47306 Water Working Notes Water Working Notes Note No. 19, January 2009 GuidinG PrinciPles for successful reforms of urban Water suPPly and sanitation sectors Alain R. Locussol Matar Fall with the assistance of Eric Dickson Water Working Notes are published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. Working Notes are available on-line: www.worldbank.org/water. Working Notes are lightly edited documents intended to elicit discussion on topical issues in the water sector. They disseminate results of conceptual work by World Bank staff to peer professionals in the sector at an early stage, i.e. "works in progress". Comments should be emailed to the authors. Acknowledgements This report has been prepared by Messrs. Alain R. Locussol, Consultant and Matar Fall, Lead Water Supply and Sanitation Specialist with the assistance of Eric Dickson, Junior Water Supply and Sanita- tion Specialist. The authors wish to thank Messrs./Mmes.: Aldo Baietti, Franck Bousquet, Fook Chuan Eng, Martin Gambrill, Meike van Ginneken, Jonathan Halpern, Peter Kolsky, Paul Kriss, Midori Makino, Philippe Marin, Dennis Mwanza, Eustache Ouaryoro, and Claude Sorel for their valuable comments and inputs. The authors would also like to recognize the important role played by Abel Mejia, Sector Manager for ETWWA, for his strategic vision to include this study among top priorities of the Water An- chor knowledge sharing agenda, his managerial support and valuable guidance to the task team all along the study. Disclaimers The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourag- es dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA, fax 978-750-4470. All other queries on rights and licenses, in- cluding subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street N.W., Washington DC, 20433, fax 202-522-2422, e-mail: pubrights@worldbank.org. Contact Details: To order additional copies, please contact the Water Help Desk at whelpdesk@worldbank.org. This paper is available online at http://www.worldbank.org/water. Copyright © 2009 The International Bank for Reconstruction and Development/The World Bank. All rights reserved. ii AcroNyms BOD Board of Directors Capex Capital Expenditure Program CBO Community Based Organization DAWASA Dar es Salaam Water and Sewerage Authority (Tanzania) DAWASCO Dar es Salaam Water and Sewerage Operating Company (Tanzania) DJB Delhi Water Board (India) IBNET International Benchmarking Network for Water and Sanitation Utilities IFI International Financing Institutions JMP UNICEF/WHO Joint Monitoring Program LRMC Long Run Marginal Cost MD Managing Director MDG Millennium Development Goals NGO Non-Governmental Organization NRW Non-Revenue Water O&M Operation and Maintenance ONEP Office national de l'Eau potable (Morocco) NWSC National Water and Sewerage Corporation (Uganda) OBA Output based Aid ONEA Office national de l'Eau potable et de l'Assainissement (Burkina Faso) PPP Public-Private Partnership SDE Sénégalaise des Eaux (Senegal) SEEG Société d'Exploitation des Eaux de Guinée (Guinea) SOE State-Owned Enterprise SONEG Société des Eaux de Guinée (Guinea) SONES Société des Eaux du Sénégal (Senegal) SSP Strategic Sanitation Plan SISS Superintendencia de Servicios Sanitarios (Chile) TORs Terms of Reference UNICEF United Nations Children's Fund USAID United States Agency for International Development WHO World Health Organization WSS Water Supply and Sanitation iii TAble of coNTeNTs introduction...................................................................................................................................vii executive summary......................................................................................................................ix 1 measuring the Performance of the Water supply and sanitation service..................... 1 1.1 Access to the WSS Infrastructure............................................................................... 1 1.2 WSS Infrastructure versus WSS Service ...................................................................... 2 1.3 Substitutes to the Piped WSS Service....................................................................... 3 2 understanding the reasons for apparent Performance Gaps ....................................... 4 2.1 Engaging in Process Benchmarking ......................................................................... 4 2.2 Presenting the Results of the "Metric" and "Process" Benchmarking .................. 8 3. designing and implementing successful urban Water supply..................................... 10 and sanitation sector reforms 3.1 Involving Stakeholders in WSS Reforms................................................................... 10 3.2 Revisiting WSS Policies .............................................................................................. 14 3.3 Changing the Culture of Public WSS Service Providers........................................ 17 3.4 Optimizing WSS Asset Management and WSS Infrastructure Development ..... 22 3.5 Improving WSS Service Provision through Internally Developed Programs........ 27 3.6 Improving WSS Service Provision through Partnerships......................................... 32 with the Private Sector 3.7 Financing WSS Operations in a Sustainable and Affordable Manner................ 37 3.8 Regulating the WSS Service in a Transparent and Predictable Manner............ 42 3.9 Implementing WSS Reforms .................................................................................... 48 3.10 Using the Recommendations of this Report .......................................................... 50 references................................................................................................................................... 52 annexes 1. Evolution of Access to Safe Drinking Water in Urban Areas ................................ 55 2. Evolution of Access to Basic Sanitation in Urban Areas ....................................... 56 3. IBNET and other Metric Indicators........................................................................... 57 4. Example of Summary Governance Assessment ................................................... 59 5. Example of Confidential "Vested Interests" Assessment...................................... 62 tables Table 1 Actors, Mandates, Contracts and Instruments ....................................................... 7 Table 2 Main Components of Non-Revenue Water........................................................... 30 Table 3 Creditworthiness and Financing Options............................................................... 39 v figures Figure 1 Select Western and Central African Countries ....................................................... 3 Figure 2 Actors, Mandates, Contracts and Instruments........................................................ 6 Figure 3 Key Actors of Urban WSS Sectors ............................................................................ 11 Figure 4 Changing the Culture of Public WSS Service Providers........................................ 18 Figure 5 Optimizing WSS Infrastructure Development......................................................... 23 Figure 6 Improving WSS Service Provision Internally............................................................. 28 Figure 7 IImproving WSS Provision through PPPs................................................................... 33 Figure 8 Financing WSS Operations....................................................................................... 38 Figure 9 Regulating the WSS Service..................................................................................... 43 Figure 10 Accountability Framework of the WSSSP of ABCDEF............................................ 61 Figure 11 Cash Flows in the XYZ urban WSS Sector (US$ million/year)................................. 63 boxes Box 1 Delhi (India): The Cost of Substitutes to Piped Water ............................................. 3 Box 2 Delhi (India): Blurred Accountability Framework, Poor Service Quality................ 8 and Suspected Vested Interests Box 3 The Cost of Non-Permanent Water Supply............................................................ 12 Box 4 Morocco: Co-Existence of Several Structures and Institutional........................... 15 Arrangements in the Urban WSS Sector Box 5 Latin America: Regulation of Independent Water Entrepreneurs. ..................... 17 Box 6 Uganda: Changing the Culture of the National Water ....................................... 20 and Sewerage Corporation (NWSC) Box 7 Côte d'Ivoire: Addressing the mid 1980s Financial Crisis...................................... 24 Box 8 Burkina Faso: the Ouagadougou Strategic Sanitation Plan................................ 26 Box 9 Corruption in WSS Infrastructure Development. ................................................... 27 Box 10 The Non-Revenue Water Paradox. ........................................................................ 31 Box 11 Guinea: Easing the Move towards Cost Recovery using..................................... 39 an Output Based Tariff Subsidy Box 12 Senegal: Using a Cash Flow Model as Regulatory Tool........................................ 40 Box 13 Africa: Mixed Experiences with Regulators............................................................ 44 Box 14 Chile: Efficient Regulation, Transparent Subsidies and Excellent WSS Service......47 vi INTroducTIoN The primary objective of this report is to provide practical guidance to World Bank teams advising on the design and implementation of reforms of urban water supply and sanitation (WSS) sectors. A Structured Methodology to Help Think Outside of the Box. The reform of urban WSS sectors is needed to increase access to the infrastructure, improve efficiency of operations, and enhance the reliability, sustainability and affordability of the service. Obviously, there is no "one-size-fits-all" solution: policies and institutional arrangements that have worked well, for example, in a French speaking West African country may not be directly replicable in an English speaking South Asian country. However, if solu- tions have to be tailored to local circumstances, issues to be addressed are often similar. Because of this similarity, this report proposes a structured methodology for engaging in the reform process and for building a broad consensus on the design of its key components. By presenting what is usually ac- cepted as best practices and under which circumstances they have successfully been implemented, the report also aims at encouraging stakeholders involved in the reform process to "think outside of the box" of existing policies and institutional arrangements. A Sourcebook. Several reports have recently been published by the Bank on specific topics related to urban WSS. Bank teams involved in operations may not always be aware of such reports, let alone publications by other institutions, even if the new website of the Bank Water practice makes a large volume of information available. Also, Bank teams involved in operations often do not have sufficient time to read lengthy papers and extract what is needed to advise on specific reforms. This report is also meant to be a sourcebook, pointing Bank teams to relevant Bank publications and indirectly to publications by other institutions, as well as summarizing key issues covered while proposing a logical framework for establishing a link between them. Improving the Outputs of Consultants. Bank teams are seldom responsible for directly advising govern- ments on the reform process. The performance of consultants engaged by governments, and some- times by the Bank, to carry out such task has been variable either because of irrelevant experience, ambiguous terms of reference (TORs) or inadequate guidance provided during reviews of consultants' reports. This report should help to draft more focused TORs.1 Also, by presenting examples of what has worked or not worked in similar cases, it should assist Bank teams in reviewing consultants' findings and formulating constructive recommendations. Analytical Work and Specific Cases. This report includes three main chapters to discuss how to: (i) measure the performance of an urban WSS service; (ii) explain apparent performance gaps, if any; and (iii) design and implement reforms to increase access to the infrastructure, improve the efficiency of operations and enhance the reliability, sustainability and affordability of the service. As already mentioned, this report builds on several pieces of analytical research already published (or about to be published) by the Bank on topics such as stakeholder consultation, governance of public service providers, service efficiency, public-private partnerships, financing, and economic regulation. The re- port also illustrates the various topics covered with specific cases of reforms, or consequences of lack of reforms, presented in boxes or referred to in footnotes. 1This report does not include examples of TORs but instead provides elements for preparing TORs tailored to the needs of specific urban WSS sectors. Attempts to develop databases of good quality TORs have mostly failed in the past. vii execuTIve summAry One of the Millennium Development Goals (MDG) is to halve by 2015 the proportion of the urban population who were without sustainable access to safe drinking water and basic sanitation in 1990. The UNICEF/WHO Joint Monitoring Program (JMP) tracks progress toward the goal country by country. Data published by the JMP show good progress of ratios measuring access to drinking water, which in urban areas mostly means piped water, with actual figures for 2004 close to notional interim targets in almost all regions. However, ratios measuring direct access to piped water through individual connec- tions decreased in Sub-Saharan Africa and Southern Asia between 1990 and 2004. Sub-Saharan Africa and Southern Asia are off target for access to sanitation, which includes sewers as well as on-site fa- cilities. Several regions, including Sub-Saharan Africa, Southern Asia, and South-Eastern Asia are even way off target when it comes to direct access to sewers through individual connections. WSS Infrastructure and WSS Service. For practical reasons, the JMP data measure access to water supply and sanitation (WSS) infrastructure. By including the words sustainable, safe and basic in their definition, the MDG suggests that one should also ensure that access to infrastructure is translated into service. This is seldom the case when policies, incentives or institutional arrangements are inadequate. In many cases, despite well-developed infrastructure, WSS service is: · Not reliable with: (i) piped water being available on an intermittent basis and thus of bacterio- logical quality that cannot be guaranteed, as pathogens enter water distribution pipes each time they empty; and (ii) raw sewage regularly overflowing in storm water drains due to sewer blockages or poorly functioning pumping stations; · Not financially sustainable with collected user charges insufficient to recover operation and maintenance (O&M) costs, let alone capital costs, leaving operations mostly dependent on fiscal transfers; · Not environmentally sustainable with water sources being rapidly depleted, often as a result of poor piped WSS service that forces customers to tap local aquifers for complementing water sup- plies, or polluted by the indiscriminate discharge of waste water into receiving bodies; and/or · Not affordable by low income groups, despite low tariff levels and complex tariff structures in- tended to protect them against high water bills. Insufficient revenues inevitably result in a poor service and force households and businesses to rely on expensive and often unsafe substitutes. Reforming WSS Sectors to Achieve the MDG. This report focuses primarily on improving the service pro- vided by official WSS service providers, which because of limited coverage or poor performance do not always have the monopoly of provision usually associated with WSS in urban areas. Substitutes to the official piped service in the form of individual infrastructure (backyard wells or boreholes), equip- ment (pumping, storage, disinfection, and so forth), or reliance on small entrepreneurs (tankers, wa- ter vendors, sludge handlers, and so forth) often play an important role and affect the MDG data. Although the correlation between reforms of official WSS service providers and achievement of the MDG in urban areas is not formally established yet, there is no doubt that engaging in reforms, i.e., im- proving the sector's accountability framework and implementing best practices, highly increases the chances of providing access to a reliable, sustainable and affordable service to a larger segment of the urban population. Several countries in Latin America, Eastern Asia, Middle East and North Africa, or Sub-Saharan Africa have, during the last two decades, implemented in-depth reforms of their urban WSS sectors and are showing positive trends towards achieving the MDG. Many other countries, in par- ticular in Southern Asia, are yet to engage in this process. ix Diagnostic of the WSS Service. Chapter 1 rapidly analyzes the data published by the JMP for monitor- ing the evolution of access to urban WSS infrastructure. It also reviews the indicators developed by the International Benchmarking Network for Water and Sanitation Utilities (IBNET) for measuring efficiency, reliability, financial sustainability, environmental sustainability, and affordability of piped WSS service. In many countries however, it is difficult, if not impossible, to carry out a meaningful analysis of the qual- ity of piped WSS service given the lack of reliable data on parameters as basic as numbers of con- nections, water production, sales and non-revenue water (NRW), or the financial situation of service providers. Implementing a program aimed at generating reliable technical, commercial and financial data is often one of the first issues to be addressed to help monitor the progress of performance im- provement programs and design improved policies. Chapter 1 also emphasizes the need for under- standing the role of substitutes when the official piped WSS service is deficient. The Reasons for a Poor WSS Service. Chapter 2 summarizes the methodology proposed for assessing the accountability framework of urban WSS sectors, defined as the set of mandates of its key actors, contractual arrangements that clarify both interaction between actors and the instruments used by each actor to implement their mandates. It focuses on five key functions of the urban WSS sector: (i) policy formulation; (ii) asset management and infrastructure development; (iii) service provision; (iv) financing of operations; and (v) economic regulation of the service. It recommends paying par- ticular attention to incentives, either productive or counterproductive, that influence the performance of the WSS service. It also suggests identifying vested interests that may be affected by moves towards better practices. Providers of substitutes to the piped WSS service and officials and staff who engage in corrupt practices could become vocal lobbies against reforms that would, if successfully imple- mented, affect their revenues. Nine Key Issues to be Addressed. Chapter 3 summarizes recommendations for designing and imple- menting reforms of WSS sectors and focuses on: · Involving stakeholders in WSS reforms; · Revisiting WSS policies; · Changing the culture of public WSS service providers; · Optimizing WSS asset management and infrastructure development; · Improving WSS service provision through internally developed programs; · Improving WSS service provision through partnerships with the private sector; · Financing WSS operations in a sustainable and affordable manner; · Regulating the WSS service in a transparent and predictable manner; and · Implementing WSS reforms. Involving Stakeholders in WSS Reforms. Reforming a non-performing urban WSS sector often leads to emotional debates that could rapidly get out of control if not properly framed. The above described diagnostic of service quality and operations efficiency aims at providing rational arguments to en- gage into constructive dialogues with key stakeholders such as consumers, non-governmental orga- nizations, management and staff of WSS service providers, providers of substitutes, politicians, the me- dia, private operators and financiers. Addressing the valid concerns of affected stakeholders is crucial for building a broad consensus on the reform agenda. Also, identifying the losers in the reform process is as essential as identifying the winners to estimate the potential economic return of the reform. Revisiting WSS Policies. Options for structuring urban WSS sectors should be investigated as part of the reform process. This might include decentralizing or aggregating operations, splitting or combining drinking water production, distribution and wastewater collection and disposal operations or merging x them with other network services, such as electricity distribution. Water resource management issues that affect the urban WSS service, such as trading of water entitlements, or standards that apply to effluent quality should also be clarified. While revisiting policies, particular attention should be paid to service provision to the poor, and in particular to those who live in informal settlements, and the regu- lation of substitutes to the official piped WSS service.2 Changing the Culture of Public WSS Service Providers. Recent Bank reports on improving the perfor- mance of public WSS service providers emphasize the need for increasing autonomy, accountability, and customer orientation of public WSS service providers. This report recommends that service provid- ers be corporatized, and that selection procedures and operation of the boards of directors, manage- ment team and staff of such corporatized entities be clarified. Contractual commitments between service providers and governments, which often remain their main financing source, and within a corporatized entity itself should be considered. Changing the culture of public WSS service providers also include developing instruments for increasing accountability to consumers (information, consulta- tion, participation, recourse and redress) and for building the capacity of the various actors (training, professional networks, and certification of professionals). The accountability framework should help identify the weak points of the culture--risks of fraud and corruption in human resource management, commercial activities, infrastructure development, and provision of substitutes--so that a credible plan to minimize the effects of those weaknesses can be designed. Optimizing WSS Asset Management and WSS Infrastructure Development. Infrastructure development is one aspect that needs special attention since significant inefficiencies can result from inadequate demand assessment, planning, design, procurement and project implementation procedures, as well as substantial diversion of public funds through fraudulent or corrupt practices. Responsibility for infra- structure development should normally be vested with corporatized entities that own and maintain WSS assets and are responsible for servicing the debt attached to the financing of their extension rath- er than with central engineering agencies: it is the best way of ensuring that infrastructure develop- ment plans correspond to customer needs and are affordable based on revenues of WSS operations. Improving the Provision of the WSS Service through Internally Developed Programs. Governments or boards of directors of public WSS service providers may opt to improve the quality of the service and the efficiency of operations through internally developed programs. A plan to outsource non-core functions of the technical, commercial and financial activities should be developed as part of this ex- ercise. Improving technical operations usually requires a special focus on reducing non-revenue water (NRW) and energy consumption, improving procurement of goods and parts and increasing staff pro- ductivity. Enhancing commercial operations normally necessitates an overhaul of customer relations, metering, billing and collection procedures. A special focus on public customers, who could represent a large share of sales revenues, and low-income customers is often needed. Findings and recommen- dations of independent audits of financial statements and financial management procedures should form the basis of financial management improvement programs. Improving WSS Service Provision through Partnerships with the Private Sector. The findings and recom- mendations of several Bank notes and toolkits on public-private partnerships (PPPs) are summarized in this report, which focuses mostly on: (i) the key steps for designing and implementing successful PPPs; (ii) the limits of PPPs for raising commercial financing; (iii) the allocation of risks and responsibilities between public and private parties; (iv) the development of institutions to manage PPPs; and (v) the selection of private operators. 