WORLD BANK Report No. 18321 INDIA - WATER RESOURCES MANAGEMENT SECTOR REVIEW URBAN WATER SUPPLY AND SANITATION REPORT VOLUME II - ANNEXES JUNE 26, 1998 Rural Development Unit South Asia Region World Bank In Cooperation with: Ministry of Urban Affairs and Employment, Government of India; and UK Department For International Development (DFID) EXCHANGE RATE Exchange Rate: US$1.00 -Rs. 36.17 (October 1997) ABBREVIATIONS AND ACRONYMS BOO Build-Own-Operate BOOT Build-Own-Operate-Transfer BOT Build-Operate-Transfer DFID Department For Int'l Development (UK), named ODA before July 1997 EGCIP Expert Group on Commercialization of Infrastructure Projects EMOS Empresa Metropolitana de Obras Sanitarias, the Santiago, Chile UWSS agency Fl Financial Internediary FIRE Financial Institutions Reform & Expansion GOI Government of India HUDCO Housing and Urban Development Corporation of India ICICI Industrial Credit and Investment Corporation of India IDBI Industrial Development Bank of India IDFC International Development Finance Corporation IFCI Industrial Finance Corporation of India kl Kiloliter MCH Municipal Corporation Hyderabad MOUAE Ministry of Urban Affairs & Employment MWSSB Maharashtra Water Supply & Sewerage Board NEERI National Environmental Engineering Research Institute NFI National-level Financial Institution NGO Non-Governmental Organization NIPFP National Institute of Public Finance Policy NIUA National Institute of Urban Affairs NTADC New Tiruppur Area Development Corporation O&M Operation and Maintenance ODA Overseas Development Agency of the UK (now named DFID) PHED Public Health Engineering Department PPAR Project Performance and Audit Report PSP Private Sector Participation PWSSB Punjab Water Supply & Sewerage Board RCUES Regional Center for Urban and Environmental Studies RWSSC Regional Water Supply & Sewerage Company SEBI Securities and Exchange Board of India SFC State Financial Commission SFI State-level Financial Institution SPARC Society for Promotion of Area Resources Centers SRA State-level Regulatory Agency STF State-leveL Task Force TA Technical Assistance UBSP Urban Basic Services for the Poor UFW Unaccounted For Water USAID United States Agency for International Development UPSS Urban Poor Service Syndicate (Hyderabad) UWSS Urban Water Supply and Sanitation WRM Water Resources Management (acronym for the India Water Sector Review Program of the World Bank and GOI, of which this report is a component) WSSB Water Supply and Sewerage Board TABLE OF CONTENTS VOLUME II ANNEX 1. International Experience in Decentralization and Private Sector Participation ..........................................................1 1 Overview of International Experience ......................................................... 1 1I.1 Introduction ..........................................................1 1.2 Decentralization ..........................................................1 1.3 Private Sector Participation ..........................................................2 2 South Africa ......................................................... 19 2.1 The Old System in South Africa ......................................................... 19 2.2 The Water and Sanitation Law Review ......................................................... 19 2.3 Boosting Municipal Capacity ......................................................... 20 3 Brazil ......................................................... 22 3.1 The Old System in Brazil ......................................................... 22 3.2 Brazil's Reforms ......................................................... 22 4 Puerto Rico ......................................................... 23 4.1 Introduction ......................................................... 23 4.2 Rationale for PSP ......................................................... 23 4.3 Industry and Market Structure and Details of the Contract ............................. 24 4.4 Process of Contract Award ......................................................... 25 4.5 Conclusions ......................................................... 26 5 Trinidad and Tobago ......................................................... 27 5.1 Introduction ......................................................... 27 5.2 Rationale for PSP ......................................................... 27 5.3 Industry and Market Structure and Details of the Contract ............................. 27 5.4 Process of Contract Award ......................................................... 28 5.5 Evaluation of PSP ......................................................... 29 5.6 Conclusions ......................................................... 29 6 Guinea ......................................................... 30 6.1 Introduction ......................................................... 30 6.2 Rationale for PSP ......................................................... 30 6.3 Industry and Market Structure ......................................................... 32 6.4 Details of the Contract ......................................................... 33 6.5 Process of Contract Award ......................................................... 35 6.6 Evaluation of PSP ......................................................... 35 6.7 Conclusions ......................................................... 38 7 Ostrava (Czech Republic) .................................................. 40 7.1 Introduction ......................................................... 40 7.2 Rationale for PSP ......................................................... 40 7.3 Industry and Market Structure ......................................................... 43 7.4 Details of the Contract ......................................................... 46 7.5 Process for Contract Award ......................................................... 48 7.6 Evaluation of PSP ......................................................... 50 7.7 Conclusions ............................. 51 8 Buenos Aires (Argentina) ............................. 53 8.1 Introduction ............................. 53 8.2 Rationale for PSP ............................. 53 8.3 Process of Contract Award ............................. 