maintenance, per standpipe, the with 6–9 callouts a day. A more cost-effective local resident has learned the installation, but how to repair the meters queuing times grow and provides on-the-spot longer. support. Windhoek, Minimize conflict Public 582 60,000 An early pioneer, since A slow and cautious Namibia over shared bills standpipes 1998. Persevered approach is for shared public with various types of appropriate when taps standpipe meters to innovating with an Improve improve services to unproven technology payments and residents of informal and without funding minimize water settlements, because it support. wastage in an sees them as the best A quick response arid area with available option to meet and rapid repair is expensive water its needs. Now has essential–delays in in-house repair capacity restoring a supply and aims for a one-hour that users have turnaround when faults already paid for invites are reported. vandalism. www.wsp.org 61