2Other key policy issues, such as corporatization of WSS service providers, WSS service standards, metering, disconnection for non-payment, cost recovery objectives and pricing principles, public-private partnerships are covered in other sections of this report. xi Financing WSS Operations in a Sustainable and Affordable Manner. The cost of WSS service eventu- ally has to be financed by customers, taxpayers or a mix of both. Gradually transferring the burden of financing the full cost of the service to customers and building the creditworthiness of service provid- ers so that financial markets can eventually be accessed make sense in developing countries whose governments are often faced with fiscal constraints and debt ceilings. There is often a long way to go for moving an urban WSS sector from a loss-making situation, where user charges are insufficient to cover operation and maintenance (O&M) costs, to a sustainable cost recovery situation where user charges allow coverage of O&M costs, depreciation of assets on a revalued basis, a return on capital sufficient to finance interest on debt and remunerate the equity invested, and a proper mitigation of the foreign exchange risk. Easing the transition often means that the development of the infrastructure has to be financed by a mix of cash generation, debt, and grants. When development grants are justi- fied, they should be designed to encourage efficiency and in any case be phased out in the short to medium terms. The best way for mitigating the foreign exchange risk is to ensure that local financial markets are able to provide debt in local currency on terms compatible with a sector whose assets are depreciated over long periods; obviously this issue cannot be addressed only by improving urban WSS policies. Regulating the WSS Service in a Transparent and Predictable Manner. Economic regulation of WSS services, broadly defined as the rules and organizations that set, monitor, enforce and change the allowed tariffs and service standards for WSS service providers, has also been the subject of several re- cent Bank reports and publications. While economic regulation has often been associated with PPPs, it is mostly about stopping the monopoly abuse of WSS service providers that could provide a bad qual- ity service and charge price above costs to increase their profits or cover their inefficiencies; thus pub- lic service providers should be regulated as should private ones. This report summarizes recommenda- tions for regulatory arrangements when the service is provided by a private or a public operator and discusses the pros and cons of regulation by contract and regulation by regulator. It also lists the key operating principles of a regulator, if created. This section finally summarizes best practice for setting WSS tariffs and tariff structures and designing subsidies that do reach those who need them. Implementing WSS Reforms. This report suggests a prioritization of issues to be addressed when con- fronted with urban WSS sectors characterized by limited infrastructure coverage, low efficiency and ac- countability of service providers, and poor reliability, sustainability, and affordability of service delivery: · First, the financial situation of the sector should be fixed: this could require a mix of balance sheet cleaning, debt restructuring, cost saving programs, commercial activities improvements and, if necessary, gradual tariff increases. The often-made statement that tariffs cannot be increased before the quality of service improves is usually a non-starter: service improvement is likely to take several years and lumpy tariff increases are unlikely to be acceptable once the quality of service has actually improved. · Second, the autonomy of service providers should be built with the main objective of moving service provision away from short-term political agendas: this usually requires the corporatiza- tion of service providers. · Third, the responsibility for developing the infrastructure should be transferred to corporatized service providers: since the latter would be responsible for servicing the debt, this should in- crease the chance of implementing investment programs affordable by sales revenues. · Fourth, plans for improving the quality of the service and accountability to consumers should be developed: this could require internal contracting, outsourcing of some activities of the ser- vice provision or comprehensive partnerships with the private sector. xii · Fifth, the consultation effort should be maintained throughout the reform process: managing expectations, addressing valid stakeholder concerns and ensuring that vested interests are not attempting to derail it are essential for successful design and implementation. If credible actions plans reflecting the above are submitted, the chances of mobilizing financing for rehabilitating and expanding the infrastructure at favorable terms should greatly be increased. xiii 1. meAsurINg The PerformANce of The WATer suPPly ANd sANITATIoN servIce Identifying the performance gaps of the WSS service should be the first step when initiating reforms of an urban WSS sector. Measuring access to WSS infrastructure, as done for example by the UNICEF/WHO Joint Monitoring Program is necessary but not quite sufficient since, in too many cases, infrastructure fails to translate into service. Indicators developed by the International Benchmarking Network for Wa- ter and Sanitation Utilities (IBNET) help to measure the efficiency, reliability, sustainability and affordabili- ty of the WSS service. However, IBNET indicators do not document the role substitutes to piped WSS play when the official WSS service provider is deficient. Chapter 1 discusses the issues of measuring access to WSS infrastructure, the quality of the service, and understanding the role of substitutes to piped WSS. 1.1 Access to the Wss Infrastructure Data Available from the UNICEF/WHO JMP. Annexes 1 and 2 summarize data published by the JMP3 for nine regions.4 For urban water supply, the JMP differentiates between direct access to piped wa- ter through individual connections and access to an improved water source that could, in addition, include shared private or public water points or other safe sources. For urban sanitation, the JMP differ- entiates between access to sewers through individual connections and access to basic sanitation that could also include on-site sanitation such as septic tanks for black waters, latrines for excreta and soak pits for grey waters. In Annexes 1 and 2: (i) the performances of select large countries in each region have been singled out, as obviously they influence the region's overall performance; and (ii) the actual 2004 performance has been assessed against a 2004 indicative interim target,5 and highlighted when the actual performance is more than four percentage points below the indicative interim target. Data reported by the JMP for coverage and connection ratios are based on multi-purpose household sur- veys, a practice that is much more reliable than the earlier one of self reporting by ministries in charge of the WSS sector. In particular the standardized methodologies of the USAID's Demographic Health Surveys and UNICEF's Multiple Indicator Cluster Surveys minimize the risk of different interpretations of how to account, for example, for households which buy their water from connected neighbors.6 Water Supply. Annex 1 clearly shows that Sub-Saharan Africa as a whole is lagging behind, both for access ratios and connection ratios and that among countries with a total population above 30 mil- lion in 2004 only South Africa is on track for access (but still slightly behind for connections). Nigeria's performance is worrisome with a 2004 connected population (9.3 million) lower than that reported for 1990 (10.2 million). Annex 1 also shows that the connection ratios have indeed decreased since 1990 in the largest countries of Southern Asia (Bangladesh, India and Pakistan). A similar remark can be made for the South-Eastern Asia region where Indonesia and Myanmar are lagging behind for both access and connection ratios and the Philippines is lagging behind for the access ratio. Sanitation. Annex 2 shows that Sub-Saharan Africa and Southern Asia are currently off target for ac- cess to sanitation. These two regions as well as South-Eastern Asia are more than 20 percentage points 3 UNICEF/WHO Joint Monitoring Programme for Water Supply and Sanitation. http://www.wssinfo.org. 4 Northern Africa; Sub-Saharan Africa; Eastern Asia; Southern Asia; South-Eastern Asia; Western Asia; Latin America and Caribbean Islands; Oceania; Commonwealth of Independent States (ex USSR). 5 The 2004 indicative target is calculated using a linear progression between the 1990 performance and the 2015 MDG target. 6 Some countries could include them in the category "with access through a direct connection," others in the category "with access to an improved water source." 1 behind targets when it comes to direct access to sewers through individual connections. Even some large countries of the Latin America and the Caribbean Islands region (Argentina, Brazil) would ap- pear to be behind schedule on direct connection. 1.2 Wss Infrastructure versus Wss service For practical reasons, the JMP publishes data that can be tracked by routine surveys and that mostly identify the type of WSS infrastructure to which consumers have access. By including the words sus- tainable and safe drinking water and basic sanitation in their definition, the MDG suggests that the efficiency, reliability, financial and environmental sustainability, and affordability of the WSS service should also be documented to provide a more accurate picture of the situation. Performance of Piped WSS Service. Since 2005, The International Benchmarking Network for Water and Sanitation Utilities7 (IBNET) has developed a series of indicators to help carry out a complete physical check-up of formal providers of piped WSS services. Annex 3 gives the complete list of IBNET indicators aimed at measuring: · Service coverage: (i) access through direct connections and shared water points; (ii) access to sewers; (iii) water production; and (iv) water consumption; · Efficiency: (i) non-revenue water (NRW); (ii) metering practices; (iii) staffing ratio; and (iv) cost structure; · Reliability: (i) continuity of the water supply service; (ii) quality of water distributed; (iii) number of water pipe breaks and of sewer blockages; and (iv) complaints by customers; · Financial sustainability: (i) billing and collection; (ii) cost structure; (iii) operating cost coverage and debt service ratio; and (iv) value of gross fixed assets by activity; · Environmental sustainability: (i) level of treatment received by the waste water generated; and · Affordability: (i) annual bill for average consumption of six cubic meters per month (six m3/ month) for households with direct or shared connections; and (ii) residential fixed component of the WSS bill. Generating Reliable Data on WSS Service. When reliable data are generated, the above indicators do give a good snapshot of the quality of the service and of the performance of service providers and a good picture of their evolution over time. As an example, Graph 1 gives the evolution of NRW and staffing ratios for select Western and Central African countries that have implemented public-private partnerships (PPPs) during recent years and where both the public and private partners had an obli- gation to report on their performance. In many cases however, it is difficult or even impossible to find reliable data on parameters as basic as: (i) the numbers of water or sewer connections, since many illegal connections are suspected to exist; (ii) water production, sales and NRW, since bulk water and individual meters are inexistent or deficient; (iii) volumes of waste water collected and treated; or (iv) on the actual financial situation, since financial statements are either not issued or not indepen- dently audited. Designing and implementing a program aimed at generating reliable technical, com- mercial and financial data if often one of the first issues to be addressed to help monitor the progress of performance improvement programs and formulate informed policies. 7 The International Benchmarking Network for Water and Sanitation Utilities is a project funded by the Department for International Development of the UK and implemented in partnership with the World Bank and the Water and Sanitation Program. It contains information on more than 2,000 utilities in 85 countries. http://www.ib-net.org. 2 figure 1 select Western and central african countries Evolution of Non-Revenue Water under PPPs Evolution of Staff Productivity under PPPs 40 10 35 9 8 30 7 25 connections 6 20 1000 5 per 4 15 3 10 Staff 2 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 No. of years of PPP operation Senegal Niger Gabon Senegal Niger Burkina (public) Mali Cote d'voire (since 1990) Mali Cote d'voire Source: Fall et al. 2006 1.3 substitutes to the Piped Wss service IBNET focuses on piped WSS service and the performance of official service providers. In cities where the latter are deficient, substitutes (such as backyard wells or boreholes, roof tanks fed by booster pumps, in house disinfection equipment, tankers, water vendors, independent distribution networks and sludge removers) play an important, if not a key, role not only for non-connected households and businesses, but also for those who need to complement a piped WSS service of poor quality (Box 1). Substitutes could have an important impact on the economy of the urban WSS sector as they capture a share of the overall WSS budget that could possibly be used to improve the piped service and ex- tend it to unserved areas (Box 1 and Annex 5). Substitutes could also impact the environment, as un- authorized abstraction of groundwater often translates into the rapid depletion of local aquifers and the indiscriminate dumping of sludge contributes to the pollution of receiving water bodies. Providers of substitutes to piped WSS are an important group of stakeholders to be included in the design of re- forms, and possibly compensated, as their revenues are likely to be affected by its implementation. Box 1 Delhi (India): The Cost of Substitutes to Piped Water In 2005, the public WSS utility Delhi Jal Board (DJB) provided piped WSS services to about 16 million people through 1.5 million water connections and 1.3 sewer connections. A comprehensive survey of about 8,000 households, 1,000 industrial enterprises and 500 commercial establishments carried out in 2006 in two zones of the city showed that while most customers in legal settlements received water twice a day for a total of about three to four hours, 95 percent of them used large overhead roof tanks, 75 percent booster pumps usually fitted directly on distribution pipes, and 50 percent indoor filtration and disinfection equipment. 35 percent of households in underserved areas relied exclu- sively on tankers and spent more than two hours per day collecting water. Households in legal settlements spent an average US$4.1/month on substitutes to piped water (of which US$1.3 were for investment and US$2.8 for operation), a figure to be compared with their average DJB bill of US$3.1/month. Households in underserved areas spent a total of US$4.2/month to cope with the poor public service, including time spent for collecting water. While customers in Delhi spend about US$110 million/year to develop and operate substitutes to the piped WSS service, only about US$80 million/year of DJB operating costs of US$120 million/year are recovered from collected user charges that the govern- ment has so far been reluctant to increase because of alleged affordability issues. Source: Misra 2008 3 2. uNdersTANdINg The reAsoNs for APPAreNT PerformANce gAPs Benchmarking is too often associated with allocating marks to the performance of WSS utilities with the objective of ranking their performance. According to IBNET, the main objective of benchmarking is rather to search and identify best practice with the objective of implementing appropriate best prac- tices and improving performance. IBNET differentiates between metric benchmarking, measuring per- formance against various indicators (Chapter 1) and process benchmarking, understanding the legal, policy or institutional factors that lead to apparent performance gaps. Process benchmarking utilizes metric benchmarking as a basis for bridging performance gaps and for achieving best performance, taking local circumstances into account. Chapter 2 focuses on process benchmarking, i.e., the analy- sis of the environment within which the WSS sector operates, and emphasizes the need for understand- ing its overall accountability framework. Chapter 2 also discusses how vested interests could affect performance. 2.1 engaging in Process benchmarking Accountability Framework, Key Functions and Governance. Assessing the performance of a WSS sec- tor requires a good understanding of: · The overall accountability framework within which its key actors operate. In this report, the ac- countability framework is defined as the set of: (i) mandates of the various actors; (ii) contractual arrangements that define relations between actors, and (iii) instruments used by actors to imple- ment their mandates; · The conditions under which the following key functions are performed: (i) formulation of WSS policies; (ii) management of assets and development of infrastructure; (iii) provision of service; (iv) financing of the development of the infrastructure; and (v) regulation of the service; and · The governance of WSS service providers. Template for Assessing the Accountability Framework. A template for assessing the accountability framework of WSS sectors and the governance of public service providers has recently been de- veloped to better frame process benchmarking exercises.8 The template was designed to cover a wide range of institutional arrangements, from corporatized public utilities with national coverage to simple municipal departments with no or limited autonomy (this is why this report uses the wording WSS service provider rather than WSS utility), and service providers that carry out all activities in house, to service providers that outsource most of them to professional operators as part of public-private partnerships (PPPs). Teams should refer to this template in particular for preparing TORs of consultants engaged for investigating the current situation. The template regroups a long list of topics to be covered under the following main headings: · Policy environment: to clarify the existing legal environment, mandates, contractual arrange- ments and instruments; · Functioning of service providers: to assess existing governance, human resources management and financial reporting arrangements; 8Locussol and van Ginneken 2008 4 · Development of infrastructure: to describe conditions under which asset management plans, demand assessments, infrastructure development plans, and financing applications are cur- rently prepared and projects implemented; · Provision of service: to review procedures currently followed for technical and commercial op- erations, including arrangements for providing the service to low-income households, as well as experiences with outsourcing; · Financing of infrastructure development: to clarify procedures currently followed by govern- ments, government-owned lending institutions, local financial markets, and international financing institutions for appraising financing applications and monitoring execution of the fi- nancing; and · Economic regulation of service: to explain current tariff setting mechanisms, performance mon- itoring and operations of the regulator (if applicable). Enhancing the accountability framework, i.e., ensuring that the mandate of each actor is clear and understood by all parties, the contractual relations are enforceable and the instruments used for implementing the mandates reflect good practice constitutes the core of the reform of urban WSS sectors. To better illustrate the concept of accountability framework, Graph 2 and Table 1 present an unbun- dled (hypothetical) urban WSS sector where: · A central ministry in charge of the urban WSS sector primarily: (i) sets policies and standards; (ii) provides grant financing to autonomous utilities to support specific public-good projects (such as pollution abatement); and (iii) directs targeted subsidies to low income residential cus- tomers to limit the impact of WSS bills on household budgets; · Provincial governments, responsible for urban WSS in their territories, delegate the provision of the service to provincial public WSS utilities; · Provincial public utilities, which own the fixed assets and are responsible for their development, finance new infrastructure from a mix of cash generated from operations, targeted grants pro- vided by the central government, and debt; · A specialized public lending institution, whose main mandate is to provide debt financing to lo- cal governments, raises funds from the central government, international financing institutions, and local financial markets; · Provincial public WSS utilities are encouraged to sub-contract the technical and commercial operations of service to professional operators within the framework of ten-year affermage9 contracts; · Customers are under direct contract with service operators, not with provincial utilities; · The central government mandates an independent regulator for: (i) setting customer tariffs in line with its cost recovery and water demand management policies, (ii) monitoring the quality of service, and (iii) efficiency of infrastructure development and operations; 9This report uses the French word affermage because its best translation, i.e., lease contract is confusing. In an affermage, revenues from collections are shared between the operator and the owner of the contract; in a lease contract, the operator is supposed to pay a fixed leasing fee to the owner of the contract, meaning that the commercial risk taken by the operator is somewhat higher. Indeed, there are only a few examples of true lease contracts in urban WSS, such as in some small towns of the Philippines. 5 figure 2 actors, mandates, contracts and instruments Mandate Unserved Central Mandate Local Appraisal Public Consumers Government Government Lender Appraisal Grant Loan Agreement Bylaws Agreement Targeted Subsidies Application Application Providers of Operation WSS Service Substitutes Customers Contract Provider Application Trading Other Water Feedback Users Customer Water & Contract Setting Discharge Rights Tariff Water Monitoring Resource/ Performance Allocation Environment Agencies Private Operator Regulator Mandate Source: Locussol and van Ginneken 2008. · A separate central government agency, responsible for allocating water resources and rights to discharge effluents in receiving water bodies, oversees the trading of water entitlements be- tween water users; and · A series of small scale and mostly informal WSS service providers cater to the needs of the population living in informal settlements where current urban development regulations forbid extension of the piped WSS infrastructure. The accountability framework, defined as the mandates of the various actors, the way they interact with each other, and the quality of instruments used, obviously affects the quality of service and the efficiency of operations. Unlike the hypothetical urban WSS sector presented above, in many cases key functions are regrouped under a single entity, limiting accountability of actors and the transpar- ency of their operations. For example: 6 table 1 actors, mandates, contracts and instruments Actor Mandates Contracts Instruments Central urban ·Setting urban WSS policies ·Appraisal of grant financing WSS ministry ·Providing grant financing applications for specific WSS projects ·Poverty surveys ·Providing targeted subsidies Provincial ·Overseeing urban WSS ser- ·Delegation agree- ·Chairmanship of the WSS utility's government vice in its territory ment (bylaws) Board of Directors Public WSS ·Managing and developing ·Delegation agree- ·Asset management plans utility, mostly WSS infrastructure ment (bylaws) ·Demand assessments; infrastruc- acting as ·Providing WSS service ·Affermage contract ture development plans; financ- "developer" ·Financing agreements ing applications ·Water entitlements ·Design, procurement, implemen- tation supervision ·Audits of operator's activities ·Consolidated financial state- ments ·Dispute resolution mechanisms ·Reporting to regulator Professional ·Operating and maintaining ·Affermage contract ·Technical operating manuals WSS service WSS assets ·Customer contracts ·Commercial operating manuals "operator" ·Meter reading, billing and ·Operating financial statements collection ·Dispute resolution mechanisms ·Interacting with customers ·Reporting to utility and regulator Customers ·Paying for WSS service ·Customer contracts ·Customer surveys ·Dispute resolution mechanisms Public lending ·Providing debt financing for ·Financing agreements ·Appraisal of financing applica- agency WSS infrastructure projects tions ·Supervision of compliance with conditionality Regulatory ·Setting customer tariffs ·Customer surveys body ·Monitoring WSS operations ·Economic and financial models efficiency ·Technical audits of reporting by ·Monitoring WSS service developer and operator quality ·Applying penalties Water resource · Allocating water entitle- ·Water entitlements ·River basin and aquifer models agency ments ·Water abstraction and quality ·Monitoring water quantity monitoring and quality ·Economic and financial models ·Setting and collecting bulk ·Dispute resolution mechanisms water tariffs ·Monitoring trading of water entitlements ·Applying penalties Other ·Paying for bulk water ab- ·Water entitlements ·Trading of water entitlements water users straction ·Dispute resolution mechanisms Small scale ·No official mandate ·No official contracts ·Pre-financing of equipment and service providers · Catering for consumers who · Informal agreements infrastructure are not served by the offi- with served customers · Operation of the service cial WSS service provider ·Full recovery of capital and O&M costs from user charges Source: Locussol and van Ginneken 2008. 7 · The functions of policy formulation, tariff setting and financing are often placed under the re- sponsibility of a central ministry in charge of the urban WSS sector, which often is also in charge of allocating water abstraction and effluent discharge rights; · The operations of the WSS service provider are not ring-fenced and still fall under the responsi- bility of a local government; or · The functions of WSS asset ownership and infrastructure development and WSS service provision are carried out by the same entity. Two cases located at both ends of the performance spectrum illustrate what rather compact (Box 2) and unbundled (Box 14) accountability frameworks could result in. As mentioned throughout this report, there is no "one-size-fits-all" solution: if unbundled accountability frameworks have usually per- formed better than compact ones, there are examples where they have been short-circuited by a powerful actor (Box 13). Likewise, there are examples of rather compact frameworks that have led to significant performance improvement by translating the notion of contracts, usually associated with relations between a public owner and a private contractor, into enforceable internal arrangements between departments of the same public WSS service provider (Box 6). 2.2 Presenting the results of metric and Process benchmarking Reporting on the Findings of the Benchmarking Exercises. The above-mentioned template suggests that the format used for reporting on the findings of metric and process benchmarking be presented in a way that helps build a consensus on the key problems to be solved before building a consensus of the solutions to be implemented. If consultants are employed to carry out benchmarking exercises, Box 2 Delhi (India): Blurred Accountability Framework, Poor Service Quality and Suspected Vested Interests In 2005, the WSS service provided in Delhi was of poor quality and the operations of the public provider Delhi Jal Board (DJB) were highly inefficient. Water was delivered at most a few hours per day and physical and commercial losses rep- resented a high share of the water produced. Also, DJB collected user charges sufficient to cover only about 70% of its O&M costs. In recent years, DJB had survived thanks to the financial support provided by the local government for both operations and capital expenditures. As this financial support had been passed on as loans, DJB balance sheet carried a debt estimated, in the absence of independent audits of its financial statements, at about US$1,100 million. In Delhi, all key functions are in the hands of the Chief Minister of the local government who at the same time: (i) sets WSS policies and standards; (ii) chairs DJB's board of directors, but loosely monitor DJB's performance because of the paucity of the data generated; (iii) approves budget allocations to support operating costs, without attaching any conditionality for improving performances, and finances infrastructure development, implemented without reference to any medium-term development plan; and (iv) sets the WSS customer tariff, primarily with a short term electoral agenda in mind. The case for reforming the piped WSS service that is neither reliable nor financially and environmentally sustainable, nor affordable despite low tariffs, would appear compelling. However, attempts to address some of the issues DJB is faced with, such as reducing NRW, increasing the permanence of the water supply and initiating a financial recovery were skillfully derailed by a local NGO claiming to be primarily concerned with governance issues. The shelving of this initiative actually served the vested interests this NGO may have unintentionally been the spokesperson of. In Delhi, vested interests are suspected to include: (i) large providers of substitutes to piped WSS services who might have no interest to see the quality of the piped WSS service improve; (ii) staff involved in commercial activities who might ob- tain kickbacks from customers for falsifying billings, expediting repair works or new connections, or not reporting illegal connections; and (iii) staff involved in procurement and construction activities who might receive kickbacks to influ- ence contract awards or allow lower quality of construction. Source: World Bank 2005 and Davis 2003 8 their reports should be summarized. In most cases, it should be possible to give a good snapshot of the quality of service and performance of WSS service providers, as well as identify the main performance gaps of those providers and the shortcomings of the accountability framework of the sector, includ- ing counterproductive incentives built in the system, in a few pages. A graph depicting the current accountability framework should also be prepared to support the presentation. Annex 4 gives an ex- ample of a summary benchmarking exercise. Presenting the Overall Economy of the WSS Sector, Incentives and Vested Interests. The template also recommends that another short report be prepared for presenting the overall economy of the WSS sector, in particular when substitutes to the piped service are known to play an important role and/ or when corrupt practices are suspected. This report should identify the counterproductive incentives exacerbated by weaknesses in the current accountability framework, identify the potential vested interests and spot evidence (or suspicion) of corrupt practices in the fields of infrastructure develop- ment, commercial operations or human resources management, with the main objective of providing to reform champions the relevant arguments they may need during consultations with vested interests. A graph showing the estimated current flow of funds could help identify areas of reforms and help es- timate their potential financial returns. Because of its sensitive content, this assessment may not neces- sarily need to be public; Annex 5 gives an example of a vested interest assessment. 