54 8.4 Industry and Market Structure ............................. 55 8.5 Details of the Contract ............................. 56 8.6 Evaluation of PSP ............................. 57 8.7 Conclusions ............................. 58 9 Manila (Philippines) .............................. 59 9.1 Introduction ............................. 59 9.2 Rationale for PSP ............................. 59 9.3 Industry and Market Structure ............................. 60 9.4 Details of the Contract ............................. 60 9.5 Price Regulation and Renegotiation ............................. 61 9.6 Process of Contract Award ............................. 62 9.7 Lessons for India ............................. 62 ANNEX 2. Indian Experience in Community Participation .63 ANNEX 3. Municipal Bonds Experience from the USA .71 ANNEX 4. UWSS Workshop 11 & 12 April 1997, New Delhi, India .77 ANNEX 5. Report from the World Bank/GOI National UWSS Workshop June 9 & 10, 1997, New Delhi, India .91 ANNEX 6. Supplementary Indian UWSS Statistics .95 ANNEX 7. Selected List of Persons Met .101 LIST OF TABLES Table Al- 1.1. Longer and Shorter Arrangements - Advantages and Disadvantages. 5 Table Al-1.2. Options for Private Sector Participation. 6 Table AI-1.3. Impact of PSP on Performance .13 Table Al -1.4. Overcoming Constraints to PSP in India .14 Table Al-4.1. Overview Information on Puerto Rico .23 Table A1-4.2. Summary of the Contract .24 Table Al-4.3. Links Between PSG and PRASA .26 Table A1-6.1. Summary Statistics for Guinea, 1993 .30 Table A1-6.2. Summary of Guinea Water Contract .31 Table A1-6.3. Allocation of Responsibilities in Guinea .34 Table Al-6.4. Performance Indicators Before and After PSP in Guinea .36 Table A1 -7.1. Summary Statistics for the the Czech Republic .40 Table A1 -7.2. Summary of Ostrava Water Contract .43 Table Al-7.3. Allocation of Responsibilities in Ostrava .47 Table Al -8.1. Overview Statistics of Argentina & Buenos Aires Metropolitan Area.... 53 Table A1-8.2. Process for Awarding Contract ......................................................... 54 Table Al1-8.3. Relative Price Bids by Final Bidders in Buenos Aires ............................ 54 Table A1-8.4. Summary of the Contract .......................................................... 55 Table Al -9.1. Overview Information on the Philippines ................................................ 59 Table A2-1. Isssuers, Purpose and Investors in the US Municipal Bond Market . 74 Table A4-1. Problem Analysis .80 Table A6-1. Plan Outlays on UWSS .95 Table A6-2. Plan Otlays and Expenditure for UWSS - Eighth Plan .96 Table A6-3. Total Infrastructure Investment Projections .96 Table A6-4. Performance of Water Sector in Selected Indian Cities .97 Table A6-5. Water Bills and Coping Costs of Intermittent Water Supply - Dehra Dun .98 Table A6-6. Tariff Increases Through HUDCO Influence .98 Table A6-7. Prevailing Rates for Consumption-based Charges - Domestic Uses. 99 LIST OF FIGURES Figure Al -4.1. The Structure of the Water Sector in Puerto Rico .................................. 24 Figure Al -6.1. Structure of the Water Sector in Guinea ................................................. 33 Figure Al -7.1. Structure of the Water Sector in North Moravia (illustrative only) ....... 42 Figure A1-7.2. Institutional Structure of the Water Sector in North Moravia ................ 42 Figure Al-7.3. Structure of the Water Sector in Ostrava ................................................ 44 Figure Al -8.1. Industry Structure in Argentina ......................................................... 56 Figure Al -9.1. Industry Structure After Letting the Concessions ................................... 60 LIST OF BOXES Box Al-1.1. Letting a Two-Stage Contract ......................................................... 9 Box AI -1.2. Structure of the Water Sector in Ostrava ................................................... 10 Box Al-1.3. Concession Arrangements in Buenos Aires ...............................................1 1 Box Al-1.4. The Manila Concession .........................................................1 I Box A3-1. Size and Structure of the US Municipal Bond System .............................. 71 Box A3-2. General Obligation versus Revenue Bonds in the USA ............................. 73 Box A3-3. Credit Enhancement Structures for Revenue Bonds .................................. 73 Box A3-4. State-level Arrangements for Bond Issuance in the USA .76 Annex I International Experience in Decentralization and Private Sector Participation ANNEX 1 International Experience in Decentralization and Private Sector Participation 1. Overview of International Experience 1.1 Introduction The recommendations in this report are focused on developing an enabling strategy for the urban water sector in India, that will provide the incentives to improve operational efficiency and effectiveness. The key element in this strategy is the democratic decentralization of the responsibility for water and sanitation services through municipalization. We have developed a framework for the implementation of this enabling strategy. As part of this, we have emphasized the need to promote PSP in the sector to assist in enhancing efficiency, and to provide access to additional sources of capital. Both these elements are part of the consensus for reform that is emerging within India. However, concerns remain over the practicalities of implementing these measures in a developing country as diverse as India. This annex draws on international experience of decentralization and private sector participation in the water sector to provide examples of how these constraints can be overcome, and of the benefits that decentralization and increased PSP can offer to India. The following sections summarize international experience and highlight some of the main lessons that arise. The annex concludes with a number of case-studies covering decentralization and PSP in South Africa, Brazil, Puerto Rico, Trinidad and Tobago, Guinea, the Czech Republic, Buenos Aires and Manila. 