9 3. desIgNINg ANd ImPlemeNTINg successful urbAN WATer suPPly ANd sANITATIoN secTor reforms Reforming a non-performing urban WSS sector usually requires clarifying the sector's accountability framework and thus: (i) the mandates of its various actors; (ii) the contractual relations between ac- tors; and (iii) instruments used by actors to carry out: · The key functions of: (i) policy formulation; (ii) infrastructure development; (iii) service provision; (iv) financing of operations; and (v) regulation of the service, · With the main objectives of: (i) improving access to WSS infrastructure; (ii) increasing efficiency of operations; and (iii) enhancing reliability, sustainability and affordability of service. Chapter 3 elaborates on the above concepts and uses the accountability framework shown in Figure 2 as the logical link between recommendations for designing and implementing reforms of urban WSS sectors. More specifically, Chapter 3 focuses on: · Involving stakeholders in WSS reforms; · Revisiting WSS policies; · Changing the culture of public WSS service providers; · Optimizing WSS asset management and WSS infrastructure development; · Improving WSS service provision through internally developed programs; · Improving WSS service provision through partnerships with the private sector; · Financing WSS operations in a sustainable and affordable manner; · Regulating the WSS service in a transparent and predictable manner; and · Implementing reforms. 3.1 Involving stakeholders in Wss reforms Reforming a non-performing urban WSS sector, i.e., improving the accountability framework within which the various actors operate, often leads to emotional debates that could rapidly get out of con- trol if not properly framed. The metric and process benchmarking exercises described above aim at providing the rational arguments needed to engage in constructive dialogue with key stakeholders such as consumers, non-governmental organizations, management and staff of WSS service provid- ers, providers of substitutes, politicians, the media, private operators, and financiers. Vested interests should also be consulted as key stakeholders since they are likely to be among the losers in the reform process and may be tempted to derail it. Designing the Consultation Process. Consultations with stakeholders should not be a one-way/top- down communication exercise, but rather be designed to provide information to stakeholders and associate them with the decision making process while ensuring that their legitimate concerns are reflected in the final design. The Toolkit on Approaches to Private Participation in Water Services10 pro- vides detailed recommendations for interacting with stakeholders and identifying potential winners and losers when PPPs are considered; these recommendations also apply if the reform does not envis- age PPPs. Facilitators in the consultation process should be perceived as neutral as possible. In particu- 10World Bank 2006 10 figure 3 Key actors of urban Wss sectors Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors lar, the role of development partners has to be defined on a case-by-case basis in order to build on their comparative advantages. Vocal groups ideologically opposed to reforms of urban WSS sectors have inappropriately linked some development partners such as the World Bank with steep tariff in- creases, privatization of public goods, massive lay-offs or exclusion of the poor; the direct implication of these partners in the consultation process could alienate such groups. Consumers. Consumers constitute a fairly heterogeneous category: obviously already connected middle income households benefiting from a highly subsidized tariff have different expectations than middle income households relying primarily on expensive substitutes, or poor households living in infor- mal settlements where current regulations forbid the extension of the formal piped WSS infrastructure. All categories of consumers should be consulted through structured surveys or focus group meetings in order to better assess their preferences and willingness to pay for the WSS service. However, it may 11 Box 3 The Cost of Non-Permanent Water Supply A critical look at the findings of consumer surveys is always needed. For example, in South Asian cities where the poor quality of the piped water supply has forced most customers to heavily invest in substitutes to complement their supply and mimic a permanent water service, the demand for a "24/7" public piped water service may not be overwhelming. This could give inefficient and somewhat complacent WSS service providers the level of comfort they need to justify poor performance and opposition to service standards they believe to be an unaffordable imported concept. Intermittent water supply has significant externalities, such as wastage of water, need to over-design the distribution infrastructure, obligation to develop and operate expensive substitutes, and incidence of water borne diseases due to questionable bacteriological quality of distributed water. Causing WSS service providers to take mea- sures, including the sub-contracting of distribution operations to professional operators, with the objective of improv- ing the permanence of piped water service makes full sense from the economic point of view, even more so that WSS infrastructure is often designed to meet generous per capita consumption, inflated by tariffs that do not even recover O&M costs. So far, little analytical research has been carried on the cost of non-permanent water supply. Source: Developed by the authors. sometimes be necessary to take a step back when analyzing the results of such surveys to assess if consumers' wishes are sustainable options (Box 3). As part of the consultation process, particular at- tention should be paid to public customers who sometimes represent a significant share (typically be- tween 15 and 25 percent in African countries) of the revenue of WSS service providers.11 Non-Governmental Organizations. NGOs are a diverse category that includes community-based or- ganizations (CBOs), groups concerned with broader interests such as governance, urban poverty or environmental protection, as well as groups that use the opportunity offered by open forums to gain some publicity. One of the main issues in dealing with NGOs is to identify on whose behalf they speak, what are their ultimate objectives, and whether their expressed concerns are legitimate. CBOs often provide a useful channel for consulting consumers, in particular in poorly served low-income areas. Management and Staff of WSS Service Providers. Managers and staff employed by public WSS service providers may, for example, feel threatened by the setting up of a periodic individual performance evaluation system or the outsourcing of activities to private operators. Managers, staff, and staff repre- sentatives (or unions when they exist) of public WSS service providers often have good ideas about what needs to be done for improving the quality of service and efficiency of WSS operations. Also, managers and staff employed by other actors, in particular the central engineering agencies,12 may feel negative- ly affected by a realignment of mandates for developing WSS infrastructure or the decentralization of procurement responsibilities. Successful reform depends on building on the knowledge of all workers and maintaining their morale by ensuring that their legitimate concerns are addressed. Providers of Substitutes to Piped WSS. Small entrepreneurs, such as water vendors, tankers or sludge handlers are likely to lose their main source of revenue if piped WSS infrastructure is extended to non- served areas. Profits of larger businesses, such as drilling companies, manufacturers of rooftop tanks and suppliers of booster pumps are likely to be affected if the quality of WSS service improves. Consul- tations with providers of substitutes should help identify options for taking into account their legitimate interests and for mitigating the negative effects of reforms on activities that would disappear once the quality of piped service has improved. 11Ensuring that consumption is properly budgeted, bills are paid in a timely manner, and agreement on the dis- connection of defaulting public customers should be normally part of the consultation process. 12Such as WSS Directorates, State Water Boards and Public Health Engineering Departments. 12 Politicians. One of the key assumptions of this report is that the government responsible for the urban WSS service, whether central, regional or local, is willing to engage in reforms for improving its quality and the efficiency of its providers, even if the need for adjusting tariffs, outsourcing activities, right- sizing staff and/or regulating provision of substitutes could have short term electoral consequences. It is essential that politicians not directly involved in the process, such as mayors if the reform is de- signed at the central level or politicians in the opposition, be consulted to ensure early support or avoid the legitimacy of the reform being questioned when changes of leadership occur following elections. Media. The media is often the most direct link between the government and stakeholders. Journalists should be encouraged to go beyond reporting anecdotes on poor service quality or petty corruption and instead expose key issues facing the urban WSS sector and options for addressing them. The tim- ing of the consultation with the media is important since the search for sensational articles could cre- ate major misunderstandings. When the main options of the reform have been identified, as much in- formation as possible should be made available to the media to increase transparency of the process and credibility of the consultation. Private Operators. When PPPs are considered as elements of the reform, formal consultation with in- ternational operators and, if relevant, the local private sector is essential to delineate the contractual arrangement and the pace at which the quality of WSS services is likely to improve. Initial discussion forums to identify a realistic allocation of risks and responsibilities as well as reasonable medium term objectives, followed by pre-bid meetings should help design win-win partnerships. Financiers. Consultation with government owned lending agencies, when they exist, should help clar- ify the issues of guarantees to be provided by the government under which the responsibility of WSS services falls. Also, early consultations with international financing institutions (IFIs) and bilateral financ- ing agencies could identify the main conditionality attached to their support. If commercial financing were sought as part of a PPP, early consultation with commercial lenders would be necessary to avoid the scheme being held up at a later point. Winners and Losers. Winners in the reform process should normally be the consumers who currently ob- tain a poor quality service and rely on expensive and unsafe substitutes. Other winners could include: (i) the staff of public WSS service providers: their competence should increase as a result of corporate culture changes; (ii) public finances: subsidies to the urban WSS sector should be eliminated and re- placed by income taxes paid by service providers; or (iii) the environment: depletion and pollution of local water sources resulting from unregulated reliance on substitutes to piped WSS should be reduced. The most difficult part of the consultation process lies in identifying stakeholders who may be negatively affected by the reform and in designing mitigation packages that take their legitimate concerns into account: · Already connected customers who benefit from subsidized tariffs may be affected by more equitable tariff structures: willingness to pay surveys, including detailed analysis of the cost of substitutes (Box 1), comparison with other cities and/or countries in similar situations could bring some rationale to the debate. · Staff of public WSS service providers may be affected by right-sizing efforts, whether or not PPPs are implemented: early discussions with staff representatives and unions should help build re- trenchment packages in the cost and financing plan of the reform; · Providers of substitutes who should eventually disappear: the capacity of the private sector to adapt to market conditions should help mitigate the effects of reforms that are unlikely to hap- pen overnight. 13 · Engineering lobbies13 may feel threatened by policies aimed at shifting the focus to improving the WSS service away from adding more WSS infrastructure or at decentralizing the responsibil- ity for the provision of the WSS service: associating them with benchmarking exercises is one way to educate them on the real issues the WSS sector is faced with. · Politicians, managers and staff involved in corrupt practices may lose the dividends of the il- legal businesses they are the invisible owners of: while improving procedures to eliminate or reduce corruption linked to infrastructure development and commercial operations is an obli- gation, launching an hostile take over of the shares of these invisible shareholders by compen- sating them for leaving might actually yield a fairly high return. 3.2 revisiting Wss Policies Section 3.2 primarily discusses: (i) possible structures for urban WSS sectors; (ii) environmental concerns related to the urban WSS service; (iii) the provision of the WSS service to the poor; and (iv) "substitutes" to the official piped WSS service. Horizontal Structure of the Urban WSS Sector. Placing the responsibility of providing the WSS service at the local level usually improves the accountability of service providers to their customers (Section 3.3). Several considerations should, however, be taken into account before decentralizing poorly perform- ing central WSS service providers or, on the contrary, aggregating inefficient local providers. They include: (i) technical conditions, such as reliance on the same water source; (ii) environmental condi- tions, such as the need for managing and protecting water sources of the same catchments area; (iii) transport conditions between the main city and secondary centers; (iv) administrative boundaries; (v) actual capacity of local governments; (vi) economies of scale; (vii) need for maintaining or elimi- nating geographical cross-subsidy schemes; and (viii) cost of transaction when assets and liabilities have to be transferred from one entity to another.14 In addition, if a PPP is considered, the financial at- tractiveness of operations in the service area should be kept in mind. Vertical Structure of the Urban WSS Sector. Ensuring an overall quality of service from water sources to customers and from customers back to the water bodies, and rationalizing infrastructure develop- ment are reasonable arguments for maintaining water production, transmission, distribution and waste water collection and treatment activities in the mandate of WSS service providers. However, in cases where water sources are scarce, it may make sense to split water production and water distribution because of the magnitude of the investment involved to develop large reservoirs and long transmis- sion lines (Box 4). Taking wastewater activities out of the mandate of a WSS service provider may also be justified to make the water supply service financially more attractive when a PPP is considered to improve the performance of the latter.15 Splitting water supply and wastewater activities, however, usually results in unbalanced developments of the two sub-sectors16 and consolidation may be justified when the water supply service has become financially sustainable. Two related issues should also be addressed when revisiting the vertical structure of the WSS sector: (i) the responsibility for on-site sanita- 13In addition to public agencies listed above, engineering lobbies could also include private consulting firms, con- tractors and suppliers traditionally associated with the WSS sector. 14There is obviously no "one-size-fits-all" arrangement: a WSS service provider with national coverage makes more sense in, for example, Côte d'Ivoire, where a well developed road network allows easy transportation of repair crews and parts from the capital city to remote secondary centers than, for example, in Madagascar where the situation is the opposite, even if in both cases the capacity of the local governments is relatively limited. 15This is the case, for example, in Senegal (affermage contract) and in Ghana (management contract). 16Tunisia is a notable exception. 14 tion on which large shares of the urban population are still likely to rely in the medium term; and (ii) the responsibility for storm water drainage in cities equipped with unitary sewers.17 Cross-sector Structure. There are examples of successful integration of WSS service with other munici- pal services, such as solid waste collection and disposal or network infrastructure such as electric- ity. Economies of scale, in particular for commercial activities, and possible cross-subsidies between activities are arguments usually presented to justify such arrangements. However, issues related to cost allocation, tariff setting and lower management focus (WSS operations typically have a lower profitability than electric power ones) are good reasons for considering multi-sector monopolies with caution.18 The co-existence of different structures and institutional arrangements adapted to specific circumstances, geographical divides and cultural differences could be envisaged in some countries (Box 4). Water Rights and Water Entitlements. Most national water legislations specify that the government owns the water resources and mention the priority of water provision for human consumption. In prac- tice this means that the quantity of water allocated to urban WSS service providers may have to be increased by the government to the detriment of other users. Although water resource management is a topic that goes well beyond the scope of this report, the option of allocating rights to own part Box 4 Morocco: Co-Existence of Several Structures and Institutional Arrangements in the Urban WSS Sector In Morocco, local governments are responsible for WSS service in their territories. The provision of service in urban areas is, however, characterized by several structures, institutional arrangements, and cost recovery and financing policies. Long term concessions of the water distribution, waste water collection and disposal and electric power distribution have been awarded during the last ten years in the larger urban centers of Casablanca, Rabat-Sale and Tangiers- Tetouan. The private concessionaires, who include international operators as investor/manager, finance regular ex- tensions of the networks from cash generation and debt provided by the local financial markets. Tariffs are regularly adjusted in accordance with the concession contracts. Cross-subsidies between electric power and WSS operations seem to have allowed a sustained program of extension of the sewer networks. Municipal statutory bodies (Régies autonomes) have similar responsibilities in 12 large cities; however as their tariffs are not automatically adjusted and as they no longer enjoy sovereign guarantees for the debt contracted, network ex- tensions are often limited to those financed by private developers. An ambitious program aimed at facilitating access to debt financing by the régies is being implemented. Office national de l'Eau potable ­ ONEP, a public water supply utility with a national coverage, acts at the same time as: (i) supplier of bulk water for the Atlantic coastal region concentrating several large urban centers (including Casa- blanca and Rabat-Sale) through an integrated network of reservoirs and long transmission lines; (ii) supplier of bulk water for several of the 12 larger cities; (iii) operator, under contract with municipal governments of the water supply service in about 300 smaller urban centers; and (iv) operator of the waste water service in about 40 of these smaller centers. ONEP is an efficient public operator, now able to export its know-how (it was recently awarded the afferma- ge contract for the urban WSS service in Cameroon). At the lower end of the spectrum are direct operations by the municipal government of some smaller towns of waste water collection and disposal that usually result in sub-standard service. Source: World Bank and KfW 2008 17In Dhaka, Bangladesh, a city where flood protection and storm water drainage are major issues, the WSS service provider is responsible for the underground storm water drains and the municipal government for surface storm water drains. 18The tendency has been to split electricity and WSS activities as part of utility reforms in several Western African countries (Togo, Niger or Benin). 15 of the water resource--a water entitlement--to urban WSS service providers, industries and irrigated agriculture should be considered as part of WSS sector reforms. Once water entitlements are clarified, users requiring additional quantities of high value water, such as cities or industries, should be able to meet growing demand by acquiring entitlements of those using water for lower value purposes, such as low value agriculture. The trading of water entitlements would be a consensual, and thus politically attractive, approach to water resource allocation. Water entitlements should increase the pressure for improving the generation of data needed for effectively managing the water resources and limit the risk of overexploiting aquifers, as those who own the entitlements would have a strong interest in ensur- ing their sustainability. Individual Groundwater Abstraction. Individual abstraction of groundwater in cities with a poor quality piped water service has often resulted in an irreversible degradation of local aquifers through deple- tion or seawater intrusion. It could also have highly negative effects on the environment.19 Revisiting the granting of groundwater abstraction rights, monitoring quantities of water pumped and taxing groundwater usage at its economic value are issues to be addressed during the design the reform. While it may not be feasible to monitor every single backyard open well tapping superficial aquifers, the focus should be on deep boreholes operated by large industrial and real estates and the private water tanker industry.20 Effluent Quality Standards. Effluent quality standards should be set at levels consistent with ambient water quality improvement objectives, overall quality of the wastewater collection service and the fi- nancial constraints of the WSS service providers. It makes little sense to impose tertiary treatment to the limited portion the waste water that reaches treatment plants, while the remainder is still disposed of in water bodies, because the WSS service provider does not generate sufficient revenue to maintain sewers and recurrent power failures affect the operation of sewage pumping stations.21 Service to the Poor. While WSS service providers in a healthy financial situation should be able to ex- tend the WSS service to all customers in their service area, the chances of reaching the poorest seg- ments of the population may be limited if no targeted interventions are specifically designed. Detailed preferences and willingness to pay assessments to be carried out as part of poverty mapping exercises should help adapt service standards, tariff structure and collection arrangements for this category of customers. Two principles should be kept in mind: (i) it often makes more sense to subsidize access to piped WSS service than consumption, as actual connection costs often represent a significant share of the annual income of households in the first and second quintiles; and (ii) tariff structures that include bands below O&M costs, with the objective of reducing WSS bills of small residential customers, do create a disincentive for a financially responsible WSS provider--whether public or private--to serve customers to whom these bands should apply. Particular attention should be paid to the type of WSS service to be provided in informal settlements, where extension of formal piped networks may be for- bidden by law; consultations with CBOs should explore options to ensure that minimum quantities of water reach households and basic sanitation needs are met. 19In the mid 1990s in Jakarta (Indonesia), large real and industrial estates relied mostly on their own groundwater supplies while better off residential customers usually used their backyard borehole as main water source and their connection to piped water only as emergency supply. Extensive individual groundwater use led to signifi- cant land subsidence along with major flood protection and storm water drainage problems in a mega-city that barely lies above sea level. 20Abidjan (Côte d'Ivoire) lies on a powerful and well protected aquifer that is its only source of water; the drill- ing of individual boreholes (mostly by industries) is strictly regulated, the volumes of water abstracted are closely monitored and the abstraction fees are collected. 21This is the case, for example, in Delhi, India. 16 Regulation of Substitutes to the Official Piped WSS Service. Providers of substitutes are key actors who provide the service in areas not covered by the official WSS service provider or who complement an official service of poor quality.22 The reform should thus clarify the regulations that apply to the provision of mobile services (i.e., tankers, water vending, or sludge handling) and fixed ones (i.e., in- dependent water distribution networks and sometimes sewers). Issues such as the legal environment, compensation in case of expropriation, tariff and service area restrictions, technical and operating standards and financing of capital expenditures should normally be clarified (Box 5). 3.3 changing the culture of Public Wss service Providers Owners, managers and staff of public WSS service providers may sometimes have the feeling that they can be immune from the consequences of their poor performance. Section 3.3 focuses on key issues to be addressed for changing the culture of public WSS service providers, whether they remain directly responsible for the service or they sub-contract part or all of it to professional operators. Section 3.3 summarizes the findings and recommendations of several Notes and Sourcebooks recently published by the Bank that cover issues of corporatization of public WSS service providers, corporate culture, use of performance agreements, instruments for increasing consumer accountability and ways of deter- ring corruption.23 Characteristics of Well Performing Public Water Utilities. The recent Bank note on this topic analyzes the environment within which well performing public WSS service providers operate. It identifies three key indicators of success: Box 5 Latin America: Regulation of Independent Water Entrepreneurs A recent review highlighted the diversity of services, market niches and business models developed by small water entrepreneurs in cities of six Latin American countries. Services ranging from mobile provision, mostly by tanker trucks, to independent distribution networks are provided to a substantial share of urban households; in addition to low in- come households and areas where the extension of networks is slow to materialize, small scale providers also cater for niche markets that coexist with and/or complement municipal water utility services. The review underlined that gov- ernment policies, in particular the enforcement of exclusive utility licenses and other regulatory constraints, influence the development of small distribution networks more than consumer demand. First, regulatory frameworks developed for large monopolies leave independent service providers in a legal limbo: as they are neither completely legal nor explicitly illegal, officials may be tempted to obtain bribes from them to allow their business. Second, independent service providers often face unfair monopoly practices from official WSS service providers which often benefit from operating subsidies and development grants and can propose connection fees and tariffs below actual costs to block the extension of independent piped systems that have to be fully financed from user charges. Third, risks of confiscation of individual water sources (bulk supply from the official service provider, or indi- vidual boreholes or wells) or expropriation of piped infrastructure, in particular when the service area of the official WSS service provider is extended, constitute major impediments for raising the financing needed to extend independent piped systems. Fourth, tariff regulations that apply to piped water (but not to the bottled water industry) usually only allow the recovery of O&M costs of independent service providers. This translates to the need to finance extensions of distribution networks mostly through high up-front customer contributions rather than from cash surpluses generated from sales. Finally, the obligation to comply with technical standards, such as pipe material, and strict water quality standards developed for official WSS service providers often limit activities of independent service providers. Source: Solo 2003. 22In Chennai (India) thousands of tankers supplied a city of six million people for the entire month of May 2004 be- cause the city could not distribute piped water through its distribution network primarily as result of an inefficient water resource management. 23Baietti et al. 2006, van Ginneken 2008, Muller 2008, and World Bank 2008. 17 figure 4 changing the culture of Public Wss service Providers Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors · Autonomy, i.e., the ability to manage WSS operations professionally without arbitrary interfer- ence by others. Rules that apply to setting salary scales and WSS tariffs, raising financing and procuring goods and works are good indicators of autonomy; · Accountability, i.e., the obligation to be answerable for the use of public resources and overall performance. Obligations to achieve and report on agreed performance levels or submitting independently audited financial statements are good indicators of external accountability. Rules that apply to staff performance evaluation are good indicators of internal accountability; and · Consumer orientation, i.e., the willingness and capacity to listen to clients and work to better meet their needs. Options offered for service delivery or bill payment, arrangements for seeking customer feedback and percentage of complaints satisfactorily addressed are good indica- tors of consumer orientation. 18 Key Topics in Public Water Utility Reform. Building on the findings of the above note and those present- ed in another Bank note on "Improving Water Services by Making Utilities Accountable to Their Users", a third Bank note discusses key topics for reforming public water utility reform. It covers issues such as: · Corporatization, i.e., the process of transforming a department embedded within a municipal- ity or a ministry into a public organization with its own corporate identity; · Performance agreements between a government and public WSS service providers to hold the latter accountable for the use of public funds and for performance; · Consumer accountability through information, consultation, participation, recourse and redress instruments; and · Capacity building of all actors of the WSS sector. Clarifying the Mandate of Public WSS Service Providers. When designing the reform of urban WSS sec- tors, the mandate of service providers often needs to be clarified. In particular the following should be confirmed: (i) service area;24 (ii) scope of activities (water production, distribution, sewerage and so forth); (iii) service standards with which the provider is expected to comply; (iv) rules that apply to financial management, procurement and employment; (v) pricing and cost recovery principles; (vi) financing sources that can be mobilized; (vii) reporting obligations and regulatory arrangements; and/or (viii) allowed PPPs. In case the functions of WSS infrastructure development and service opera- tion are separated and carried out by two different public entities,25 the exact mandate of each entity should be clarified. Corporatizing Public WSS Service Providers. The success of reforms depends largely upon the change of behavior of the government that owns the public WSS service provider. Corporatization of public WSS service providers should be considered because it is an important first step towards moving incentives away from short-term political objectives. Statutory bodies (or parastatals), to be created in application of specific urban WSS laws, or public enterprises, whose shares are all owned by the government, to be incorporated under the country's company law are usual options. The funding of the corporatized WSS service provider should be specified in the articles of incorporation, as should the distribution of dividends (if any), in particular when the service provider is owned by an aggregation of local governments. The issue of ownership of WSS assets should also be clarified, es- pecially in countries that usually do not allow the transfer of assets financed by central government funds to lower levels of governments, parastatals or public companies. Placing WSS assets in conces- sion under the corporatized WSS service provider is an option to consider.26 The corporatization pro- cess should also clarify: · The composition, appointment criteria and compensation of the members27 and chairperson of the Board of Directors (BOD) as well as the code of conduct and treatment of conflicts of interests; · Conditions under which the BOD should recruit the Managing Director (MD) and key man- agers. The preference should be given to competitive selection from the market rather than 24In decentralized WSS sectors, it is important to clarify if urban WSS service providers are also responsible for the WSS service in peri-urban and rural areas. 25This is the case in Nairobi, Kenya, or Dar es Salaam, Tanzania, for example. 26This is the case in many French and Spanish speaking countries. Most Asset Holding Companies created in West- ern and Central African countries as part of the reform of the urban WSS sectors are in fact concessionaire of the WSS service for a set duration. 27The representation of consumer associations, the business community and financiers able to analyze a financial statement should be encouraged. 19 from pools of civil servants.28 In addition to the code of conduct and conflicts of interests, the managers' contracts should specify performance to be achieved and bonuses for exceeding them; and · Conditions under which the management should recruit the staff and offer contracts within the framework of the overall compensation package approved by the BOD. As reforms of ur- ban WSS sectors often result in changes of statute of the WSS service provider staff, the issue of transfers of benefits, such as annual leave and pension rights, should be looked at in detail. Successful reforms can result in spectacular changes in the culture of public WSS service providers under the impetus of performing BOD and management team (Box 6). The above mentioned notes identify a few key elements for achieving this change: (i) formulating a strong mission statement and ensuring that managers and staff identify with it; (ii) clarifying procedures for each technical, commercial and financial task; (iii) establishing quality control procedures; (iv) setting realistic perfor- mance targets to departments, managers and staff and evaluating their achievement during sched- uled meetings; (v) paying bonuses to managers and staff for achieving of exceeding performance targets; (vi) clarifying rules for promotion; (vii) instituting healthy competition between departments; and (viii) improving internal communication processes to convey management decisions to staff and obtain staff and staff representatives feedback.29 Obtaining ISO certification provides a proof that the WSS service provider operates according to internationally accepted standards.30 Using Performance Agreements. The reform could envisage the signing of Performance Agreements between the government and public WSS service providers. The note on "Key Topics in Public Utility Reforms" lists several options: Box 6 Uganda: Changing the Culture of the National Water and Sewerage Corporation (NWSC) At the end of 1997, NWSC was a highly inefficient public WSS utility, with NRW and collection ratios of 54 percent and 70 percent respectively and a staffing ratio of about 36 staff per 1,000 water connections. Although the customer tariff was one of the highest in the region, NWSC was posting an operating deficit of about UgSh2.0 billion (US$0.4 million). Also, as NWSC connection fees were exorbitant, its customer base was stagnant and the infrastructure exten- sions built in the early1990s remained idle. The government, unwilling to approve another tariff increase, accepted to temporarily freeze NWSC's debt and caused NWSC to enter into a Performance Agreement setting clear short term performance objectives. The BOD, MD and management team were replaced. Two attempts to increase operating revenues in the capital city of Kampala through "service contracts" with private operators did not yield expected results. NWSC then embarked on a decentralization of its operations, with NWSC management in turn entering into performance agreements with all area managers. Increased internal accountability for results, enhanced customer orientation and clear financial incentives in case performance objectives were achieved led NWSC, whose service area now includes about 1.7 million people located in 22 urban centers including Kampala, to significantly improved 2007 metric indicators (figures between bracket are the 1998 performance indicators): (i) service coverage 71 per- cent (47 percent); (ii) NRW: 32 percent (54 percent); (iii) connections metered: 100 percent (65 percent); (iv) total connections:181,000 (51,000); (v) staffing ratio: 7/1,000 water connections (36/1,000); (vi) sales: 40 million m3/year (22); (viii) operating result: UgSh6.5 billion (minus Ugsh2 billion). NWSC now provides management consultancy services in several neighboring countries. With a much improved financial situation, NWSC envisages issuing revenue bonds on the local market to finance further extensions of its distribution networks. Sources: Baietti et al. 2006, Berg and Muahirwe 2006. 28If necessary, assistance should be sought from specialized recruiting consultants for preparing job description, short listing and interviewing candidates and for fixing contract terms to meet that of similar managerial positions in the country. 29Private WSS service providers often distribute shares to their staff to create an ownership feeling and involve staff in the decision making process. 30The private WSS service provider of Senegal (SDE) has obtained an ISO 9001 version 2000 certification in 2003. 20 · Business plans, which usually translate into annual improvement plans, often as part of a lon- ger-term program. They are good tools for clarifying distribution of responsibilities among parties and building the planning capacity of those involved; · "Contrats plans," which typically clarify commitments and the obligations of the two parties for a period of four to five years. Experiences with contrats-plan in Africa, a region where this concept was introduced in the early 1980s have been mixed, although there are a few successes.31 The enforceability of agreements between public entities is limited, in particular when the defaulting party is a government that does not honor its commitments to adjust tariffs, provide financing, or pay its bills. If a contrat plan is envisaged, it should be short, commitments of each party should be clearly specified, performance targets should be realistic, and the number of indicators to measure performance should be limited. Also, pro- visions should be made for independent audits of the performance of both parties and for resolving disputes; · Performance based intergovernmental transfer systems, which have sometimes been devel- oped in countries with decentralized WSS sectors. Service providers have to compete for public funds whose availability is linked to the implementation of reforms and achievements of spe- cific performance targets; and · Performance agreements with managers and staff including the payment of bonuses if perfor- mance targets are achieved have proven to be the key for changes of corporate culture. Increasing Consumer Accountability. Changing the culture of the WSS service provider almost always requires improving accountability to customers. The recent Bank note on this topiclists the various tools to be considered as part of the reform:32 · Information through making annual reports available, distributing fliers with WSS bills or provid- ing answers to most commonly asked questions at service centers or on-line; · Consultation aimed at obtaining consumer feedback through structured surveys, public hear- ings or advisory committees. The credibility of the consultation process depends very much upon actions taken to address concerns expressed by those consulted; · Participation for example by having consumers represented at the BOD or in regulatory com- mittees; and · Recourse, (the possibility of calling WSS service providers to account for the service) and if justi- fied to redress (obtain an appropriate response either internally or through an ombudsman). Consumer accountability cannot be achieved through a single tool. A well-functioning mechanism should be effective and judged by the results it produces; inclusive by ensuring that all categories of consumers are consulted (including those who do not have access to piped WSS service); and ef- ficient so as to not result in high costs to consumers. The mechanism should also be sustainable and integrated into normal operational management and associated with organizational excellence. Building the Capacity of the Various Actors. Reforms are likely to require a massive capacity building effort of the owners, managers and staff of WSS service providers as well as other stakeholders who could influence its design and implementation, such as NGOs and the media. Capacity could be built using instruments ranging from classroom training, on-the-job training, establishing networks of profes- sionals to specialized support through PPP, and twinning. The main targets of the capacity building ef- fort could be: 31Senegal, Niger and Uganda. 32Muller, Simpson, and van Ginneken 2008. 21 · Governments and members of the BODs (and if relevant NGOs and the media): on topics such as urban WSS policy good practice, planning, financing, procurement, pricing and regulation of WSS services, and PPPs; · Managers: on the above topics plus human resources development, team building, and com- munication; and · Operational managers and staff, on topics such as (i) WSS infrastructure development (de- sign, procurement, construction supervision and so forth) and related environmental and social issues; (ii) operational efficiency (NRW reduction, energy savings, outsourcing and so forth); (iii) commercial operations and customer management; (iv) accounting and finan- cial reporting; (v) and quality control. Particularly in countries with decentralized WSS service providers, the investigation of the possibility of instituting a formal certification of the compe- tence for specialized technicians and managers could increase recruitment transparency and favor an active staff market. Deterring Corruption in WSS Service Provision. The Bank has recently prepared a Sourcebook33 that proposes approaches and instruments for assessing and addressing governance weaknesses and cor- ruption from an urban WSS sector perspective. The Sourcebook clarifies the dynamics of corruption, analyzes the various levels of governance and suggests options for second best solutions when deal- ing with countries with low administrative capacity and/or political will. It also suggests methodologies for carrying out country level and sector assessments, detecting corruption at the provider level and analyzing implications of different sector structures on the focus and impact of corruption. Involving governance specialists to carry out confidential vested interest assessments (Annex 5) is essential to help judge the magnitude of issues to be addressed while designing reforms. Fraudulent and corrupt practices could affect commercial operations (metering, billing, collection, and connections), techni- cal operations (supply of chemicals and parts), human resources management (market for lucrative positions34 and employment of ghost staff), assets of the WSS service provider (illegal use of equipment or land of the WSS service providers), provision of substitutes to piped WSS service (dividends distrib- uted by tankers or vendors to keep their business in poorly served areas) and, of course, capital devel- opment projects (planning, design, procurement, and construction supervision). When a public or pri- vate operator aiming at maximizing its profit provides the WSS service, the risk of corrupting the regula- tory function for obtaining higher tariffs also needs to be assessed. Indeed, the main conclusion of the Sourcebook is that the best way for discouraging fraud and corruption is to implement sound industry practices while redefining the mandates of the various actors, drafting and enforcing contractual commitments and designing and implementing operating procedures. Reforms to be considered for limiting fraudulent and corrupt practices linked to WSS infrastructure development and to commercial activities are proposed in Sections 3.4 and 3.5 respectively. 3.4 optimizing Wss Asset management and Wss Infrastructure development Infrastructure development is one aspect that needs a particular attention: it could lead to significant inefficiencies as a result of inadequate planning, design, procurement, and project implementation procedures as well as to the diversion of public funds through corrupt practices. Since engineering lobbies are likely to be affected by reforms of the way the WSS infrastructure is developed key stake- holder support can be built by associating these entities with the new design. 33World Bank 2008. 34In countries where corruption is the fact of sophisticated systems, lucrative managerial positions are open for bid, sometimes for fairly large amounts (J. Davis 2003). 22 figure 5 optimizing Wss infrastructure development Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Appraisal Application Application Financial Providers of WSS Service Markets Substitutes Customers Provider Demand & WTP Assessments Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge Tariff Monitoring Rights Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors Responsibility for WSS Infrastructure Development. The development of the WSS infrastructure should normally be the responsibility of the entity that manages WSS assets (either their owner or their con- cessionaire) and services the debt attached to their financing, rather than that of central engineer- ing departments with no or limited financial obligations (Box 7). Detailed financial forecasts should be prepared to help identify capital expenditure (Capex) programs that can be afforded by future revenues of operations, taking into account constraints imposed by the likely evolution of demand for WSS services, socially acceptable WSS tariffs and realistic improvement of WSS operations. When separation of WSS infrastructure development from provision of the WSS service is considered for enhancing the accountability framework, the creation of an asset-holding company35 (AHC) could 35Asset-holding companies have been created successfully in African countries that have implemented affer- mage contracts with private operators (Guinea, Senegal, Niger and Mozambique) or that have split the responsi- bility of asset development and service provision between two public companies (Kenya). 23 be envisaged since it should help clarify the actual financial situation of the WSS operation (Box 12). The use of the word "asset-holding company," first introduced when the Bank started supporting the implementation of affermage contacts in the late 1980s, has often led to misunderstandings. An AHC is in fact the utility, i.e., the entity eventually responsible for the quality of the service, in particu- lar when the performance of the operator does not meet contractual obligations.36 Again, there is no "one-size-fits-all" solution, and the creation of AHCs should be considered with caution in highly decentralized urban WSS sectors where the small size of each individual WSS operations could justify some kind of aggregation.37 Focusing on Asset Management. The downward spiral in which many urban WSS sectors are caught is well known: (i) low WSS tariffs do not generate revenues sufficient to maintain WSS assets in work- ing condition; (ii) assets in bad condition translate into a poor quality WSS service; (iii) a poor quality service gives decision makers a good excuse for not increasing tariff; and (iv) deferred maintenance diverts large shares of the Capex for rehabilitating existing infrastructure rather than for extending it to un-served areas.38 Stopping this spiral and building the capacity for preparing WSS assets manage- ment plans and budgets for preventive maintenance and regular replacement of equipment, pipes and civil works should be one of the main objectives of the reform process. As part of this exercise, assets revaluation may have to be carried out and depreciation rules may have to be adjusted to be consistent with expected life durations. If the legislation does not allow this, it may be wise for the WSS service provider to issue pro-forma financial statements based on industry good practices to support request for tariff adjustments. Box 7 Côte d'Ivoire: Addressing the mid 1980s Financial Crisis In the mid 1980s, the urban water supply service in Côte d'Ivoire, successfully operated by a professional private op- erator since 1959 under an affermage contract with the central government, was the reference in Western Africa. The government's Direction de l'Hydraulique humaine also had been able to mobilize significant financing to develop the infrastructure. However, the combination of the absence of a public entity to act as owner of the assets and of a government policy to finance the rapid development of the infrastructure exclusively on debt led to a severe finan- cial crisis, when the US dollar, in which a large part of the debt was denominated, steeply appreciated against the local currency in which the revenues were generated. Debt overexposure could have been avoided, had a consoli- dated balance sheet of water supply operations been issued: the debt/equity ratio was way off industry good prac- tice. Côte d'Ivoire eventually addressed the issue by transferring the responsibility for the Capex to the private opera- tor, whose contract was transformed into a hybrid concession/affermage, and by shifting its financing policy from 100 percent debt to 100 percent cash generation. Although the customer tariff decreased as a result of the renegotiation of the affermage contract and the shift of financing policies, between 1988 and 2006, operations have been able to generate enough revenues to service a restructured debt and finance the extension of the water supply service to an additional four million people. Most neighboring countries that implemented PPPs in the early 1990s and were faced with the need for investing heavily decided to create public asset holding companies with the main objectives of managing the assets, developing the infrastructure, and ensuring that both the Capex and its financing plan could be afforded by revenues to be generated by the private operator. Source: Fall et al. 2008. 36This is what happened in Dar es Salaam, Tanzania, when the AHC terminated in 2005 the affermage contract awarded to a private operator in 2003. 37In France where each of the 36,000 municipal governments is responsible for the WSS service in its territory, syn- dicats de communes are created on a voluntary basis to pool limited resources; when the operation of the WSS service is sub-contracted to a private operator, the syndicat plays the role of AHC. 38In some African countries, water production units are rehabilitated every 10 to 15 years, i.e., each time an exter- nally financed large WSS project is implemented. 24 Improving Demand Assessments. Standardized per capita water demand and standardized technolo- gies recommended by central engineering agencies have often resulted in over-designing WSS infra- structure. Customer surveys should be carried out prior to planning infrastructure extension to identify preferred services, consumption patterns, and elasticity of demand to pricing. · Levels of water service. The demand for individual (or courtyard) water connections by low in- come households is usually influenced by the amount of initial connection fee and the monthly bill: well-designed customer surveys should provide inputs to the design of the WSS tariff structure. · Water consumption patterns. Typical customer behaviors should be investigated during surveys. For example, it is not unusual for low income urban water customers to use piped water only during a few hours during the day or only during the dry season and to rely on free water har- vested from roofs during the rainy season,39 or for better off customers to use public piped wa- ter as an emergency supply in case their individual supply fails.40 · Elasticity of water demand to pricing is rather difficult to assess in situations where the WSS ser- vice is of poor quality and user charges below O&M costs. The use of comparisons with cases that present similarities can prove useful.41 · Demand for sanitation services. The demand for sanitation services is influenced by hygiene promotion, a responsibility that seldom falls under urban WSS service providers. When assessing demand and willingness to pay for sanitation services, a wide range of technical options and their associated capital and operating costs should be presented. Options typically range from on-site installations (from simple latrines for excreta and with soak pits for grey waters to septic tanks for black waters) which are almost always built by small private entrepreneurs, to sewer- age networks developed and operated by WSS service providers. When presenting sewer op- tions, it may be necessary to clarify who would bear the cost of upgrading indoor plumbing, if applicable, in addition to that of connection to sewers. The preparation of strategic sanitation plans using the findings of detailed customer preference and willingness to pay surveys for se- lecting affordable sanitation options is an approach to be preferred to the preparation of tra- ditional sewer master plans that could result in idle infrastructure (Box 8). Planning Infrastructure Development. The technical, environmental, social, financial and economic criteria to be used to identify the least cost solution should be clarified up-front. In addition to service standards and consumption levels derived from customer surveys and drinking water and effluent quality standards, technical criteria should define design specifications (minimum delivery pressure, storage capacity, minimum velocity in sewers and so forth), environmental and social costs to be taken into account and methodology used for carrying out economic comparisons. Standard terms of reference (TORs) for planning exercises should be prepared in countries with decentralized WSS service providers, with appropriate training provided to strengthen the capacity of both the service providers and the local consulting industry. As mentioned above, key stakeholders should be involved in the review of the infrastructure development plan so that concerns about environmental, social, or economic consequences could be reflected in the final design. Infrastructure development plans, complemented by outlines of the implementation plan, operation plan (Sections 3.5 and 3.6), and fi- nancial forecast (Section 3.7) should constitute the backbone of financing applications. 39This is often the case in small African towns. 40As still is the case in Jakarta, Indonesia. 41In Côte d'Ivoire and Senegal, two Western Africa countries with well performing urban water services, water is supplied on a 24/7 basis in all urban centers served for per capita productions below 100 lpcd. In these countries, the WSS service providers recover full O&M and capital costs from users and are allowed to disconnect customers in arrears. 