1.2 Decentralization Internationally, municipal responsibility for water and sanitation services is .a common arrangement. It is the dominant mode of service provision in Australia, France, Germany, New Zealand and the USA, to name a few examples. Most developing countries reforming their water service industries have chosen to do so through the devolution of the responsibility for services to the municipal level. The majority of the former command economies within Central and Eastern Europe have chosen to follow this route, as have Brazil and South Africa. In decentralizing the responsibility for water services, each country had to develop answers to the problems of: overcoming the constraints imposed by limited capacity at the municipal level; and defining the role of existing regional and bulk service providers in the new structure, and reforming them appropriately. India will face these same problems in the process of decentralization. In those countries reforming their water sector, there has been a general move to separate the functions of bulk water provision from that of distribution. The water sector in South Africa is dominated by regional water boards, who are responsible for both bulk water provision and the distribution of water. Under legislation currently being prepared, these functions will be separated, and municipalities will be obliged to sign a contract with a service provider for water and sanitation services within their area. Anne-x I International Experience in Decentralization and Private Sector Participation Alternatively, municipalities may also provide these services o01 their own behalf. Municipalities will be given incentives to cooperate in providing these services. The existing regional water boards will be corporatized and can continue to provide distribution services, but must do so under contract with the relevant municipality. They may also provide other services as agreed with the Minister of Water Affairs. These are expected to include the continuing provision of capacity-building assistance to municipalities where this is requested. In line with the new commercial orientation of the boards, this will be done under contract with the municipalities, where such assistance is not of commercial interest to the board. Within Brazil, state water boards have historically received the majority of resources devoted to the sector. Consequently, they have been able to expand from their initial functions as bulk water providers into distribution services, edging out less well resourced providers. States are now devolving the responsibility for water services to municipalities, who contract with a service provider for distribution services within their areas. As a result, state water boards are being forced to redefine their roles as municipalities increasingly opt for alternative service providers, including private sector providers. Similarly, in the Czech Republic, the existing 10 regional water bodies were broken up and the responsibility for service delivery devolved to municipalities. There are now 74 companies serving individual and groups of municipalities. The extent and nature of the break-up varied from area to area. For example, in North Moravia the existing regional provider continues to provide distribution water services to smaller municipalities, as well as retaining the responsibility for bulk water provision. The largest municipality, Ostrava City, has taken over the provision of distribution services within its area. Ownership of the regional provider has been vested in the municipalities it serves, with each receiving shares in proportion to the use it makes of the services provided. This approach has succeeded in devolving the responsibility for service provision, whilst overcoming problems of low capacity at the municipal level through the retention of the existing service provider. The case studies provide further details of these examples. 1.3 Private Sector Participation In looking at the international experience of PSP, it is important to remember that this takes various forms. The first part of this section therefore outlines the main options for PSP in the water sector. The second part covers the lessons of experience of PSP, internationally, in overcoming similar problems to those faced by the Indian water sector. 1.3.1 Options for Private Sector Participation We divide PSP into those options which leave management of the system in public hands, but make the private sector responsible for discrete functions or assets, and which give the private sector responsibility for managing the entire system. Private sector participation in discrete functions The public operator can contract out discrete functions, such as meter installation, meter reading, billing and collection, and accounting, to private sector companies operating under service contracts. These are 2 Annex 1 International Experience in Decentralization and Private Sector Participation relatively common internationally. Examples include Mexico City, and Santiago, Chile. Such contracts generally result in the service being provided at lower cost and higher quality than before contracting out. However they can create a co-ordination and quality control challenge for the public entity. A similar concept is to contract out operation of existing treatment works. Again this is quite common internationally. One example is Puerto Rico, where contracts to operate treatment works preceded the current management contract. In India, Chennai has contracted out the operation and maintenance of a number of sewage pumping stations and boreholes and the de-silting of sewers, with great success. A number of other municipalities have contracted out various maintenance functions. A more ambitious approach is to contract out finance, construction and operation of new treatment works or similar discrete pieces of infrastructure. Such contracts are called BOO contracts (Build Own and Operate). The private operator recovers its costs through a contract with the public entity for the services it supplies. BOOT contracts, in which the private operator transfers ownership of the infrastructure to the public operator after it has recovered its capital costs (typically between 10 and 30 years), are also possible. Contracts of this general type have been used in many countries, including Thailand and Australia. South Africa is in the process of letting its first BOOT contract in the water sector. BOO/T contracts are