25 Box 8 Burkina Faso: the Ouagadougou Strategic Sanitation Plan In Burkina Faso, the national WSS utility ONEA is responsible for both water supply and waste water collection and disposal in urban centers. In the early 1990s, it embarked on the definition of a strategic sanitation plan (SSP) for the capital city Ouagadougou after detailed surveys of beneficiary preferences and willingness to pay. Sewers were limited to a small part of the city center, while on-site sanitation was actively promoted and artisans trained to satisfy demand for appropriate technologies in the other parts of the city. The construction of the small sewer system and stabilization ponds was financed from external sources; 75 percent of construction costs of on-site sanitation and 100 percent of operation costs were (and still are) borne by beneficiaries. ONEA however finances 25 percent of the construction costs of on-site sanitation, and 100 percent of marketing and artisan training from a sanitation tax that applies to the water bill. Ouagadougou is one of the very few cities in Sub-Saharan Africa to have developed a sus- tainable arrangement for demand-based sanitation services. Source: World Bank 2005. Improving Project Designs. Central engineering agencies enjoying de facto monopolies for preparing WSS projects implemented by decentralized WSS service providers have often been associated with over-design, in particular when their fees are based on a percentage of the project cost,42 or design unbalance, with a strong focus placed on production and trunk infrastructure and little attention paid to the end users. WSS service providers should as a general rule: (i) select specialized consultants ac- cording to transparent short listing and competition on quality and cost procedures; and (ii) remuner- ate consultants either on a time spent or lump sum basis. Again, standard TORs should be prepared to assist decentralized WSS service providers take over this responsibility. It may be appropriate to develop programs to strengthen the capacity of the local consulting industry on specific topics. Restrictions on technical specifications should be discussed as part of the reform process: while some may initially be justified on, for example, pipe materials, meter technologies or treatment processes, they should peri- odically be revisited by independent committees that should include external expertise. Increasing Procurement Efficiency and Transparency. While it is likely that public WSS service provid- ers would still have to comply with government procurement rules, the focus of the reform should be on increasing the efficiency and transparency of internal procedures. For this, internal guidelines and standard bidding documents, requests for proposals and formats for bid evaluation reports should be prepared, and training provided to senior staff in charge of procurement. As a matter of principle, specialized consultants should be employed for drafting technical specifications, replies to requests for clarification during the bidding period, and bid evaluation reports. To the extent possible, reliance on central public procurement agencies or prior clearances by such agencies should be limited to very large contracts for which an independent review could add value. Supervising Project Implementation. Specialized consultants should also be employed to supervise construction activities, certify payment requests, and commission works; their remuneration should be based on time spent rather than on a percentage of the contracts supervised. For large projects, it is preferable that external technical auditors employed by the WSS service provider carry out technical audits of the performance of construction supervisors. Deterring Corruption in WSS Infrastructure Development. If corruption is suspected,43 infrastructure de- velopment is likely to be a main source of diversion of public funds (Box 9). While designing the re- form, it would be necessary to understand if corruption is mostly the fact of a few individuals or that of fairly sophisticated systems that levies commissions at each step of the project cycle. The extent 42This is the case in many Indian States. 43World Bank 2008. 26 to which corruption affects WSS infrastructure development could be assessed by comparing prices obtained by public and private developers for similar goods and works and the characteristics of the consulting and construction industries.44 The robustness of anti-corruption measures proposed could be tested against the willingness to implement best practice in infrastructure development such as: · Estimating demand for services on the basis of consumer surveys, preparing infrastructure de- velopment plans, meeting least cost solution criteria, and submitting such plans to public re- views; · Sub-contracting design and construction supervision activities to consultants selected accord- ing to transparent procedures and remunerated on the basis of actual outputs or time spent; · Fully documenting restrictions on technical specifications; · Sub-contacting procurement activities to consultants and independently preparing bid evalu- ation reports or reviews of complaints filed; and · Closely monitoring the performance of consultants in charge of construction supervision to as- sess the quality of work and justification of variation orders. 3.5 Improving Wss service Provision through Internally developed Programs Section 3.5 focuses on internally developed programs to improve the quality of the WSS service and the efficiency of operations. It covers issues that usually have to be addressed as part of the reform, such as overhauling organizational set-ups of WSS service providers, reducing staff costs through outsourcing, and reducing costs by improving technical, commercial, procurement and financial operations Overhauling Organizational Set Ups. Again, there is no "one-size-fits-all" solution for organizing an ur- ban WSS service provider. It is however likely that departments of various importance dealing with public relations, technical operations, asset management and infrastructure development, commer- Box 9 Corruption in WSS Infrastructure Development The Sourcebook regroups typical "red flags" of likely corruption in WSS infrastructure development in three categories: Red flags for bribes and kickbacks, which usually include: (i) multiple sole source awards or clusters of awards just below thresholds for competitive procurement; (ii) bid specifications too narrow, too vague, or favoring particular suppliers or contractors; (iii) unreasonably short time frames for submitting bids; (iv) disqualifications of bidders for dubi- ous reasons or awards of contracts to apparently non-qualified consultants or contractors; (v) unexplained delays in issuing bid evaluation reports; (vi) awards to supplier and/or contractor who did not submit the lowest bid; (vii) limited numbers of bidders with losing bidders becoming sub-contractors of winning ones or officials insisting on the use of specific sub-contractors or suppliers. Red flags for bid rigging, in addition to the above listed red flags, include: (i) unreasonable pre-qualification criteria; (ii) unjustified disqualifications of lowest bidders; (iii) selections of lowest bidder followed by negotiations of large varia- tion orders; and (iv) pattern of rotating winning bidders among the same companies. Red flags for fraud usually include: (i) loose supervision by absentee teams; (ii) delays or refusals to allow independent inspections of goods delivered or construction sites; and (iii) repeated failed quality and operational tests. Source: World Bank 2008. 44If some consulting firms and contractors work only for public clients and other only for private clients, and if, in addition, prices obtained by the former are systematically higher than that obtained by the latter, it is a good indication that the public clients are not behaving appropriately. 27 figure 6 improving Wss service Provision internally Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Customer WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Users Setting Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Regulator Agencies Mandate Source: Developed by the authors cial operations, procurement, financial operations, human resources development, and internal audit may have to be strengthened, reorganized, or created. Specialized management consultants of ex- perienced WSS service providers willing to export their know-how may have to be associated with the definition of the optimal structure, level of decentralization, procedures, rules that apply to financial commitments or reporting, as well as a realistic implementation timetable. Outsourcing Plan. Staff costs are often one of the largest operating costs of a public WSS service provider, even if in most cases staff compensation packages are low when compared with that of the private sector. In developing countries, staffing ratios of public WSS service providers vary widely, but countries that have successfully implemented efficiency gains programs have caused their WSS service providers to achieve performances, measured by staff per 1,000 connections, that compare with that of developed countries (Figure 1) through a combination of customer base ex- 28 pansion and outsourcing and, more rarely, staff lay-off. Indeed, many public WSS service providers themselves still carry out non-core activities, such as security of facilities, maintenance of vehicles and buildings, and construction that can be provided much more efficiently by sub-contracted specialized companies. Outsourcing programs should be defined as part of the above mentioned overhauls of organizational set ups. Programs to assist affected staff, such as transfers to sub-con- tractors or assistance to launch businesses could be envisaged. When staff reduction cannot be avoided, normal attrition should first be considered. Consulting with staff representatives or unions on the design of separation packages and providing assurances that financing is available for such packages would be necessary. Procurement and Limitation of Corruption Linked to Procurement Activities. Designing programs to out- source non-core tasks should give an opportunity to revisit procurement procedures related to day to day operations: recurrent procurement is usually an area where significant inefficiencies occur as the result of inadequate procedures, improper supervision, or corrupt practice. As a matter of principle, bids for the supply of goods (chemicals, spare parts, meters, and so forth) and the provision of out- sourced services should be called for regularly, technical specifications should be updated from time to time, and pre-qualification of contractors, if necessary, should be carried out in accordance with transparent criteria. Audits of procurement procedures should also be regularly carried out. Improving Technical Operations is likely to require: (i) an overhaul of the detailed operating proce- dures for water production, transmission, and distribution as well as wastewater collection and treat- ment; (ii) the training of middle management to comply with the new procedures, given that a WSS service provider depends on their technical capacity and satisfactory performance; and (iii) the gen- eration of reliable data on the key parameters of the WSS service45 so that informed decisions can be made to design asset management plans and monitor their outcomes. Particular attention should be paid to reducing non-revenue water (NRW) and energy consumption. NRW Reduction. Ensuring that public WSS service providers develop and implement NRW reduction pro- grams with the objective of limiting operating costs and delaying the need for further extension of water production units is one of the many challenges of urban WSS reforms. A recent Bank Note on the chal- lenge of reducing NRW in developing countries clarifies many issues on this topic and the role perfor- mance-based service contracts could play.46 Table 2 below summarizes the main components of NRW. · Commercial losses can be reduced by implementing a meter installation/replacement pro- gram and by limiting metering inaccuracies and data handling errors. Rotating meter readers to limit petty corruption, distributing bonuses for identifying illegal connections and using com- mercial software that cannot be tampered with are also options to consider. · Physical leaks on transmission or main distribution lines are usually taken care of because they are visible; the same usually applies to storage tanks overflows.47 However, most physical leaks are located on service connections (including the connecting point to the distribution pipe) and are usually less (or not) visible. In the many cities where the development of secondary and tertiary distribution networks has been neglected and customers have installed long legal 45Quantities of water produced, distributed and sold; quantities of waste water collected and treated; energy and chemical consumptions; operation of storage tanks; pressure at which water is delivered at critical points of the distribution system; overflows of sewers; drinking water quality at production plants and at select distribution spots; and effluent quality. 46Kingdom, Liemberger, and Marin 2006. 47When storage tanks are actually used: in many South Asian cities, storage tanks are often bypassed and water is usually pumped directly in distribution networks a few hours per day. 29 or illegal connections of poor quality material and construction, physical leaks can only be ef- ficiently limited by replacing "spaghetti" networks. The magnitude of such programs is often un- der estimated in WSS asset management plans.48 Also, as physical leaks are roughly proportion- al to the pressure at which the water is delivered, a pressure management program may have to be included in the NRW reduction program, if the rehabilitation and extension of distribution networks are expected to result in increased pressures. Measuring NRW as a percentage of the water produced could be controversial (Box 10); NRW indi- cators expressed in m3/day/connection or m3/day/km of distribution pipes are more representative of the main causes of NRW. Also, estimating NRW when water is distributed on an intermittent basis is fairly complex;49 physical leaks should in theory be proportional to the number of hours of distribution, and the volume to be quoted should be for a permanent supply, not only for the hours of supply, even if this does not take into account the fact that if the water were to distributed permanently it would likely be at a lower pressure. Energy Efficiency. Energy is also one of the largest operating costs of a WSS service provider. Limiting physical losses to reduce pumping costs is an efficient way of addressing the issue. Technical audits of pumping plants should also be carried out to identify the need for replacing outdated equipment and/or adapting pumping programs to the characteristics of the pumping equipment and electricity tariff structures. Financial incentives available through the Carbon Fund should be systematically con- sidered. Improving Commercial Operations usually requires: (i) establishing clearer relations between WSS ser- vice providers and customers and embedding rights and obligations of both parties in an updated "customer contract;" and (ii) overhauling metering, billing, and collection procedures. table 2 main components of non-revenue Water System Authorized Billed Authorized Billed Metered Consumption Revenue Water Input Consumption Consumption Billed Un-metered Consumption Volume Unbilled Authorized Unbilled Metered Consumption Non-Revenue Consumption Unbilled Un-metered Water Consumption Water Losses Commercial Unauthorized Consumption Losses Metering Inaccuracies and Data Handling Errors Physical Losses Leakage on Transmission and Distribution Mains Leakage and Overflows at Utility's Storage Tanks Leakage on Service Connections up to Customer Meter Note: Shaded boxes highlight losses of commercial origin. Source: Kingdom, Liemberger, and Marin 2006. 48For example, in African cities, the low density of connections (typically of 30 to 60 per km of distribution pipe) usually translates in large programs of construction of tertiary pipes and standardized connections that cannot only be implemented over long periods. 49This is the case in most South Asian cities. 30 Box 10 The Non-Revenue Water Paradox Traditionally, NRW has been measured as a percentage of the water production and NRW targets have been Year 0 m3/day Year 10 m3/day set in reference to international best practices in similar circumstances. However this indicator does not really consumption consumption reflect the fact that: (i) the number of physical losses is 100,000 conn. 75,000 250,000 131,250 linked more to the number of connections (where about @ 0.75 m3/day @ 0.525 m3/day 70 percent of them are usually found) and the length of the distribution network; and (ii) the volume of physical losses losses losses is linked more to the pressure at which water is de- 100,000 conn. 20,000 250,000 conn. 37,500 livered than to the volume of water introduced in the dis- @ 0.20 m3/day @ 0.15 m3/day tribution network. Similarly, commercial losses depend as much upon the number of connections served as upon 1,000 km @ 8,000 3,250 km 19,500 the volume of water consumed. In cities that implement 8 m3/day @ 6 m3/day aggressive programs to connect low-income households, the average per connection consumption tends to de- Production 103,000 Production 188,250 cline significantly over time and measuring NRW as a per- total losses 28,000 total losses 57,000 centage of the production could be misleading. nrW 27 % nrW 30 % The table below presents a case where in 10 years: (i) the number of residential connection was multiplied by 2.5; (ii) the average consumption per connection decreased from 0.75 to 0.525 m3/day/connection; (iii) the av- erage losses per connection decreased from 0.20 to 0.15 m3/day/connection; and (iv) the average loss per km of distribution pipe decreases from 8 to 6 m3/day/km. While these indicators translate a good performance in terms of increasing access and improving efficiency, NRW, expressed in percentage of the production increased from 27 per- cent to 30 percent in 10 years! Source: Developed by the authors. Customer Relations. A recent Bank Note proposes options for improving water utilities accountability to their customers.50 WSS service providers should ensure that customers are offered several WSS service options and understand the impact of the tariff structure on the initial connection costs and periodic WSS bills. Customer contracts should clarify that the WSS provider is allowed to disconnect customers in arrears and required to promptly reestablish the service upon payment. WSS service providers should be requested to: (i) monitor the handling of customer complaints; (ii) seek feedback from customers on the quality of the service provided; and (iii) make independent assessments of its performance for handling complaints available to the public. Particular attention should be paid to two categories of customers: · Government agencies and State Owned Enterprises (SOEs), which often represent a large share of the billing: agreeing on an action plan to improve budgetary and payment procedures may require specific negotiations with the Treasury and/or the ministry responsible for SOEs; and · Low-income households to whom subsidized connections and lower tariffs or subsidies for life- line consumption should be offered to encourage access to and minimum consumption of piped WSS service (Section 3.8). The criteria used for identifying such customers should be clari- fied. Also, the issue of periodicity of billing should be addressed and the economic feasibility of meter using a pre-payment technology should be analyzed where the customers' irregular revenues could affect bill collection. Metering. Too many WSS service providers still estimate their production on the basis of the number of hours on their pumping stations. Accurate bulk metering is necessary in any case; the rehabilitation of 50Muller, Simpson, and Ginneken 2008. 31 existing meters, or their replacement by better performing ones, should be a priority of infrastructure development programs. Many developing countries have implemented successful individual metering programs, but many still believe that metering the consumption of each individual account should be a remote objective. In cities where individual metering is inexistent or deficient, customers to be me- tered should be prioritized.51 One would have to be realistic about the pace of implementation of a comprehensive metering program, as installing meters often requires a reconstruction of the connec- tion itself, which could be a major task when this requires replacing long connections by shorter ones hooked on properly built tertiary distribution networks (see discussion on NRW reduction). The depend- ability of meters proposed for installation should be investigated, in particular where plans call for wa- ter to be distributed on an intermittent basis for many years. Billing, Collection and Limiting Corruption Linked to Commercial Activities. Limiting the human han- dling of data will eliminate meter reading and billing errors, whether involuntary or resulting from fraudulent practices; audits by specialized consultants should help identify equipment, software and procedures to achieve this. Several well-tested software are available on the market, and it is often preferable to purchase an off-the-shelf product rather than developing home grown ones. Various options for the payment of WSS bills by customers, including that using post offices or banks with well-developed networks as payment points should be investigated. As mentioned above, discon- nection and reconnection procedures should be the subject of a particular attention, as well-run WSS service providers, whether public or private, cannot afford the accumulation of large accounts receivable. Financial Management. While designing the reform, audits of financial operations should be carried out to help design and implement programs aimed at: (i) improving accounting procedures includ- ing: accounts receivable and payable, inventory records, provision for income taxes, valuation of fixed assets, profit distribution (if applicable), and internal controls; (ii) identify adequate software and hardware to be acquired; (iii) define relevant training programs. This may involve a complete overhaul of accounting procedures. As a general rule, financial statements should be audited by independent auditors rather than by government auditors. 3.6 Improving Wss service Provision through Partnerships with the Private sector Two Toolkits on the design of public-private partnerships (PPPs) in WSS have been published by the World Bank during the last ten years.52 Section 3.6 summarizes the main recommendations of the 2006 Toolkit that should be referred to when PPPs are considered as part of the reform of an urban WSS sector. Two reports have recently been prepared by the World Bank to review the ac- tual impact of a large number of PPPs in developing countries on the reliability, sustainability and affordability of the WSS service.53 This section does not summarize their finding; they should also be consulted prior to engaging in a PPP. Finally, many reports by other financing agencies, research in- stitutes or NGOs (listed in the two recent reviews of the PPP experience) have been published on this somewhat controversial topic. Key Steps for a Successful PPP. The 2006 Toolkit proposes nine steps for designing a successful urban WSS PPP: (i) considering PPP; (ii) planning the process of introducing PPP; (iii) involving stakeholders 51In many cities 20 percent to 30 percent of the customers generate 70 percent to 80 percent of the revenues; it makes sense to install meters on these connections first. 52World Bank 2006 and World Bank 1997. 53Fall et al. 2008 and Marin et al. 2008. 32 figure 7 iimproving Wss Provision through PPPs Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors in the design of the arrangement; (iv) setting upstream policy; (v) setting service standards, tariffs, subsidies, and financial arrangements; (vi) allocating responsibilities and risks; (vii) developing insti- tutions to manage the relationship; (viii) designing the legal instruments for the arrangement; and (ix) selecting an operator. As successful PPPs are always designed and implemented as an integral part of a reform of the urban WSS sector, there are many overlaps between issues identified in these nine steps and those covered in the various sections of this report. Among others, stakeholder involvement, policy formulation, service standards, tariff setting, subsidy designs, financing arrange- ments and economic regulation are covered in sections 3.1, 3.2, 3.6 and 3.7. This section mostly fo- cuses on the rationale behind PPPs in WSS, the types of PPPs that can be considered on the basis of an optimum allocation of responsibilities and risks, the arrangement for managing the PPP and the selection of operators. 33 Considering PPPs for Improving WSS Service or for Raising Financing? The above-mentioned recent re- view of the PPP experience worldwide concludes that PPPs should primarily be considered for improv- ing the quality of WSS service and efficiency of WSS operations. · Where there is no major ideological opposition to the concept of private provision of the WSS service and a positive response from the professional private sector can reasonably be ex- pected, involving a private operator in the provision of the WSS service should normally bring the know-how that is often missing to improve the quality of service and achieve efficiency gains because: (i) it should normally be easier to enforce contractual obligations between a public and a private partner than between two public partners;54 and (ii) private partners are expected to react swiftly to the financial incentives either explicitly specified or implicitly built in its contract to encourage achievement of performance targets. · PPPs could also be considered for raising commercial financing, without recourse to sovereign guarantees, to develop the WSS infrastructure if: (i) the credibility of the technical and com- mercial WSS operations has been proven; (ii) the predictability of the WSS tariff setting mecha- nisms has been tested; (iii) a debt repayment track record of the WSS service provider has been established; and (iv) as explained in section 3.7, financial markets are able to provide debt in local currency and on terms compatible with the characteristics of a sector whose assets are depreciated over much longer periods than most infrastructure sectors.55 Ensuring that local financial markets can meet the needs of the urban WSS sector obviously cannot be achieved solely by reforming the latter. Types of PPPs. This report focuses mostly on the following types of PPPs:56 · Service contracts designed for outsourcing specific activities, such as meter reading, collection of bills, leak detection and repair, plant operation or network maintenance are awarded for periods of time of one to five years. The service contractor, whose contract mentions the tech- nical specifications to be complied with, usually receives a fixed payment from the owner of the service contract, which is sometimes complemented by a bonus or a penalty for exceed- ing or not meeting contractual targets. · Management contracts designed for outsourcing all technical and commercial operations, for a period of time usually limited to about five years. The manager, whose contract also men- tions technical specifications and service standards to be complied with, receives remunera- tion similar to that described above for a service contract. · Affermage contracts also designed for outsourcing all technical and commercial operations; the main differences between a management contract and an affermage contract are in: (i) the relation with the customers: in an affermage, customers are under contract with the private operator, not the owner of the contract; (ii) the status of the operational staff: in a af- fermage, operational staff are employed by the private operator, not by the owner of the 54As is the case in Kenya, where ownership and operations have been split in Nairobi and Mombasa and the Coastal Region and operation contracts between public owners and public operators have been in effect for several years. The situation is now similar in Dar es Salaam, Tanzania where a public operator now holds the affer- mage contract previously awarded to a private operator selected after open competition. 55For example, these conditions are met in Morocco where three combined power/water/sewerage concessions are successfully implemented in Casablanca, Rabat/Sale and Tangiers/Tetouan. 56This report does not discuss BOOT (Build, Own, Operate and Transfer) types of PPP, mostly designed for provid- ing additional WSS production infrastructure and not really for improving the WSS service. It does not discuss full divestiture option either; that is limited to a very small number of countries where conditions for accessing private equity markets exist (see Section 3.7). 