extremely common in the power sector, where they are frequently used to provide new generating capacity in the form of Independent Power Producers (IPPs). Within India, a number of IPPs are under negotiation, and construction has begun on others - notably Enron's Dahbol plant in Maharashtra! A related concept, likely to be important in India, is the Rehabilitate, Operate and Maintain (ROM) contract. This is like a BOO, except instead of building a new plant the private operator takes over responsibility for an existing plant, provides the investment needed to rehabilitate it, and sells its services on contract to the public entity. Private sector participation in management of the system Metering, billing, collections, and maintenance and operation of the distribution system are often among the most important problems in current operations. These aspects are all inter-related. This means the greatest potential for overall efficiency gains will often come from options which involve the private sector in the management of the entire system. Options used internationally include: * management contracts - typically these run for 3 to 5 years. The private operator takes over responsibility for managing the existing system and staff. The public entity is usually responsible for rehabilitation and new investment. The management company receives a fee, which may be partly related to performance. Puerto Rico and Trinidad and Tobago are good examples of management contracts; * lease contracts - typically these run for around 10-20 years. The operator is not paid a management fee. Instead, it is responsible for both collecting revenues and meeting all The original contract was signed in 1994. Subsequently, a new state government reopened the contract negotiations and significant changes were made, including a reduction in tariffs charged and an equity stake in the project being reserved for the State Electricity Board. 3 Annex I International Experience in Decentralization and Private Sector Participation operating and maintenance costs, retaining any surplus for itself. The operator may pay Government a lease fee for use of the assets. Responsibility for financing new investment remains with the Government. Guinea in West Africa, and Ostrava in the Czech Republic, are both examples of lease contracts; * concession contract - this is like a lease, except that it typically runs for around 20-30 years, and the operator is responsible for new investment during the life of the contract. Since the operator must fund new investment, the lease fee paid to the Government may be reduced or eliminated. Buenos Aires is one of the best-known examples of a concession. Manila, in the Philippines, has just let two concession contracts, each covering half of the city; * asset sale (regulated) - the Government sells the infrastructure and the operating company to the private sector. Tariffs and service standards may regulated, in which case privatization can be thought of as similar to a concession which runs in perpetuity. England and Wales is the only example of this approach we are aware of; and * asset sale (unregulated) - it is also possible to sell the assets and not regulate the resulting private water operator. In theory, this option could be expected to provide the most efficient outcome.2 We are not aware of any examples, probably because the high water charges which would result would be politically unpopular. However, if water consumers were given the shares in the company, what they paid in higher bills they would get back in dividends. Areas with no or minimal service currently could also benefit from this approach, since unregulated private supply would certainly be better than no service at all. In summary, there is a continuum of options from management contracts with a duration of 3 years and upwards, through to privatization through asset sales, which lasts for ever. Typically, the longer the contract the more responsibility for investment the private sector takes, and the more risk. On the other hand, shorter contracts mean more frequent competition for the market, and more flexibility. Table Al_1.1 summarizes the advantages and disadvantages of longer and shorter arrangements. Table Al-1.2 provides a summary of the allocation of responsibilities under various options for PSP. 2 P Brook Cowen (World Bank) & T Cowen (George Mason University), The Feasibility of Unregulated Privatization for Natural Monopolies: A Proposalfor Water Policy, (draft) unpublished. 4 Annex 1 International Experience in Decentralization and Private Sector Participation .Tab.l.e. . A i..L.n.r.and Soter.Arr....... - A vantages.and. D dntage X . Longer Shorter Investment Private sector is responsible for Govemnment funds or controls investmnent investrnent Competition for Non-existent or infrequent Frequent the market ..................................................................................................................... ..........................;; Long term focus Increased. Managers who are Reduced. Managers who are in place for responsible for the business for a long only a short time will concentrate on short- time will aim to maximize the long term term gains efficiency of the business ............................................... .............................................. ........................................... ................................................................................................................ Efficient Increased. Managers who are If the Government is responsible for balancing of responsible for investments as well as investment, managers may push for investment and operations will make good trade-offs inefficient investments to reduce operating operating needs between investment and operating costs costs. Risk Private sector bears more risk Government bears more risk Flexibility Reduced Increased 5 Annex I International Experience in Decentralisation and Private Sector Participation ,~~~~~~~~~ .... .. ... ..... ...... . . . ,,,, ....., , . ,, ,..,. ....... .... .. ....... ......... . . . .___............_- . . .. . . . ... . :- ... ...... . .. .. .. . - - - , , ,, . . - . . .. ...... , . - . .. . ..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . .. . . . -......Table A1-1.2. tions for Private Sector Participation .. ,, , ,, , ,,, .,,,, ,,,, ,, . .: ....~.. ....... . _, ,....... . . .. .....,...... ... . . .. ... .. . .... Option Example Operation Management Maintenance Investment Ownership of Duration of system assets (Years) a b c Planning Financing .......................... ........ .... ............... . ----- - j- - - - Y>i------- Service contract Chennai Public sector 1-5 BOOT Thailand Company- 10+ (new assets) ~~~~~~~~~~~~~~~~~~~~~~~~Public sector Management Puerto Rico, Public sector 3-5 contract . Trinidad & Tobago ~~~~~~~Tbg gg g..... - -. ......... ..................... ...................... . . . . ............................ --------------------- . ................. Lease Guinea, Public sector 10 20 Ostrava (Czech) ........................................ ........................ ........................ ............................ Concession Buenos Aires, Public 20 30 Manila sector 2 ....................................... ...................................... . ...................................rt.r ;r ;;.; :.............................. Asset sale England & Company Perpetuity Wales Notes: Three different functions exist: planning (a), carrying out the work (b), and financing the maintenance (c). 2 The assets are transferred to the concessionaire for a fixed period of time but are owned by the State. Key: Solid shading: responsibility lies with the private operator Clear: responsibility lies with the public sector Diagonal shading: responsibility varies according to the contract 6 Annex I International Experience in Decentralization and Private Sector Participation 1.3.2 Lessons from experience This section looks at the success of PSP in the water sector, both in India and internationally, in overcoming the problems faced by the Indian water sector. These include: commercial and operational inefficiency reflected in indicators such as high staff-connection ratios and high levels of unaccounted- for-water (UFW); financially non-viable utilities, with tariffs below cost-recovery levels, and limited access to investment finance; and poor service coverage and quality of service. The text also provide illustrations of means of overcoming constraints to PSP in the sector. These include: a lack of basic information, which is likely to deter the private sector from involvement; tariffs below cost recovery levels and/or political influence in tariff setting which makes it unlikely that the utility will be financially viable and increases private sector risk; political concerns over private and/or foreign control of the water industry; and a lack of capacity in smaller municipalities to manage the process of PSP. Within Europe, there is a long history of PSP in the water sector in France. In England and Wales, a number of smaller private water companies have operated for over 100 years. In 1989, the larger state- owned utilities were privatized through an asset sale. In Central and Eastern Europe, both the Czech Republic and Hungary have introduced PSP at the level of municipalities. There are also a number of BOOT-type projects underway across the region. French-influenced West Africa also has a number of examples of PSP through lease and concession arrangements in Cote d'Ivoire (the only example of a concession in a developing country that has been re-let), Guinea and recently in Gabon. In South Africa, as part of the reform of the sector, private service providers will be encouraged, and the first contracts are currently being let. The USA has a large number of private water service providers. Latin America has moved to embrace the private sector, with the Buenos Aires concession being one amongst a number of similar contracts awarded in the region. A number of Caribbean islands have also introduced PSP, and both Trinidad and Tobago and Puerto Rico have let management contracts. In Australia, a number of cities have reformed their water utilities, and introduced new capacity through the use of BOOT projects. For example, in Sydney, all new treatment capacity will be constructed through BOOT contracts. A number of these examples of PSP are discussed in the text. More detailed case studies are included in at the end of this Annex. Table A1-1.3 provides a summary of the outcomes in some of the case studies. Table Al-1.4 summarizes means of overcoming constraints to PSP, with examples of their use internationally. Service Contracts Service contracts are relatively widespread, in India and internationally. In India there are a number of examples of service contracts being let for various municipal services such as toilet construction in Delhi and Faridabad. Chennai and a number of other municipalities have also let service contracts for the operation and maintenance of sewage pumping stations and sewers, and New Mumbai has contracted out maintenance of its water supply system. The experience to date has been that these offer significant gains in efficiency. Santiago, Chile, since 1979 has placed extensive reliance on the use of service contracts with the private sector to achieve efficiencies. Partly as a consequence, EMOS, the public water and sewerage utility in Santiago, is today the best-performing water utility in Chile. As an example, the ratio of staff per 1,000 7 Annex I International Experience in Decentralization and Private Sector Participation water connections is only 1.9,3 and UFW has fallen from 28% in 1990 to 22%. The impact on the labor force was limited by encouraging existing employees to form companies to bid for contracts. Management Contracts In Puerto Rico, Government dissatisfaction with the performance of the state utility, PRASA, led to the award of a management contract to Professional Services Group (PSG) in 1995. This contract was sole- sourced to PSG, and was the latest stage in a relationship between PRASA and PSG which has developed since PSG offered to mediate in labor negotiations. PSG subsequently won service contracts for the operation and maintenance of new and existing treatment plants. Throughout the relationship, the emphasis on both sides has been on the development of credibility as a partner in the sector. This appears to have paid off in allowing PRASA to