34 contract; and (iii) the remuneration scheme: in an affermage the operator shares the collec- tion of user charges with the owner of the contract. Since the operator of an affermage has to finance the working capital of the WSS operation, the duration of the contract should be suf- ficient to allow for recouping the initial investment and yielding a reasonable return; affermage contracts are usually awarded for about ten years. · Concessions that transfer to a private operator the responsibility for financing the development of the WSS infrastructure and for implementing the Capex in addition to operational responsi- bilities. When the WSS service is already provided by a public concessionaire, which is the case in many French and Spanish speaking countries, the privatization of the concession results from the acquisition of a majority share of the latter by its selected private partners.57 Because of the long depreciation periods of WSS assets, WSS concessions are usually awarded for duration of 25 years and more. Concession contracts specify coverage objectives, service standards, tar- iffs the operator is allowed to charge to the customers, as well as the conditions under which they can be changed. Allocating Risks and Responsibilities. The provision of WSS service in urban areas involves, among oth- ers, operational, commercial, financing, foreign exchange, regulatory, and political risks. If all these risks can be mitigated adequately, a concession could reasonably be considered. · Operational risks are usually linked to the reliability of water sources (yield and water quality), the conditions of the WSS assets, and the reliability of key inputs such as energy. Mitigating operation- al risks usually requires rehabilitating assets. Normally, the operational risk should be transferred to the private operator, but if rehabilitation programs cannot be financed timely and implemented efficiently, it may be preferable to initially settle for service contracts of limited scope. · Commercial risks are mostly associated with the evolution of demand for WSS service, the capacity and willingness of the customers to pay and the ability of the operator to collect bills and disconnect customers in arrears. Mitigating commercial risks usually requires detailed assessments of demand and elasticity to pricing, the design of appropriate tariff structures, metering of consumption and enforcement of disconnection policy.58 Normally, the commer- cial risk should be transferred to the private operator, but if the mitigation program cannot be implemented, it may be preferable to opt for a management contract that guarantees part of the payment to the manager. · Financing and foreign exchange risks are linked to the capacity to generate revenues from op- erations sufficient to service the debt and contribute cash to the Capex. Mitigating financial risks usually requires that local financial markets are able to provide debt on terms compatible with the characteristics of the WSS sector (Section 3.7) and in local currency, to limit the foreign ex- change risk. If local financial markets do not meet these conditions, concessions could logically be considered only if cash surpluses are expected to be sufficient to finance the entire Capex.59 But if financing that meet the needs of the WSS sector can only be provided in foreign exchange by international financing institutions (IFIs) and bilateral agencies, it may be preferable to allo- cate the financing and foreign exchange risks to the public partners and, provided that the op- erational and commercial risks can be reasonably mitigated, opt for an affermage contract. 57In Western and Central Africa, public electricity and water concessions in Gabon and Mali have been priva- tized by the sale of shares to the selected private professional partners and investors (Fall et al. 2008). 58In African countries, the payment of WSS bills by government agencies that typically represent 15 percent to 25 percent of the billing has been a recurrent issue and requires a special attention when assessing the commercial risk. 59This has been the case, for example, in Côte d'Ivoire since 1989 and in Gabon since 1997. 35 · Regulatory risks are associated, as explained in section 3.8, with the capacity to set, monitor, enforce, and change the allowed tariffs and service standards for the WSS service provider. In short-term service and management contracts, the contracts set service standards and the remuneration of the operator, and there should normally be no need to amend them. Services standards and remuneration however cannot always be fixed for the full duration of longer- term affermage or concession contracts. Specifying in the contract the conditions under which they can be adjusted and ensuring that they are not superseded by other legislation should provide sufficient transparence and predictability to both parties. · Political risks: long term affermages and concessions always face the risk of change of political environment and shift of policies. Ensuring that a dispute resolution mechanism acceptable to all parties is specified in the contract and that all parties are willing to refer to it in case of dis- agreement should help mitigate the risk of unilateral contract termination or expropriation. Developing Institutions to Manage the PPP. A key ingredient for successful PPPs is the building of a good working relationship between the private operator and its public employer. During implementa- tion of PPPs, the main issues to be addressed are likely to be: (i) monitoring the performance of all par- ties and taking actions to improve performance; (ii) resolving disputes between parties; and (iii) adjust- ing service standards and tariffs. · Monitoring the performance of the private operator should normally be carried out by the own- er of the operation contract with the assistance, if necessary, of independent technical consul- tants or auditors. The role of a regulator (if one exists) with regard to monitoring the operator's performance must be clarified to avoid confusion. · Monitoring the performance of the public partners is equally important, but more difficult to carry out: many PPPs have failed because public partners defaulted on their commitments.60 When an independent regulator exists, it could be requested to monitor the performance of the public partners as well. If not, a joint committee that includes public and private partners and customer representatives could help identify key issues linked to the performance of the public partners as well as help design remedies. · Resolving disputes that may arise even if the PPP is well designed should normally involve sev- eral steps. Negotiations between partners should be the first one; a mediator, who could well be the regulator if the role exists, could facilitate them. Reviews by an independent expert or panel of experts could be considered to help find a solution to negotiations that are at an impasse. Arbitration that would allow parties to choose a tribunal and arbitrators and appoint experts has many advantages over courts and all PPP contracts should provide for it. But since arbitration awards are not directly enforceable, one may have to go to court to enforce them. The 2006 PPP Toolkit lists issues to address when drafting arbitrations provisions. · Adjusting service standards and tariffs: Section 3.8 includes a discussion on this issue and in par- ticular on the pros and cons of regulation by contract and regulation by regulator. Selecting an Operator. While there are examples of successful direct negotiations for large WSS conces- sions61, it is widely accepted that competitive bidding is the best method for selecting an operator since it encourages transparency and can stimulate interest among a broad range of potential partners.62 60For example, to timely pay WSS bills issued to government's agencies, approve tariff adjustments, mobilize financing for the Capex or implement the investment program. 61Casablanca (Morocco) or Jakarta (Indonesia). 62For example, in Western and Central Africa, operators from the Netherlands, Portugal, Morocco and South Africa have recently successfully competed with operators from France who had been active in the region for a long time. 36 The 2006 Toolkit includes a detailed discussion on the selection process, which should be referred to when organizing the selection of an operator. Three issues need particular attention: · Pre-qualifying operators is a must for most management, affermage and concession contracts; setting pre-qualification criteria too high would limit competition to a few international operators, but setting them too low could attract companies which do not have the technical breadth and financial depth to implement the contract. It is worth noting that the process of pre-qualifying operators is different from that of short listing consultants: only companies that meet the selection criteria should be pre-qualified, regardless of their numbers and country of origin. · Bid evaluation procedures should normally include a two-stage process with a technical evalu- ation followed by a financial evaluation of bids that have been declared technically respon- sive. When the operator of an affermage is requested to implement large rehabilitation and ex- tension programs in addition to technical and commercial operations, special attention should be paid to the respective weights of the elements of the bid and the possibility of manipulating figures to make the bid look more attractive. Limiting the number of bidding variables could be envisaged to increase transparency of the bidding process.63 · Owners must be protected against voluntary underbidding by companies that could expect to be in a strong position for renegotiating service standards and/or remuneration soon after the contract is awarded; it could make sense to indicate the minimum financial bid that would be declared responsive.64 3.7 financing Wss operations in a sustainable and Affordable manner The cost of operating WSS services and expanding infrastructure eventually has to be financed by customers, tax payers or a mix of both. In developing countries, often confronted with strict fiscal constraints and debt ceilings, it makes full sense to transfer the cost of the WSS service to customers and the responsibility for providing debt to financial markets.65 Section 3.7 reviews the key issues to be addressed to gradually build the creditworthiness of WSS service providers and transfer the burden of financing the full cost of the WSS service to customers and financial markets. Creditworthiness and Financing Options. Table 3 below summarizes the financing sources available to WSS service providers at various stages of financial sustainability. Getting Out of a Loss-Making Situation. At the lower end of the spectrum are those WSS service provid- ers that do not even recover O&M costs from user charges and survive primarily on budgetary trans- fers from national or local governments.66 Improving cash flows and restoring liquidity usually requires a combination of tariff adjustments, O&M cost reduction and collection improvement. When lumpy tariff increases are not socially or politically acceptable, one option to consider for encouraging gradual 63In Dar es Salaam, in addition to the affermage contract the operator was awarded a small construction con- tract for urgent rehabilitation and an engineering contract for designing and implementing a large program of rehabilitation and extension of secondary and tertiary water distribution pipes. To simplify bid evaluation, the price to be paid by the owner of the affermage contract for the construction and the engineering contracts were set in the bidding document. The only variables for the bidding were the operator tariff and the guaranteed amount of equity to be injected in the local operating company by its shareholders. 64For the Dar es Salaam WSS affermage contract, the bidding document included a graph linking the proposed operator tariff to the funding of the operating company; in other words, the lower the operator tariff proposed by the bidder, the higher the guaranteed equity to be injected in the operator by its bidders/shareholders. The affer- mage contract ran into trouble, among others, because the equity was not injected according to its contractual schedule. 65Baietti and Curiel 2005 and Baietti and Raymond 2005. 66Most Indian WSS service providers are at the unviable loss-making stage. 37 figure 8 financing Wss operations Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Contract Setting Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors tariff adjustments and efficiency gains could be to link the amount of operating subsidies to the actual collection performance of the WSS service providers (Box 11). The Limits of the Pay-as-you-Go Approach. WSS service providers that have reached the pay-as-you- go stage generate sufficient revenues to finance O&M costs and repay the principal and interest of their loans. But since they do not generate cash surpluses, they continuously have to raise debt financ- ing for new projects. Box 7 describes some of the risks associated with financing the development of the WSS infrastructure exclusively on debt. But since WSS service providers in this situation usually raise debt from public sources, either on-lent funds made available by IFIs and bilateral agencies to central governments, loans guaranteed by central governments or loans from government lending institutions, it is usually easy to reschedule it or even partially write it off, as part of the design of the reform. 38 table 3 creditworthiness and financing options Level of Creditworthiness User Charges Financing Options Loss-making Below O&M costs Government operational and capital subsidies Pay-as-you go recovery O&M costs, principal and interest Mostly government guaranteed IFI of cash costs of ongoing debt loans and infrastructure funds Cost recovery O&M costs, depreciation, interest Financial markets with government on debt and return on equity guarantees Sustainable cost O&M costs, depreciation on Financial markets with limited recovery revalued assets, interest on debt, government guarantees return on capital, foreign exchange risk Creditworthy As in sustainable cost recovery plus Financial markets reliable refinancing sources, security for loans, and stable regulatory environment Source: Baietti and Curiel 2005. Box 11 Guinea: Easing the Move towards Cost Recovery using an Output Based Tariff Subsidy In the late 1980s, Guinea embarked on a bold reform of its customer Tariff Increase (as implemented) urban WSS sector based on: (i) the sub-contracting of the technical and commercial operations to the private opera- Customer Tariff Increase (as implemented) tor SEEG within the framework of a 10-year affermage con- 1.4 tract with the public asset holding company SONEG; and (ii) the gradual move towards full recovery of O&M and 1.2 capital costs from user charges. 1.0 Support to full cost of water The full cost of water, estimated at about GF400/m3 (equiv- 3 alent to US$0.80/m3) had to be compared with the GF60/ 0.8 m3 customer tariff that was applicable before the mobi- US$/m0.6 lization of SONEG and SEEG. The government agreed to immediately raise the customer tariff to GF150/m3, a level 0.4 sufficient to cover SEEG's operating expenses in local cur- 0.2 rency and make a limited cash contribution to SONEG's capital budget. The government also requested funds 0.0 from the World Bank to finance 100 percent of the foreign 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 exchange component of the operator tariff for four years, Operator tariff Owner tariff and a gradually decreasing share of it for six more years, so Full cost of water Customer tariff that after ten years the operator tariff would be fully cov- ered by collections from customers. This support was to be paid on the basis of the actual collection of water bills by SEEG, so that the operator would obtain the operator tariff indicated in its bid for each cubic meter of water billed and collected (this is indeed a good example of "output-based" financing). The government finally agreed to ser- vice 100 percent of SONEG's debt for two years and then to gradually decrease its support so that the debt would become fully serviced by SONEG after six years. This move towards cost recovery was ambitious, but nevertheless implemented, even more rapidly than initially envisaged. After seven years, revenues from customers were sufficient to cover O&M, depreciation and financing costs and to contribute cash to SONEG's Capex. Source: Fall et al. 2008. 39 Box 12 Senegal: Using a Cash Flow Model as Regulatory Tool When awarding an affermage contract for the water supply service in Senegal's 45 largest urban centers was consid- ered, the government requested that customer tariff increases be limited to a maximum of three percent per year. A cash flow model was then developed to help identify the Capex and a financing plan that would be affordable with- in the constraints of: (i) tariff increases imposed by the government; (ii) operating performance improvements that could reasonably be expected from the private operator; and (iii) the commitment made to financiers that the urban water sector would, by 2003, reach a financial equilibrium, meaning that sources of funds (sales, loan proceeds, and grants) would be higher than uses of funds (O&M expenses, debt service, and Capex). After mobilization of the asset holding company SONES and the private operator SDE in 1996, this cash flow model was used as the main regulatory tool by the joint committee made of representatives of the government and the two parties to the affermage contracts for identifying the Capex and a financing plan compatible with cash surpluses transferred by SDE to SONES. SONES' operations reached the financial equilibrium in 2003, as scheduled. In fact, and despite a decrease of the customer tariff (in constant terms) since 1996 (as a result of efficiency gains achieved by SDE), cash surpluses transferred to SONES steadily increased and allowed it to finance an extension program that translated into a quasi universal water coverage in the affermage service area and one of the highest connection ratios in sub-Saharan Africa in 10 years. Sources: Fall 2008 et al. 2008. Moving to the Cost Recovery Stage. Well performing WSS service providers recover O&M costs, de- preciate fixed assets and generate a return on capital sufficient to cover interest of the debt and remunerate the equity invested from collected user charges. Several East Asian, Latin American and even a few African service providers have reached the cost recovery stage. Moving to that stage usually requires that the balance of cash generation, debt and development grants to finance Capex programs be defined through an iterative process to take into account: (i) the assessed cus- tomer willingness to pay, or the expressed government willingness to charge, for estimating future revenues; (ii) realistic scenarios of operational performance improvements; and (iii) reasonable WSS infrastructure development scenarios (Box 12). · Service providers should contribute cash to their Capex: an average of 30 percent, for exam- ple, calculated on a three-year sliding basis could be considered a reasonable target; · When service providers rely mostly on on-lent government funds, the debt element of their fi- nancing plan should preferably be set on terms that match the terms that IFIs would offer for similar projects67 and for loan amounts that would result in a debt service compatible with esti- mated future revenues; · The grant element of the financing plan, if still necessary, should be adjusted accordingly, and gradually phased out. In any case, it is essential that governments and/or government lending agencies carry out a proper financial appraisal of WSS service providers and that the evolution of agreed financial indicators is lat- er monitored closely.68 Extending debt financing to WSS service providers which do not even recover O&M costs against a guarantee provided by a municipal or state government does not help building the financial sustainability of beneficiary WSS service providers. Achieving Sustainable Cost Recovery Stage. Guaranteeing long-term financial sustainability usually requires that: (i) local financial markets are able to provide long term debt on conditions compat- 67World Bank procedures in theory request that IDA credits made available to governments be on-lent on IBRD terms to the WSS service provider, including a premium for the foreign exchange risk. 68Annex 3 lists standard efficiency, leverage, liquidity and profitability indicators used by the World Bank as part of financial appraisals of WSS service providers. 40 ible with the characteristics of the WSS sector, whose assets depreciate over long periods, to avoid repayment of loan principals being higher than depreciation; and (ii) WSS service providers are pro- tected against sudden variations of exchange rates when funds are borrowed in foreign currencies. When WSS service providers recover all explicit and implicit costs, including return on assets, foreign exchange variations, and depreciation of assets on a revalued basis, they should have access to a much wider pool of local and international financing options, although they may still need govern- ment guarantees to reduce their borrowing costs. To become fully creditworthy, WSS service providers would have, in addition to providing accurate historical financial statements, adequate loan security and capacity to operate within a predictable regulatory framework. This has been achieved by Chile, one of the few countries able to finance the development of its urban WSS sector, including collection and treatment of wastewater, entirely from financial markets (Box 14). Easing Access to Financial Markets. In order to raise commercial debt and private equity and reach the sustainable cost recovery stage defined above, WSS service providers would have to adequately mitigate risks typically associated with WSS projects. Guarantee schemes offered by the World Bank for privately financed WSS projects could cover:69 · Political risks, such as war, civil disturbance, terrorism, expropriation and confiscation currency convertibility and transferability risks;70 · Contractual risks, such as breach of contracts or regulatory capture: in view of the number of privately sponsored WSS projects that failed during the last decade, instruments to cover these risks would seem to be well adapted, but few examples are available; · Credit risks covering lenders and bondholders, but not equity investors: partial credit guaran- tees typically cover only part of the borrowed funds and the portion of the debt service that falls due beyond the normal tenure of loans normally available from commercial lenders; they could also cover a portion of the debt service throughout the life of the loan.71 Dealing with the Foreign Exchange Risk. For WSS service providers that generate revenues in local cur- rency but have to borrow in foreign exchange, the foreign exchange risk is significant. As service pro- viders move towards the cost recovery stage, this risk is usually taken care of by governments which on-lend in local currency externally borrowed funds against a premium on the interest rate. When service providers are able to raise private financing, creeping exchange rate variations72 can rather easily be taken care of by automatic tariff adjustments based on cost index formula. However, there is currently no meaningful coverage for shock, let alone catastrophic, devaluations, such at those that hit some Latin American or East Asian in the late 1990s. The focus has thus mostly been on developing local currency financing and enhancing products offered by local financial markets that usually can- not mobilize long-term financing at affordable conditions; the above described partial credit guaran- tees have been designed primarily to extend loan maturities.73 IFI lending in local currency has been 69 Gupta et al. 2002. 70 Examples in the WSS sector are currently limited to a concession in Guayaquil (Ecuador) and a BOOT desalina- tion plant in Sudan. 71 Recent examples in the WSS sector include projects in Mexico and Colombia. 72 Baietti and Raymond provide the following definition: (i) creeping devaluation: a band with which, based on past performance and future assessments, a currency may be expected to fluctuate on a year-to-year basis; (ii) shock devaluation: unexpected and significant devaluation in the order of 5­10 percent; and (iii) catastrophic devaluation: unexpected and significant devaluation where the prospect of exchange rates returning to previous levels are remote over the foreseeable futures. 73 For WSS projects loan maturities of 10 to 15 years are usually optimal; beyond 15 years, reductions of principal repayment are offset by increases in interest payment, as interest rates increase with loan maturities. 41 limited to a select group of countries where funds in local currency can be raised and where cross currency swap markets are available to hedge IFI exposure. Designing Grants aimed at Building Sustainability. Development grants are often needed to help WSS service providers move to the cost recovery stage. However, traditional ways of subsidizing infrastruc- ture inputs, either by providing a percentage of the total project cost or by financing sub-projects aimed at achieving specific objectives, such as network extension to low income neighborhoods or pollution abatement, has often led to unsatisfactory results: the delivery of WSS infrastructure alone does not guarantee that the WSS service will be delivered. Output-based aid74 (OBA) has been used for improving the efficiency of grants extended to WSS service providers: (i) either to smooth tariff increases (Box 11); or (ii) for rapidly extending direct access to piped water and sewers in low income neighbor- hoods.75 As private operators better react to the financial incentives created by OBA than public op- erators, OBA has so far mostly been implemented in support for PPPs, with private operators bidding for the amount of OBA requested. But OBA can also be provided to publicly owned WSS service providers to support medium term performance improvement plans with the amount of the OBA subsidy be- ing set by an independent party. When designing an OBA, it is important to properly identify the right output and to assess the potentially counterproductive incentives the OBA scheme could result in. For example, it could sometime make more sense to complement WSS bills collected from customers, be- cause it does correspond to a service that has actually been delivered and partially paid for, than new connections, as there is no guarantee that water will reach customers or bills will be collected. 3.8 regulating the Wss service in a Transparent and Predictable manner Three recent World Bank notes and publications cover in detail the issue of economic regulation of urban WSS services, which they define as the rules and organizations that set, monitor, enforce and change the allowed tariffs and service standards for WSS service providers.76 Economic regulation is mostly about stopping the monopoly abuse of WSS service providers that could provide a bad quality service and charge price above costs to increase their profits or cover their inefficiencies. Section 3.8 includes a summary of these papers, and discusses principles for setting WSS tariff and designing WSS tariff structures and subsidies. Adapting Regulatory Arrangements to Local Conditions. As for all other elements of the reform, there is no "one-size-fits-all" solution for economic regulation of the WSS service and importing regulatory models designed for other countries is seldom a good option. Regulatory designs should be suited to the specific needs of each country, after proper definition of the objectives pursued, analysis of the potential contribution of economic regulation to the overall accountability framework, specification of regulatory functions, and choice of legal instruments and organizations in which to embed such func- tions. While the regulatory function usually includes controlling tariffs and service standards, it could also be extended to controlling assets conditions, efficiency parameters, coverage targets, or design- ing subsidies. When in-country capacity for regulation is assessed to be scarce, using existing organiza- tions or outsourcing this function to regional or international bodies could be an option to consider. Regulation and PPP. Economic regulation has often been associated with private participation in the provision of the WSS service, in particular to keep WSS tariffs down and limit the profit of private partners to what could be considered reasonable according to industry and local standards. In the Anglo-Saxon PPP tradition, the WSS utility is privately owned and an independent regulatory body sets allowed tariffs and service standards. In the French and Spanish PPP traditions, the WSS infrastructure is usually publicly 74Brook and Smith 2001. 