rely on PSG's reputation as a guarantee that it will not exploit its position as sole bidder for the management contract, and similarly for PSG to feel secure with PRASA as regulator. This contract is also notable for the incentives it contains for improved performance by PSG. In Trinidad and Tobago, a management contract came into operation in April 1996. This is part of a two- phase approach to PSP, after 3-5 years the management contract will be converted into a long-term concession. After years of poor service, in 1994 the Government decided to involve the private sector as quickly as possible in the water sector. The preferred option was a long-term concession. However, to let such a contract would require amending the legislation governing the utility and the establishment of new institutional arrangements to regulate the sector. These would take more time than the Government wanted to wait. In addition, basic information on the condition of the water system and consumption patterns was lacking. Without this, the Government was unable to establish an effective tariff-setting regime, and given the resulting risks, the private sector would be unlikely to bid. The Government therefore decided to let a 3 to 5-year management contract initially, as part of which the operator would be required to provide the information the Government required. Various performance targets were specified as part of the contract, and once these were met either the Government or operator could request a switch to the concession. The operator would be given first rights to negotiate on the concession. Box Al_1.1 discusses the implications of such an arrangement: 3 However, personnel costs are still 57% of total operating costs, compared to a ratio of 40% in most developed country utilities. 8 Annex I International Experience in Decentralization and Private Sector Participation Box AlLI. Letting ae Cotratis :;ltwed If the c ssi is wadedn the basisan wmpetitivebidding process, then Xt existing private operto lne he maaeet cotrc hasFa sgnfiat informational advntag. Thiswill detr One possi su t bltod ie w f emanagement contt from bidding for the to bid for he managmn otat Aniothr alrtive ol io pre nl tsbid forthe concession to tie winner of the mana ni con i is opted i i However, some commentators have arguedthat,as arltG n t fed tdevote almost as many resources to letting lie management contac as It wod havit had let a logterm concession immediately. Lease Contracts Lease or affermage contracts are well established in France and are increasingly so in French-influenced West Africa. For example, Guinea has had a lease contract in place since 1989. This contract is notable for the mechanism adopted to guarantee the financial viability of the utility whilst tariffs are gradually increased to cost reflective levels. The primary aims of this contract were to improve efficiency in the urban water sector, expand service coverage and make the sector financially viable. Following a competitive bidding process, in which bidders were evaluated on the reduction they offered against a benchmark tariff calculated by consultants, a consortium of two French water companies took a 51% share in the operating company (SEEG) holding the lease contract. The winning bid offered a discount of 30% on the benchmark tariff. The Government retained the remainder of the shares, and also 100% ownership of a separate holding company (SONEG) which owns the sector's assets, receives the lease payment from SEEG and finances investment. Initially, tariffs were well below cost recovery levels. To allow time for service improvements to reduce opposition to tariff increases, and for households to adjust, tariffs were increased gradually to cost recovery levels. In the interim, the World Bank Group provided a declining subsidy to cover the difference between costs and revenues. This provided the necessary guarantee for the private sector that revenues would be sufficient to cover costs. The utility is now financially viable, with a ratio of operating costs to operating revenues of 71%, compared with 122% in 1988. However, tariffs have now increased to around Rs. 32/m3 (US$ 0.90/m3), a level which is higher than that of many developing countries. As a result, approximately one-third of connections are inactive. A lease arrangement has also been adopted for Ostrava municipality in the Czech Republic. As part of this, an innovative ownership structure has been adopted which enables the private sector to have a degree of control over the utility and therefore control its risks, whilst also retaining ownership of the 9 Annex I International Experience in Decentralization and Private Sector Participation infrastructure and an element of control over operations in public hands. Box Al-1.2 provides a summary of the ownership structure adopted in Ostrava. Box A1-1.2. Structure of the Water Sector in Ostrava In Ostrava, the municipality wanted to introduce a foreign operator into the water sector, to provide the necessary expertise that it lacked. However, it was also concerned to retain ownership of the sector in public hands, and to ensure that the domestic private sector was able to participate in some form. Under the structure adopted for the sector, ownership of the infrastructure was retained by the municipality. A separate operating company, OVAK, was created which signed a 30-year lease agreement with the municipality to operate the infrastructure. The municipality retains a 20% stake in the operating company. A further 31% is owned by the municipality's chosen partner, Lyonnaise des Eaux (LDE) of France. A shareholders agreement, valid for 10 years, between the municipality and LDE provides for them to seek each others agreement on all major decisions affecting the sector. LDE also provides support to the operating company, under a technical assistance agreement. The remaining 49% of the operating company is held by private individuals, including employees, and investment funds. To date, this structure has proved successful in satisfying the municipality's objectives for PSP, and all parties feel that the relationship is working well. The diagram below illustrates the structure in Ostrava. [ Sliareliolders Ostrava City reelnent Lyonnaise des (Municipality) Eaux _ r- Lease TA _ _ i - Contract Agreement ,. / OVAK (Operating Compay Owns Operates Assets Customers Concessions Concession type arrangements are also well established in France. Outside France and West Africa, concessions have also been let in a number of countries in Latin America, and one was recently awarded in Manila. Box Al-1.3 discusses the concession arrangements in Buenos Aires, perhaps the best known recent concession arrangement. Box A 1-1.4, which immediately follows, considers the Manila concession. 10 Annex I International Experience in Decentralization and Private Sector Participation Box A1-1.3. Concession arrangements in Buenos Aires In 1991, the Government took the decision to privatize the Greater Buenos Aires system in order to improve efficiency and attract private sector financing frthe large investments that the sector required. The need for the private operator to undertake investments dictated the choice of a concession as the means to introduce PSP. To reduce the risk to bidders, detailed information on the current status of the system was collected by a team of consultants and made available as part of the bidding documents. Evaluation of bids was made on the basis of the lowest water rate offered, whilst meeting stipulated service levels and performance targets. The winning bid, by an international consortium Aguas Argentinas (AA) was almost 27%/o below the current tariff level at the time of bidding. The concession contract contained a number of performance targets, covering the extension of water and sewerage coverage, increases in sewage treatment and reductions in UFW. The performance of the concession to date has been impressive. An additional 500,000 water connections and 400,000 sewerage connections have been added, metering has increased from 30,000 to 170,000 connections and UFW has fallen from 43% to 25%. Staff numbers have been substantially reduced through early and voluntary retirement schemes. The ratio of staff to water connections fell from 6.4 to 3.3 per 1,000 connections. The utility has also moved to a profit, after previously making substantial losses. There have been disputes between AA and the regulator for the sector, ETOSS, centering around the issue of investment. Following a requirement by ETOSS that AA speed up its agreed investment program, AA demanded a revision of tariffs under a contract provision that an increase in costs of more than 7% would lead to a rise in tariffs. Subsequently, tariffs were increased by 13.5%. Whilst they remain about 17% below levels at the time of privatization, this increase was extremely unpopular, particularly as the cause was not well understood. Additionally, AA has accused ETOSS of being too rigid in requiring it to stick to the investments defined in the concession contract, rather than allowing it to look for alternative approaches. Box A1-1.4. The Manila concession The Manila concession was awarded in January 1997. An interesting feature is that, to increase the scope for comparative competition, the decision was taken to let two separate concessions, one for the East Zone of the city and one for the West Zone. To ensure that competition took place, bidders could only be awarded one concession, although they could bid for both. Bids were awarded on the basis of the tariff offered. Current tariffs in Manila average around Rs 12/m3 (US$ 0.33/m3). The winning bid for the East Zone was far lower, at Rs 3/m3 (US$ 0.09/in3). In the West Zone, the winning bid was again far lower than the existing tariff. However, the winning bid was submitted by the same consortium awarded the East Zone contract, and the contract was therefore awarded to the second-lowest bidder. The tariff level submitted, of Rs 7/mi3 (US$ 0.19/m3), is, however, more than twice that for the East Zone and this has resulted in a political outcry, and the threat of legal action against the process. Summary At present, there are few examples of long-term experience of PSP in the water sector in developing countries. Table A 1-1.3, summarizes the experience to date in Guinea and Buenos Aires, where PSP has been in place since 1989 and 1993 respectively. It is clear from these that PSP can deliver substantial Annex I International Experience in Decentralization and Private Sector Participation gains in efficiency, reflected in improvements in physical performance, improved financial viability and reduced tariffs. The extent of efficiency gains possible enable the private sector to make the high retums it requires in compensation for the risks it assumes, while still delivering improvements for customers and the public sector. Table Al -1.4, provides examples drawn from international experience, of how the constraints, identified in the main text of the report, on the promotion of PSP can be overcome. 12 Annex 1 International Experience in Decentralization and Private Sector Participation . . . ~ ~~~ . ...... . . .. ....... ... . . .. Example . Contract . ServiceCoverage Metering . Staff ..Unaccounted-For- Financial Viability Type . Water ...... ~~~~~~~~~~~~~~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... . Buenos Aires IConcession . Water coverage Rose from . Staff per 1 ,000 .Reduced from 43% /. Utility is now profitable. increased from . 30,000 .water connections to 25% . Tariffs initially reduced by 70% to 80% connections to . reduced from 6.4 . . 27% from level at time of bid. Sewerage 17,0 to3. Subsequently increased, but coverage increased .. still 17% lower from 58% to 66%o Guinea ..Lease Number of Rose from 5% to ..n/a After peaking at .Ratio of operating costs to j . connections rose . 95% of all ... 62% reduced to . operating revenues reduced ..from 16,500 to ..connections ..47% r .om 122% to 71% * ..33,500 ................................... ....... . ............ ----------.. .. ........................... .................................... ........................................ ............................................................. Sources: D. Riviera, 1996, Private Sector Participation in the Water Supply and Wastewater Sector: Lessons from Six Developing Countries, World Bank. P. Brook Cowen, 1996, The Guinea Water Lease - Five Years On, Public Policy for the Private Sector No 91, World Bank. London Economics' own research. 