75This has been done, for example, in the Philippines or Morocco. 76Groom, Halpern, and Ehrhardt 2006; Ehrhardt et al. 2006; and Brown et al. 2006. 42 figure 9 regulating the Wss service Mandate Unserved Central Mandate Local Public Consumers Government Government Lender Appraisal Appraisal Grant Performance Loan Agreement Bylaws Agreement Agreement Application Appraisal Application Financial Providers of Operation WSS Service Markets Substitutes Customers Contract Provider Feedback Application Trading Other Water Customer Users Setting Contract Water & Discharge Tariff Rights Monitoring Performance Water Resource/ Allocation Environment Private Agencies Operator Regulator Mandate Source: Developed by the authors owned, private operators are contracted to carry out some or all functions of the WSS service and the contracts specify allowed tariffs and service standards. While PPP in developing countries have usually followed the contractual approach, many governments have superimposed an independent regulator to the operation contract.77 However, the possibility for the regulator to make discretionary decisions cre- ates uncertainty for the operator and investors and could eventually undermine the partnership (Box 13). Imposing an Anglo-Saxon type of regulator on a French or Spanish type of concession contract usually does not work: tariffs, standards and rules embodied in the contract cannot be changed by the regula- tor without the consent of the parties to the contract. Imposing a regulator on a management contract 77As examples, this was, or still is, the case for the WSS concessions in Buenos Aires (Argentina) and Manila (the Philippines), the affermage contracts in Mozambique, Tanzania and Niger, and the management contracts in Guyana or Zambia. 43 Box 13 Africa: Mixed Experiences with Regulators Since the mid 1990s, several African countries have created regulators, either in parallel to PPPs (Cape Verde, Mali, Niger, Tanzania, Mozambique) or as part of reforms of urban WSS sectors that were not based on PPPs (Ghana, Kenya, Zambia). mali: In 2000, Mali awarded the concession of the electricity and water supply services in large urban centers to a pri- vate operator that included an international professional partner and other investors. In its early years, the concession achieved notable improvements in access to piped water and quality of the water supply service. The concession ran into trouble when discretionary decisions made by a regulator, created in 2002 and eager to reduce tariffs to meet one of the campaign objectives of the government elected in 2003, endangered its financial equilibrium. In 2005, the professional partner sold its shares to the government, which then became the concessionaire's majority shareholder. The Mali concession has sometime been labeled a "resounding failure" mostly because of the confusion created by the shortcomings of a regulatory body whose decisions were not predictable and independence not guaranteed. niger: In 2001, Niger awarded an affermage contract for water supply service in 51 urban centers to a private profes- sional operator. Performance indicators of the water supply service have since been making good progress. The cre- ation of a regulator in 2003 created some confusion, again because of unclear terms of reference and inadequate procedures. Attempts to micro-manage the private operator had to be arbitrated by Niger's Supreme Court. tanzania and Kenya: In Dar es Salaam (Tanzania), the WSS regulatory act was passed before the affermage contract for the WSS service was awarded. Two of the three pre-qualified international professional operators refused to submit bids, because they were unable to ensure that the affermage contract would include a clause protecting its econ- omy against discretionary rulings by the regulator. The regulator mobilized only after the affermage was terminated (18 months after its commencement) and the private operator replaced by a public operator. The latter still operates under the same affermage contract with the public asset-holding company (AHC). The Dar es Salaam situation is thus now similar to that of Nairobi (Kenya), where the reform of the urban WSS sector was based on a separation of the functions of asset ownership/infrastructure development, to be carried out by a public AHC owned by several local governments, and service provision, to be carried out by a public operator under contract with the AHC. In both cases, the independence of the regulator is not guaranteed. Sources: Fall et al. 2008; and research by the authors. is generally useless since incentives to improve performance are embedded in the contract. The same applies to an affermage contract that sets the tariff that remunerates the operator, the service stan- dards to be complied with as well as the conditions under which they can be adjusted. Regulation by Contract versus Regulation by Regulator. As a general rule, contract-based regulation may be more compatible with existing jurisprudence in civil law countries (mostly French and Span- ish speaking counties), while common law countries (including many of the countries with an Anglo- Saxon tradition) may be more comfortable with independent regulators. The discussion on the ben- efits of regulation by contract versus regulation by statutory body for affermages should however be tempered. In an affermage, the contract only specifies the operator tariff and standards that apply to the contracted activities, and there is still a need for: (i) setting the customer tariff to be charged to customers; and (ii) ensuring that operations of the public party (i.e., mostly infrastructure development and financing) are efficiently carried out. Also, it is unlikely that the initial operator tariff will reflect op- erating conditions after, say, five years in a country where the WSS sector is rapidly evolving.78 Finally, efficiency gains achieved by the operator should eventually be passed on to the customers. There is thus a need for a predictable and transparent mechanism for periodically resetting customer and op- erator tariffs, beyond what is covered by contractual cost index formula.79 78Affermage contracts usually list the circumstances under which the parties are allowed to request changes to standards and remunerations. 79Côte d'Ivoire or Senegal, two countries with a long affermage tradition, offer good examples of customer tariff resetting and regulation of the capital expenditure program and their financing plans using well tested financial models. 44 Regulation of Public WSS Service Providers. Public WSS service providers could also abuse their monop- oly by providing substandard service or charging high prices to cover inefficiencies. Some countries have tried to address the issue of poor performance of public service providers by creating indepen- dent regulatory bodies.80 Regulating a corporatized public service provider that is supposed to oper- ate on a commercial basis is fully justified, even if it is unlikely that it would react to financial incentives and/or penalties the same way a private service provider would. Independent regulation alone can- not fix the poor accountability framework within which many public WSS providers operate. Overall policies, improved governance of WSS service providers, enhanced discipline during appraisal of financing applications by government or government owned lenders and enforcement of financing conditionality are likely to achieve more to improve the reliability, sustainability and affordability of the WSS service than decisions by a regulator. Operations of a Regulator. When an independent regulatory body is envisaged, the following ten prin- ciples should be reflected in its mandate and the instruments used to carry it out:81 · Independence: the regulator should be insulated from short-term political pressures and be able to make decisions without prior approval from other government agencies; in particular, the regulator should be funded from independent sources of revenue such as a regulatory fee to be paid by the regulated entities; · Accountability: the parties whose interests may be affected by the regulator's decisions should be able to appeal those decisions; · Transparency: decisions should be supported by documentation to be made available to the public; · Predictability: decisions should follow principles and rules that can be amended only after ex- tensive public notice; · Clarity of role: the role of the regulator should avoid duplication with that of other institutions; · Completeness and clarity of rules: rules to be followed should be complete, clear and well un- derstood by all stakeholders; · Proportionality: the interventions of the regulator should be proportionate to the challenges ad- dressed and undertaken only if benefits outweigh expected economic and social costs; · Requisite powers: the regulator should have the power to perform its mission, including setting tariffs, monitoring market and service quality, addressing market power and designs, investigat- ing and mediating consumer complaints, providing dispute resolution mechanisms, compelling provision of information and monitoring and enforcing its decisions; · Institutional characteristics: education levels and compensation packages of the regulator's staff should compare with that of the regulated entities; decisions should preferably be taken by a group of commissioners rather than by individual staff; all decisions should be subject to appeal in a legally designated court or tribunal, which should have minimum regulatory exper- tise; and · Integrity: the staff of the regulatory body should be subject to strict rules when it comes to the payment of "gratuities" of all kinds and conflicts of interest. Setting WSS Tariff Levels. Best practices suggest that the WSS service should be priced to meet eco- nomic, efficiency, financial, equity and simplicity objectives: 80This is the case, for example, in Colombia, Zambia, Kenya. 81Brown et al. 2006. 45 · Economic principle: managing water demand requires that tariffs be set in reference to the long run marginal cost (LRMC) of water and include externalities, such as abstraction of raw water and the collection and treatment of waste water. The LRMC is supposed to maximize benefits of both the supplier and the consumer, thus that of the sector as a whole. A good proxy to the LRMC is the average incremental cost (AIC) of water that can be calculated for each WSS system by dividing the discounted value of the incremental capital and O&M ex- penses by the discounted value of incremental volumes of sale; · Efficiency principle: the LRMC should be calculated for efficient operations, with for example NRW, staffing ratio, energy consumption and collection ratio set at best practice, and for in- frastructure meeting the least cost solution test. In practice, few countries apply the economic and efficiency principles that are, nevertheless, often referred to in their legislation; Chile is a noteworthy exception (Box 14); · Financial principle: tariffs should generate sufficient revenue to cover O&M costs, depreciate as- sets and yield a sufficient return on capital to cover the interest on debt and a return on the eq- uity invested.82 While many public WSS service providers struggle to recover O&M costs from user charges, many well performing ones, in particular those that have benefited from strict financial appraisal of their development programs and strict supervision of the conditionality attached to the financing agreement, are able to recover O&M and capital costs, as defined above; · Equity principle: tariffs should not discriminate between customers within the same WSS system; customers should be charged the same tariff for a cubic meter of water consumed; and · Simplicity principle: tariff structures should be simple to understand and give WSS service cus- tomers and providers proper signals about the consequences of their behavior. Designing WSS Tariff Structures. In countries where WSS service providers have a national or regional coverage, cross subsidies between geographical WSS systems are usually used. Also, many WSS ser- vice providers implement overly complex tariff structures that include many bands and categories with the main objective of subsidizing minimum residential consumption from revenues generated by better off residential, commercial and industrial customers. The simplest WSS tariff structure, when consumption is metered, is to charge a uniform tariff for each m3 of water consumed. WSS bills could include a fixed part to cover fixed costs and variable part to cover its variable costs, an option that is well adapted when consumption is subject to high seasonal variations.83 When the consumption is not metered, the monthly charge could be based on the assessed property value, but this arrangement is not adapted to situations where water retail by connected customers to unconnected ones is com- mon. Fees charged for new water or sewer connections have to be set as part of the design of the WSS tariff structure. Construction costs often represent a significant percentage of the annual income of households in the first and second quintiles; if, in addition, new customers are required to contribute to the financing of the extension of the distribution network, direct access to piped water may not be affordable by this category of customers. Designing Subsidies. Cross-subsidies are difficult to justify because they seldom achieve their objectives and tend to benefit better-off customers.84 They can also distort water demand: (i) geographical cross- subsidies could favor the installation of large consumers in areas where the cost of water is higher than the tariff charged; or (ii) cross-subsidies between categories of customers within a same system could 82Baietti and Curiel 2005. 83In some African cities, customers stop using piped water during the rainy season, as rain water harvesting from roofs is sufficient to meet their need. 84Komives et al. 2005. 46 Box 14 Chile: Efficient Regulation, Transparent Subsidies and Excellent WSS Service In Chile, the various functions of the WSS service are clearly separated with: (i) a central Ministry, in charge of setting WSS service policies and standards, granting regional concessions, and implementing a subsidy scheme targeted at lower income households; (ii) an independent regulator SISS, responsible for setting tariffs in reference to the long run marginal cost (LRMC) of water, full recovery of O&M and capital costs, efficiency of operations and asset develop- ment and equity among customers; (iii) the same regulator, responsible for closely monitoring the technical, com- mercial and financial performance of the concessionaires and for applying penalties in case of non-compliance with agreed standards; and (iv) 18 regional concessionaires, initially public and now all privatized, responsible for providing service according to the standards and for financing development of the WSS infrastructure from cash generation and local financial markets. Between 1970 and 2005, water supply and sewerage coverage ratios in urban areas evolved from 66 percent to 99.5 percent and 31 percent to 95 percent in 2005 respectively. Between 1990 and 2005, the wastewater treatment ratio increased from about 10 percent to 73.5 percent. In 2005, water was supplied on a permanent (24/7) basis in all ur- ban centers (total population: 11.5 million) through 3.9 million connections; compliance with water quality standards reached 99.5 percent. Water production and sales were measured at averages of 330 and 224 liters per capita per day (lpcd) respectively, suggesting NRW at 33 percent of water production, below the 15 percent set by the regula- tor. The WSS sector directly employed about 2.5 staff per 1,000 connections. In 2005, about US$285 million equivalent were invested as part of a fully justified medium-term infrastructure development plan, of which more than a third was devoted to the waste water treatment program. The capital expenditure program was entirely financed from the cash generated from operations and fund raised on local financial markets, without fi- nancial support from the government. In 2005, the return on the equity invested in the sector averaged 15.7 percent. About 17.5 percent of the households, identified as poor according to strict standards, benefited from a subsidy scheme administered by the central government: vouchers distributed to low income households cover, depending upon the city or town, between 15 percent and 85 percent of the WSS bill for the first 15 m3 consumed each month. In 2005, vouchers scheme contributed less than six percent of the total sector sales revenue (there is no subsidy scheme applying to new connections). Source: Developed by the authors on the basis of data available from the website of the Regulator Superintendencia de Servi- cios Sanitarios; http://siss.cl. encourage over-taxed large customers to opt out of the public WSS service and develop less expen- sive substitutes, thus depriving the WSS service provider from a large share of its revenue. However, subsidizing the cost of new connections and the consumption of a minimum quantity of water by low- income households makes full economic sense, taking into account the public good characteristic of urban water supply.85 Better targeting subsidies for lifeline consumptions86 could be achieved either through government vouchers distributed to low-income households (Box 14) or fixed discount applied to residential WSS bills.87 If the option of a lower tariff for the lifeline consumption is selected, it should be set at a level that compares with O&M costs in order to not discourage the WSS service provider to extend the service to low income areas. Adjusting and Resetting WSS Tariffs. WSS tariffs should be protected against inflation, preferably by ap- plying automatic cost index formulae that reflect the respective weights of the cost components, i.e., energy, chemical, staff for O&M costs and construction and foreign exchange (if applicable) for the capital costs. As WSS sectors tend to evolve rapidly in developing countries, the WSS tariff and the cost 85Subsidy schemes for small residential connections have proven to be a key for the successful development of piped water in several Western African countries. 86Depending upon the country lifeline consumption could be between 5 and 15 m3/month. 87For example, assuming a WSS tariff of US$1.0/m3, a discount of US$6.0/month would guarantee that the WSS bill for a consumption of 10 m3/month would not be higher than 4 percent of the average revenue of households in the lower quintile of US$100/month. Consumption below 6 m3/month would be free. A consumption of 25 m3/month would result in a WSS bill of US$19.0. The discount could be phased out for consumption over, say, 50 m3/month. 47 index formulae should also be periodically reset to reflect efficiency gains achieved by the operator or actual and future development of the WSS infrastructure. The periodicity of the WSS tariff resetting should be consistent with the financial incentives built in the remuneration of the WSS service provider to encourage achievement of efficiency gains.88 Monitoring Performance. Independently monitoring the quality of WSS service and the efficiency of its provider requires that credible data on technical, commercial, financial operations be generated. In countries where only data of dubious quality exist, one of the first actions to be supported by the reform is a data generation program. This program should at least include bulk metering, pressure monitoring, water and effluent quality monitoring, responses to customers requests and complaints and assistance to the establishment of credible financial statements. As measuring efficiency also requires a reasonable assessment of NRW, the implementation of district and individual metering pro- grams should be envisaged as well, but this could be a medium term objective. Also, special attention may have to be paid to the monitoring of the service provided to the poor. Technical and financial auditors should independently validate data generated. A central database could help benchmark the performance of WSS service providers and establish the legitimacy of performance objectives as- signed to them by the regulatory mechanisms during tariff renegotiations. 3.9 Implementing Wss reforms There are several examples of countries that have engaged in major reforms of their urban WSS sec- tors, addressing all key performance gaps in parallel. Most countries however willing to consider a re- form wish to implement it gradually and thus are confronted with the identification of which action(s) should come first. Section 3.9 proposes a hierarchy of issues to be addressed to increase the chance of successfully implementing the reform. Where to Start when confronted with a poorly performing urban WSS sector, characterized by one or more of the following performance gaps: · Insufficient water production and waste water treatment capacities; · Low coverage of the water distribution and sewer networks, in particular in areas where the poor live; · Drinking water supplied only a few hours per day, and thus of dubious quality, and raw sewage regularly overflowing into receiving water bodies; · Collection of user charges insufficient to cover O&M, let alone capital costs, leaving WSS ser- vice providers entirely dependent upon operating subsidies and development grants; · Local water sources depleted by the development of substitutes to piped water to comple- ment poor quality service or polluted by the indiscriminate dumping of waste water in the envi- ronment; · Households spending significant amounts in addition to their WSS bills to complement a piped WSS service of poor quality; · Inefficient WSS service providers with high NRW, energy consumption and staffing ratios and low collection ratios; 88For example, if the WSS tariff is based on a NRW ratio of 30 percent, the WSS service provider is implicitly encour- aged to achieve a better performance to increase its profit before the tariff next resetting, at which time calcu- lations should be based on the actual performance achieved by the operator and efficiency gains would thus passed on to consumers. 48 · WSS service providers with limited or no autonomy; · WSS service providers with limited or no accountability to customers; · WSS service providers with non-audited financial statements, in financial difficulty or technically bankrupt; and · Strong vested interests, likely to lobby against any changes in the way WSS service is currently provided, because it could affect their legal revenues generated by the provision of substitutes or illegal ones derived from fraudulent or corrupt practices. Addressing the Financial Situation of WSS service providers is obviously the first action to consider. Me- dium term programs for improving the financial situation of WSS services providers could include: · Cleaning balance sheets (if any) including, if necessary, writing off unserviceable debt and un- collectible bills; · Implementing a cost saving program focusing primarily on reducing operating costs such as staff, energy, chemicals, and parts; · Improving commercial activities by focusing on bulk and individual metering, billing and collec- tion procedures with, if relevant, special attention to public customers; · Gradual adjusting user charges, if cost recovery is not achievable only through efficiency gains. The statement that tariffs cannot be increased before the quality of service improves is usually a non-starter: it is likely to take many years before the reliability of the service improves and lumpy tariff increases are unlikely to be acceptable once the reliability of the service has improved. Financial improvement programs should preferably be part of contrat plans between the government, likely to remain the main source of financing for rehabilitating and developing infrastructure, and ser- vice providers. Building the Autonomy of WSS Service Providers is the second key element of reforms because it is direct- ly related to fixing their financial situations. Governments that are committed to reforming their urban WSS sector and willing to provide financial assistance during a transition period generally prefer to deal with WSS service providers that can be held accountable for the use of public funds and overall perfor- mance. Corporatization of WSS service providers should normally be the preferred option to achieve this. Ensuring that BODs represent various stakeholders (and not only government departments) and that managers are transparently selected on the market (rather than among a pool of civil servants) and have sufficient autonomy and financial incentives for implementing the decisions of BODs are essential steps to move the provision of the WSS service away from short-term political objectives. Ensuring that Corporatized WSS Service Providers are Responsible for Infrastructure Development, their Capex are affordable by their projected revenues. and designed to actually improve the WSS service provided to customers (not only increasing the production and trunk infrastructure capacities) is an- other key step for making developers of WSS infrastructure more accountable to their financiers. Choosing between Internally Developed Programs and PPPs for improving the quality of WSS service and enhancing the accountability to consumers should be considered in parallel with the other ac- tions, as the mobilization of operators, if the PPP option is preferred, is usually a long process that re- quires a specific stakeholder consultation. Raising Financing for rehabilitating and expanding WSS Infrastructure should be much easier if real- istic solutions and timetables are proposed to the above issues and are described in a detailed ac- tion plan. 49 Maintaining the Consultation Effort throughout would be necessary to manage customer expectations (since improvements are unlikely to happen overnight) and to ensure that vested interests affected by the reform do not attempt to derail it. 3.10 using the recommendations of this report Section 3.10 makes some suggestions on the best use of this report and on future activities aimed at further supporting its findings and recommendations. A Structured Methodology. Reforming urban WSS sectors is often needed for increasing access to the infrastructure, improving efficiency of operations, and enhancing the reliability, sustainability, and af- fordability of the service. As mentioned several times in the report, there is no "one-size-fits-all" solution: policies and accountability frameworks that have worked well, for example, in a French speaking West African country may not be directly replicable in an English speaking South Asian country or a Central Asian country. However, if solutions have to be tailored to local circumstances, issues to be addressed are often similar. Because of this similarity, this report proposes a structured methodology for engaging in the reform process. Thinking Outside of the Box. Stakeholders involved in the reform process could sometime experience difficulties envisaging solutions that differ from those currently in place, even if their performance has been unsatisfactory. By presenting what are usually considered good practices and describing under which conditions they have successfully been implemented, this report aims to encourage "thinking outside of the box" of current policies and accountability frameworks. A Sourcebook. The Bank has recently published several reports and notes on specific topics related to urban WSS. Bank teams involved in operations may not always be aware of such reports, let alone publications by other institutions, even if the new website of the Bank Water practice makes a large volume of information available. Also, Bank teams involved in operations often do not have sufficient time to read lengthy papers and extract what is needed to advise on specific reforms. This report is meant to be a sourcebook, pointing Bank teams at relevant Bank publications and indirectly at publi- cations by other institutions, and summarizing key issues covered while proposing a logical framework for establishing a link between them. Need for User Friendly Instruments to Help Build a Consensus on the Reform. Because this report covers all key issues to be addressed when revisiting policies and accountability frameworks and because its length has been limited, its density could discourage some readers. The methodology and the various subjects covered in this chapter should be translated in user-friendly presentations mainly designed for facilitating exchange of views among stakeholders on issue to be addressed before building a con- sensus on the scope and timetable of the reform. Improving the Outputs of Consultants. Bank teams are seldom responsible for directly advising govern- ments on the reform process. The performance of consultants engaged by governments, and some- times by the Bank, to carry out such task has been variable either because of irrelevant experience, ambiguous TORs or inadequate guidance provided during reviews of consultants' reports. This report should help to draft more focused TORs. Also, by providing references to what has worked or not worked in similar cases, it should assist Bank teams reviewing consultants' findings and formulating con- structive recommendations. What We Know and What We Don't Know. The main objective of this report is to summarize the Bank's collective knowledge on urban WSS sector reforms. In its various sections, it however identifies several areas where there is obviously a need for further analytical work. For example: · Estimating the actual cost to the local economy of an intermittent water supply in urban areas; 50 · Better understanding the overall economy of an urban WSS sector, as formal utilities on which urban WSS sector reforms usually focus often handle only a share of the budget devoted by consumers to their WSS service; and · Dealing with losers, including providers of substitutes and public and private actors engaged in fraudulent and corrupt practices, likely to be affected by changes in policies and accountabil- ity frameworks and tempted to oppose them. 51 refereNces demand for Water supply and sanitation services Gulyani, Sumila, Debabrata Talukdar and Mukami Kariuki. 2005. "Water for the Urban Poor: Water Mar- kets, Household Demand, and Service Preferences in Kenya." The World Bank. Misra, Smita. 2007. "Water Supply and Sewerage Services in Delhi ­ Demand Assessment and Consum- ers' Preferences for an Improved System." The World Bank. Water and Sanitation Program. 2007. "Engaging with Citizens to Improve Services". World Bank. 2005. "Burkina Faso ­ Urban Environment Project: Project Completion Report." Public Water supply and sanitation service Providers Baietti, Aldo, William Kingdom and Meike van Ginneken. 2006. "Characteristics of Well-Performing Pub- lic Water Utilities." The World Bank. Berg, Sanford and William Muhairwe. 2006. "Healing an Organization: High Performance Lessons from Africa." National Water and Sewerage Corporation of Uganda. http//:www.nwsc.co.ug/modules/ PDdownloads. Locussol, Alain and Meike van Ginneken. 2008. "Template for Assessing the Governance of Public Wa- ter Supply and Sanitation Service Providers." The World Bank. Muller, Mike, Robin Simpson and Meike van Ginneken. 2008. "Ways to Improve Water Services by Mak- ing Utilities more Accountable to their Users: a Review." The World Bank. van Ginneken, Meike and Bill Kingdom. 2008. "Key Topics in Public Water Utility Reform." The World Bank. World Bank. 2005. "India ­ Delhi Water Supply and Sewerage Project: Project Concept Note." World Bank. 2008. "The Political Economy of Policy Reform: Issues and Implications for Policy Dialogue and Development Operations". World Bank in partnership with Kreditanstalt für Wiederaufbau (KfW). 2008. "Royaume du Maroc: Re- vue Stratégique du Programme National d'Assainissement". Public-Private Partnerships in Water supply and sanitation services Brockelhurst, Clarissa and Jan G. Janssens. 2004. "Innovative Contracts, Sound Relationships: Urban Water Sector Reform in Senegal." The World Bank. Evans, Barbara, and Clarissa Brocklehurst. 2002. "New Designs for Water and Sanitation Transactions: Making Private Sector Participation Work for the Poor." Public-Private Infrastructure Advisory Facil- ity, the World Bank. Fall, Matar, Philippe Marin, Alain Locussol and Richard Verspyck. 2008. "Reforming Urban Water Utilities in Western and Central Africa: Experiences with Public-Private Partnerships ­ A Discussion Paper." Public-Private Infrastructure Advisory Facility, the World Bank. 52 Marin, Philippe et al, 2008: "Public-Private Partnerships in Urban Water Utilities ­ Findings from Develop- ing Countries." Public-Private Infrastructure Advisory Facility, the World Bank. World Bank. 1997. "Toolkits for Private Participation in Water and Sanitation." World Bank. 2002. "Decision Makers' Workshop: Private Sector Participation in Water Supply and Sani- tation Services in Sub-Saharan Africa; Summary of the Proceedings and Outline for a Roadmap." Dakar, Senegal. World Bank. 2004. "Public and Private Sector Roles in Water Supply and Sanitation Services: Operation- al Guidance for World Bank Group Staff." World Bank. 2006. Public-Private Infrastructure Advisory Facility, BNWP. "Approaches to Private Partici- pation in Water Services: A Toolkit." World Bank. undated. "Communication for Water Reform: A Guide for Task Managers." Development Communication Division. small-scale Private Water supply service suppliers Kariuki, Mukami, and Jordan Schwartz. 2005. "Small-Scale Private Service Providers of Water Supply and Electricity: A Review of Incidence, Structure, Pricing, and Operating Characteristics." Policy Research Paper. The World Bank. Ruiz-Mier, Fernando, and Meike van Ginneken. 2006. "Consumer Cooperatives: an Alternative Institu- tional Model for Delivery of Urban Water Supply and Sanitation Services." Water Supply & Sanita- tion Working Note. The World Bank. Solo, Tova Maria. 2003. "Independent Water Entrepreneurs in Latin America ­ the Other Private Sector in Water Services." The World Bank. van Ginneken, Meike, Ross Tyler, and David Tagg. 2004. "Can the Principles of Franchising be Used to Improve Water Supply and Sanitation Services? A Preliminary Analysis." Water Supply and Sanita- tion Sector Board Discussion Paper. The World Bank. financing Water supply and sanitation services Baietti, Aldo, and Paolo Curiel. 2005. "Financing Water Supply and Sanitation Investments: Estimating Revenue Requirements and Financial Sustainability." The World Bank. Baietti, Aldo, and Peter Raymond. 2005. "Financing Water Supply and Sanitation Investments: Using Risk Mitigation Instruments to Bridge the Financing Gap." Public-Private Infrastructure Advisory Fa- cility, BNWP, the World Bank. Briscoe, John. 1995. "Financing Water and Sanitation Services: the Old and the New Challenges." Pre- sentation at the World Congress of the International Water Supply Association. The World Bank Brook, Penelope, and Suzanne Smith. 2001. "Contracting for Public Services: Output-Based Aid and its Applications." Public-Private Infrastructure Advisory Facility, the World Bank. Drees-Gross, Franz, Jordan Schwartz, Maria-Angelica Sotomayor, and Alexander Bakalian. 2005. "Out- put-Based Aid in Water: Lessons in Implementation from a Pilot in Paraguay; the World Bank, OBA Approaches." 53 Gupta, Pankaj, Ranjit Lamech, Farida Mazhar, and Joseph Wright. 2002. "Mitigating Regulatory Risk for Distribution Privatization ­ The World Bank Partial Risk Guarantee." Energy & Mining Sector Board Discussion Paper. The World Bank. Komives. Kristin, Vivien Foster, Jonatahn Halpern, Quentin Wodon with the support of Toohi Abdullah. 2005. "Water, Electricity, and the Poor ­ Who Benefits from Utility Subsidies? The World Bank. Lauria, Donald, Omar Hopkins, and Sylvie Debomy. 2005. "Pro-Poor Subsidies for Water Connections in West Africa." Water Supply and Sanitation Working Note. The World Bank. Non-revenue Water Kingdom, Bill, Roland Liemberger, and Philippe Marin. 2006. "The Challenge of Reducing Non-Revenue Water (NRW) in Developing Countries; How the Private Sector Can Help: a Look at Performance- based Service Contracting." Public-Private Infrastructure Advisory Facility, the World Bank. regulation of Water supply and sanitation services Bitran, Gabriel, and Pamela Arellano. 2005. "Regulating Water Services: Sending the Right Signals to Utilities in Chile; the World Bank Viewpoint." The World Bank. Brown, Ashley and Jon Stern, Bernard Tenenbaum and Defne Gencer. 2006. "Handbook for Evaluating Infrastructure Regulatory Systems." The World Bank. Eberhard, Anton. 2006. "Infrastructure Regulation in Developing Countries: an Exploration of Hybrid and Transitional Models." University of Cape Town, South Africa. ------. 2006. "The Independence and Accountability of Africa's Infrastructure Regulators; Reassessing Regulatory Design and Performance." University of Cape Town, South Africa. Ehrhardt, David, Eric Groom, Jonathan Halpern and Seini O'Connor. 2007. "Economic Regulation of Ur- ban Water and Sanitation Services: Some Practical Lessons." Public-Private Infrastructure Advisory Facility, the World Bank. Groom, Eric, Jonathan Halpern, and David Ehrhardt. 2006. "Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services." Public-Private Infrastructure Advisory Facility, the World Bank. Nauges, Céline and Caroline van den Berg. 2007. "How Natural are Natural Monopolies in the Water Supply and Sewerage Sector? Case Studies from Developing and Transition Economies." The World Bank. Raab, Jonathan.1994. "Using Consensus Building to Improve Utility Regulation." American Council for an Energy-Efficient Economy. corruption in Water supply and sanitation Davis, Jennifer. 2003. "Corruption in Public Service Delivery: Experience from South Asia's Water and Sanitation Sector." World Bank. 2008. "Deterring Corruption and Improving Governance in the water Supply and Sanita- tion Sector: A Sourcebook." 54 ANNex 1 evolution of Access to safe drinking Water in urban Areas 1990 2004 Actual 2004 Inter.Target 2015 Target Urban Urban Water Pop. Served Conn. Pop. Served Conn. Served Conn. Served Conn. Supply million % % million % % % % % % northern africa 58 95 83 80 96 92 96 88 98 92 Egypt 24 97 89 31 99 99 98 92 99 95 sub-saharan africa 145 82 45 258 80 36 87 60 91 73 DR Congo 11 90 79 18 82 27 93 85 95 90 Ethiopia 7 81 2 12 81 32 86 29 91 51 Kenya 6 91 59 14 83 52 94 70 96 80 Nigeria 32 80 32 62 67 15 86 51 90 66 South Africa 18 98 87 27 99 87 99 91 99 94 Sudan 7 85 75 14 78 46 89 82 93 88 Tanzania 6 85 33 14 85 43 89 52 93 67 eastern asia 367 99 82 579 93 87 99 87 100 91 China 312 99 81 523 93 87 99 86 100 91 southern asia 312 90 56 459 94 50 93 68 95 78 Bangladesh 21 83 28 35 82 24 88 48 92 64 India 221 89 53 304 95 47 92 66 95 77 Pakistan 35 95 60 47 95 52 96 71 98 80 south-eastern asia 139 93 42 235 89 50 95 58 97 71 Indonesia 56 92 27 103 87 30 94 47 96 64 Myanmar 10 86 18 15 80 16 90 41 93 59 Philippines 30 95 41 51 87 58 96 58 98 71 Western asia 85 94 83 129 97 84 96 88 97 92 Turkey 34 92 70 48 98 96 94 78 96 85 lac 315 93 85 428 96 90 95 89 97 93 Argentina 28 97 76 35 98 83 98 83 99 88 Brazil 112 93 90 154 96 91 95 93 97 95 Colombia 24 98 94 35 99 96 99 96 99 97 Mexico 61 89 86 80 100 96 92 90 95 93 oceania 2 92 69 2 80 57 94 78 96 85 cis 184 97 86 178 99 90 98 90 99 93 Russia 108 97 86 105 100 93 98 90 99 93 Source: WHO/UNICEF Joint Monitoring Program 55 ANNex 2 evolution of Access to basic sanitation in urban Areas 1990 2004 Actual 2004 Inter.Target 2015 Target Urban Urban Pop. Served Conn. Pop. Served Conn. Served Conn. Served Conn. Sanitation million % % million % % % % % % northern africa 58 84 58 80 91 73 88 70 92 79 Egypt 24 70 39 31 86 68 78 56 85 70 sub-saharan africa 145 52 21 258 53 19 65 43 76 61 DR Congo 11 53 4 18 42 4 66 31 77 52 Ethiopia 7 13 2 12 44 2 37 29 57 51 Kenya 6 48 12 14 46 9 63 37 74 56 Nigeria 32 51 22 62 53 23 65 44 76 61 South Africa 18 85 68 27 79 70 89 77 93 84 Sudan 7 53 6 14 50 1 66 32 77 53 Tanzania 6 52 1 14 53 3 65 29 76 51 eastern asia 367 64 30 579 69 50 74 50 82 65 China 312 64 30 523 69 50 74 50 82 65 southern asia 312 54 28 459 63 24 67 48 77 64 Bangladesh 21 55 14 35 51 7 68 38 78 57 India 221 45 30 304 59 25 60 50 73 65 Pakistan 35 82 45 47 92 40 87 60 91 73 south-eastern asia 139 70 4 235 81 9 78 31 85 52 Indonesia 56 65 2 103 73 2 75 29 83 51 Myanmar 10 48 1 15 88 10 63 29 74 51 Philippines 30 66 3 51 80 7 76 30 83 52 Western asia 85 97 69 129 96 83 98 78 99 85 Turkey 34 96 74 48 96 85 97 81 98 87 lac 315 81 57 428 86 62 86 69 91 79 Argentina 28 86 39 35 92 48 90 56 93 70 Brazil 112 82 50 154 83 53 87 64 91 75 Colombia 24 95 89 35 96 90 96 92 98 95 Mexico 61 75 66 80 91 80 82 76 88 83 oceania 2 80 28 2 81 32 86 48 90 64 cis 184 92 61 178 92 82 94 72 96 81 Russia 108 93 84 105 93 85 95 88 97 92 Source: WHO/UNICEF Joint Monitoring Program 56 ANNex 3 IbNeT and other metric Indicators Template IBNET Category Category Indicators Comments access Service coverage ·Water coverage ·percent of pop. in service area ·Water coverage; connections ·percent of pop. in service area ·Water coverage; public water points ·percent of pop. in service area ·Sewerage coverage ·percent of pop. in service area Water ·Water production ·lpcd; m3/conn./month consumption ·Water consumption ·lpcd; m3/conn./month and Production ·Residential consumption ·percent of total consumption; ·Residential consumption; ·lpcd connected ·lpcd ·Residential consumption; public WP ·percent of total consumption ·Other consumption efficiency Non-revenue water ·NRW ·percent of production; ·m3/km/day; ·m3/conn./day Metering practices ·Metered connections ·percent of total ·Billing based on metered ·percent of total sales (in m3) consumption Piped network ·Pipe breaks ·breaks/km/year performance ·Sewer system blockage ·blockages/km/year Cost and staffing ·Operation cost (water and waste ·US$/m3 sold; US$/m3 produced; water) breakdown between W and ·Operation cost (water only) WW ·Operation cost (waste water only) ·US$/m3 sold; ·US$/waste water population served by 1,000 W conn.; by 1,000 WW conn.; by 1,000 total W & WW conn.; per 1,000 peo- ple served. ·Staffing ratio ·percent water; percent waste ·Staff breakdown water ·Labor costs ·percent of total operating costs ·Energy costs ·percent of total operating costs ·Contracted out services ·percent of total operating costs reliability Quality of service ·Continuity of service ·hours per day ·Discontinuous water supply ·percent of total water customers ·Quality of water supplied ·residual chlorine tests carried out as percent or required; percent of test that pass standard ·Complaints about W & WW services ·percent of total W &WW conn. (continued on next page) 57 ibnet and other metric indicators (continued) Template IBNET Category Category Indicators Comments financial Billings and ·Average revenue W & WW ·US$/m3 water sold; US$/ water sustainability collections conn./year; breakdown between W and WW ·Water revenue ·percent residential; percent industrial/commercial; percent institutions ·Waste water revenue ·US$/person served ·Resid. fixed component of water ·percent of average bill; tariff breakdown between W & WW ·Ratio of industrial to residential tariff ·Collection period ·ratio; breakdown between W & WW ·Collection ratio ·Days of billing ·percent cash income/billings Financial ·Operating cost coverage ·ratio: operating revenue/ performance ·Debt service ratio operating costs ·percent cash income/debt service Assets ·Gross fixed assets ·US$/ W &WW pop served; breakdown between W and WW environmental Quality of ·Waste water treatment ·percent at least primary treatment sustainability service ·percent primary treatment only ·percent secondary treatment affordability Affordability of ·Total operating revenue per served ·percent services pop/GNI per capita ·Average water bill for 6 m3/month ·US$/year ·Residential fixed component of tariff ·US$/conn/year; breakdown between W and WW; percent of total average bill Source: Locussol and van Ginneken 2008. The Bank Note on "Characteristics of Well-Performing Public Water Utilities" in addition clarifies key fi- nancial indicators. · Efficiency indicators: (i) working ratio; operating ratio; collection period; accounts receivable/ collection period; percentage contribution to investment · Leverage indicators: (i) debt service coverage ratio; (ii) debt-equity ratio; · Liquidity indicators: (i) current ratio; · Profitability indicators: (i) return on fixed assets; (ii) return on equity. 58 ANNex 4 example of summary governance Assessment89 Snapshot at the Water Supply and Waste Water Service in Abcdef (2006) Quality of the service: In 2006, out of the 5 million people living in the city Abcdef, 70 percent were directly connected to the public piped water and 50 percent to sewers. 15 percent of the popula- tion lived in military and private developments that operate their own water supplies and 15 percent in informal settlements served by private water vendors. 25 percent of the population relied on septic tanks, 10 percent on latrines; 15 percent had no access to adequate sanitation. Water was distributed on a permanent basis in about half of the city and for an average 12 hours per day in the other half, despite a production capacity of 275 lpcd. Only half of the wastewater collected received secondary treatment; the remainder was discharged directly in the Ghijkl River. Performance of the service Provider: WSSSP is responsible for piped water and wastewater manage- ment; the municipality is in charge of on-site sanitation and storm water drainage. In 2006, WSSSP produced 350 million m3, billed 60 percent of it and collected 75 percent of the bills. Two thirds of ac- counts receivable, equivalent to 500 days of billing, were with public agencies. WSSSP employed 9,000 permanent employees. The outsourcing of billing and collection initiated in 2003 was terminated after 18 months. The average tariff US$0.60/m3, the highest in the country, allowed WSSSP to only recover O&M costs of US$95 million. Since 2002, WSSSP has been unable to service a debt of US$25 million/year and to contribute to its capital expenditure program of about US$15 million/year, now mostly financed by provincial and municipal grants. The provincial auditor has audited WSSSP financial statements since 2000. WSSSP tariff includes many bands and categories, with an industrial tariff six times that that applies to residential consumption below 30m3/month; several large industries representing 25 percent of WSSSP's revenue now envisaged to develop their own supplies. The cost of a small residential con- nection (US$150) represents 1.5 month of income of households in the first quintile. Governance of the service Provider: WSSSP is a municipal company created in 1999 in application of the Decentralization Act. Its Board of Directors, chaired by the Mayor, includes municipal civil servants and staff representatives. WSSSP Managing Director is appointed for three years after open competition, a process that has so far failed to attract competent managers from the private sec- tor. Members of the management team are primarily civil servants seconded from the provincial WSS Department. WSSSP relies mostly on the expertise of this Department for preparing its infra- structure development plans and extension projects and for supervising project implementation. Procurement above US$100,000 has to be vetted by the provincial Tender Board. Loans totaling US$225 million, mostly contracted prior to 1999, have hitherto been provided by the public Munici- pal Bank with the guarantee of the provincial government. To address inefficiencies of municipal WSS service providers a provincial WSS Regulator was created in 2003 in application of the Public Utility Act. WSSSP reports on its performance to the Regulator, but tariffs set by the latter are subject to approval of the Mayor. Performance Gaps: The assessment has detected a series of performance gaps to be addressed: · WSSSP board of directors does not include representatives of the vibrant local business commu- nity and of customers; a more business-oriented board should help to attract good managers. 89Locussol and van Ginneken 2008. 59 · WSSSP is over-staffed; many commercial and O&M tasks could be more efficiently carried out if outsourced. · WSSSP has little grip on its infrastructure development plan; there is evidence that WSSSP does not get best advice from the provincial WSS Department for planning, design and implementa- tion. · WSSSP is not responsible for procuring major works; there is evidence that prices obtained by the provincial WSS Department and Tender Board are 25 percent higher than that obtained by the private sector. · Loose conditionality attached to debt and grant financing has resulted in low financial dis- cipline; WSSSP balance sheet should be cleaned up as part of a financial recovery plan; the quality of audits should be improved and qualifications addressed. · The WSS tariff average level does not need adjustment, because of potential efficiency gains; its structure should be simplified to be more equitable; connection costs need to be reduced. · Data submitted to the Regulator are of poor quality; independent validation is needed. selected metric indicators Unit 2004 2005 2006 Target Population is service area 000' 4,500 4,750 5,000 Water connections 000' 300 325 350 Water connection ratio % 66 68 70 85 Sewer connections 000' 210 230 250 sewer connection ratio % 46 48 50 80 Average production lpcd 250 295 275 225 connection metered % 40 45 50 100 meters in working order % 40 50 60 100 nrW % 39 41 40 25 Waste water treated % 15 15 30 100 Total staff 8.750 8,750 9,000 staff per 1,000 connections1 17.2 15.8 15.0 7.0 operating revenues/costs2 ratio 0.95:1.0 1.0:1.0 1.05:1.0 2.0:1.0 debt service ratio3 % na 0 20 160 1Total water and sewer connections 2Operating revenues divided by cash operating costs 3Cash income divided by debt service 60 figure 10 accountability framework of the WsssP of abcdef Monitoring Provincial Municipal Government Municipality Bank Appraisal Grant Application Agreement Bylaws Customer Application Loan Customers Contract WSSSP Agreement Feedback Mandate Regulator Source: Locussol and van Ginneken 2008. 61 ANNex 5 example of confidential "vested Interests" Assessment90 In Xyz, the poor quality of the piped WSS service provided by the municipal WSS utility (MWSSU) has forced most households and businesses to revert to "substitutes" to complement their water supply and mimic a permanent service. A recent comprehensive survey showed that when customers spend US$1.0 on their WSS bill, they spend an additional US$1.0 to develop and operate substitutes, which include delivery by tankers, backyard boreholes equipped with electric pumps, large roof tanks, sump pumps sucking directly on the distribution pipes and disinfection equipment installed on indoor plumb- ing. This does not include a valuation of the time spent by the poorest households to fetch water. MWSSU is an inefficient utility which bills about 50 percent of the water produced, collects about 70 percent of the bills issued and employs 25 staff per 1,000 (water and sewer) connections; energy and staff costs represent 45 percent each of its total O&M costs. A recent audit showed that it should easily be feasible to: · Supply the entire city on a permanent basis, as the production capacity of 275 lpcd is suffi- cient, provided that operation of the distribution network be rationalized; · Reduce pumping costs by about 20 percent by lowering pressure to limit physical leaks in a large part of the distribution network; · Reduce staff costs by about 25 percent by outsourcing several maintenance and commercial activities; · Reduce commercial leaks by metering water consumed by the 20 percent largest customers that represent 80 percent of the sales; · Reduce by 25 percent the cost of the capital investment program of US$15 million/year by us- ing adapted design standards and allowing technical alternatives; · Reduce by 20 percent the cost of goods and works procured by increasing the transparency of the procurement process. There is either evidence or strong suspicion that: · Large providers of substitutes have ties with key MWSSU staff and that the latter artificially main- tain a poor quality of service to justify activities of the former; altogether, it is estimated that 15 percent of the cash flowing to substitutes eventually benefit MWSSU staff engaged in this non ethical practice; · A large share of commercial leaks result from bills directly negotiated between key staff in the commercial department and large customers as well as between meter readers and residen- tial customers; altogether it can be estimated that 20 percent of the difference between good practice and current practice (i.e. NRW of 75 percent and 50 percent) benefit MWSSU staff en- gaged in fraudulent practices; · The difference between prices obtained by the private sector and MWSSU for similar works directly benefit corrupt staff within MWSSU and the municipality involved in procurement and construction supervision. 90Locussol and van Ginneken 2008. 62 Figure 11 below summarizes the estimated cash flows in the current situation. It shows that MWSSU ac- tually obtains only 56 percent of the cash injected in the WSS sector, providers of substitutes 31 percent and corrupt vested interests the remaining 13 percent (or US$18.0 million/year). figure 11 cash flows in the XyZ urban Wss sector (us$ million/year) MWSSU 77 Customers 77 Municipality 107 30 50 OPEX 65 15 0 CAPEX 15 15 50 Inflow Customers 107 Government 30 3 7 Total 137 Providers of Outflow Substitutes MWSSU 77 42 Substitutes 42 Vested Vested Interests 18 8 Interests 18 Total 137 Source: Locussol and van Ginneken 2008. 63 Other Water Working Notes Water Working Notes are published by the Water Sector Board of the Sustainable Development Net- work of the World Bank Group. Working Notes are available online at www.worldbank.org/water. Working Notes are lightly edited documents intended to elicit discussion on topical issues in the water sector. They disseminate results of conceptual work by World Bank staff to peer professionals in the sector at an early stage, that is, "works in progress." Comments should be e-mailed to the authors. No. 1 Models of Aggregation for Water and Sanitation Provision. ERM, in association with Stephen Meyers Associates and Hydroconseil, and William D. Kingdom. January 2005. No. 2 Assessment of Resource Flows in the Water Supply and Sanitation Sector: Ethiopia Case Study. Peter L. Watson, Joseph Gadek, Eyob Defere, and Catherine Revels. January 2005. No. 3 Pro-Poor Subsidies for Water Connections in West Africa: A Preliminary Study (full report). Donald T. Lauria, Omar S. Hopkins, and Sylvie Debomy. January 2005. No. 4 Pro-Poor Subsidies for Water Connections in West Africa: A Preliminary Study (executive summary). Sylvie Debomy, Donald T. Lauria, and Omar S. Hopkins. January 2005. No. 5 Consumer Cooperatives: An Alternative Institutional Model for Delivery of Urban Water Supply and Sanitation Services? Fernando Ruiz-Mier, and Meike van Ginneken. January 2006. No. 6 Sanitation and Hygiene at the World Bank: An Analysis of Current Activities. Pete Kolsky, Eddy Perez, Wouter Vandersypen, and Lene Odum Jensen. November 2005. No. 7 Financing Water Supply and Sanitation Investments: Estimating Revenue Requirements and Financial Sustainability. Aldo Baietti and Paolo Curiel. October 2005. No. 8 Poverty Dimensions of Water, Sanitation, and Hygiene in Southwest Sri Lanka. Subhrendu K. Pattanayak, Jui-Chen Yang, Kelly Jones, Caroline van den Berg, Herath Gunatilake, Chetan Agarwal, Herath Bandara, and Thushara Ranasinghe. February 2006. No. 9 Characteristics of Well-Performing Public Water Utilities. Aldo Baietti, William Kingdom, and Meike van Ginneken. May 2006. No. 10 Rural Water Supply, Sanitation, and Hygiene: A Review of 25 Years of World Bank Lending: 1978­2003. Summary Report. Param Iyer, Jennifer Davis, Elif Yavuz, and Barbara Evans. July 2006. No. 11 Taking Account of the Poor in Water Sector Regulation. Sophie Trémolet and Catherine Hunt. August 2006. No. 12 Engaging Local Private Operators in Water Supply and Sanitation Services: Initial Lessons from Emerging Experience in Cambodia, Colombia, Paraguay, The Philippines, and Uganda. Thelma Triche, Sixto Requena, and Mukami Kariuki. December 2006. No. 13 Principles of Town Water Supply and Sanitation. Part 1: Water Supply. Nick Pilgrim, Bob Roche, John Kalbermatten, Cathy Revels, and Mukami Kariuki. December 2007. No. 14 Principles of Town Water Supply and Sanitation. Part 2: Sanitation. Kevin Tayler. December 2007. No. 15 Ways to Improve Water Services by Making Utilities More Accountable to Their Users: A Review. Mike Muller, Robin Simpson, and Meike van Ginneken. May 2008 No. 16 Poverty Analysis in Agricultural Water Operations. Salah Darghouth, Christopher Ward, J. Price Gittinger, Julienne Roux and Animesh Srivastava. May 2008. No. 17 Key Topics in Public Water Utility Reform. Meike van Ginneken and Bill Kingdom. August 2008. No. 18 Deterring Corruption and Improving Governance in the URBAN Water Supply & Sanitation Sector. Jonathan Halpern, Charles Kenny, Eric Dickson, David Ehrhardt, and Chloe Oliver. December 2008.