13 Annex I International Experience in Decentralization and Private Sector Participation Table A1 vercomi Co i t PSia i.c.. .. .. ... .. ... o .... r:I n ..... .. . - ~~~~~~~~~~. - -. ....-:.:-. -.-. . - I :: .... . - .:- . .... ... ........-...- ..-..... .. .... .. .... . : .... -.--... ... Constraint Option Advantages Disadvantages Lack of basic Employ consultants to gather as Opens the way to long term Gathering the information is expensive and tise- information much inforpnation as possible, arrangements and risk sharing consuming. (makes it impossible to then call for bids (e.g. Buenos from the start, which can Consultants generally will not guarantee the specify arrangements ieforration provided, reducing bidders' comfort in which are long term or relying on it. transfer ~slares Botwan has doetitnbemreetniepiaeeh raiain transfer risk to the ~~~~~~~~~~~~Experience in Buenos Aires and UK shows that pnvate ~ ~ ~ ~ ~ ~ ~ ~~~~~~sco invlveenolaer successfully.r) infonexation provided may be inadequate or inaccurate. Contract for specified skills. For A relatively quick and easy way Weak incentives on managers. exarple, senior management to boost performance. tative dialoge withath management, team, ant pofilow w iould go o Resulting gains in efficiency hired, not a team. btetat'onally, and paod depends ~ ~ ~ ~ an onrato satisfactould interationally competitive en'.informatensys te Does not directly address institutional weaknesses in salaries. Botswana has done this senabltore i vexense leriv the organization. successfully. scoinovmtlae.If expatriates are employed, care will be needed to select people who can operate effectively in Indian conditions and culture Management contract with low- Brings in a new management Requires capacity in the public sector to sustain a co- powered incentives. An example team with incentives to do a operative dialogue with the management team, and to of low-powered incentives would good job, but with acceptable develop a reasonable judgmnent on whether be that 'continuation of contract risk levels. performnance is satisfactory depends on satisfactory performance'. 14 Annex I International Experience in Decentralization and Private Sector Participation .:. -..-'.'-'.''-,'"'......... . w ; -i,,.,,i ..RRRR ii E..... " J....... .E., EE ,i -,:1T,-,, .....'.....'.... : - ~ . I IED I i? IE E-:-.::.-.:I: -:...... t t T V I.......:: Management contract focused on Relatively quick, and yields What to do with the management contractor when preparing for longer term PSP. quick improvements, bids for the long term arrangement are called? If the The management contractor is Effective preparation for more management contractor is allowed to bid, it will have required to both improve extensive PSP an unfair advantage, deterring other bidders. If the performance, and gather management contractor is precluded from bidding, information necessary for the fewer companies will compete for the management longer-term, risk-sharing PSP contract. arrangement. Trinidad followed In Trinidad, some commentators have argued that the this approach. time and expense involved in preparing for the management contract were similar to that involved in preparing for a longer term arrangement from the start. For any of the management contract options, can supply discrete new capital projects through BOO schemes in conjunction with management contract. Tariffs below cost Explicit Government subsidy to Makes many kinds of PSP Availability of subsidies can make it hard to measure recovery make up the forecast gap possible, leading to efficiency the performance of the private entity. This problem between costs and revenue. This and service gains, which will in can be reduced if the subsidy is set at a pre- approach has been used in Puerto turn contribute to financial determined level. Rico and Guinea, viability. The subsidy may entrench non-cost-reflective tariffs. This problem can be reduced by specifying in advance a progressive reduction in subsidy. In Guinea, the World Bank's involvement in financing the subsidy helped make the transition path credible. Commit to tariff path which leads If tariffs are raised and Likely only to be feasible if tariffs are already close to to cost recovery. efficiency increased over the cost recovery levels, or the losses at the start would be life of the PSP, profits toward too large. the end of the period may be Hard for the Government to commit to such a plan, enough to offset losses at the since it will always have an incentive to prevent tariff start. This could make many increases once PSP has started and initial investments forms of PSP possible without have been made. subsidy.. 15 Annex I International Experience In Decentralization and Private Sector Participation . ......... .......~~~~~~~~~~~~~~~~~~~~~~~~ : ~~~~~~~~~~~~~~~~. :....: ...... ..... .:. :. ..: :.: -:-. --...............-,:-,- ,D,:-. :T bk A ~,4(ot) vroming: ConstrittoPPnId ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .,., .,,.. ,,.. . . .... : .. ,; .,........ .. ............ :.:.: :--- ..... Political interference Tariff setting procedures set out Contracts enforceable under Difficulties in specifying long term complete in tariff setting in contract normal contract law will often contracts, especially given the lack of information and (leads to risk which be the best protection for the unpredictable developments facing the sector deters PSP) private sector. This facilitates rational and cost-reflective tariff setting, which is a benefit in itself Independent regulator sets tariffs Facilitates rational and cost- Problem in achieving real independence and reflective tariff setting. professionalism for the regulator. Compared to a contract approach, a regulator may be better able to respond to unpredicted developments. Poor operational and Involve the private sector in the Greatest scope for efficiency Uncertainty and risk are usually highest for operation commercial efficiency, operation and maintenance of the gains often lies in operation of of the existing distribution system high UFW existing distribution and the existing distribution system commercial systems, not just in specific new schemes. 16 Annex I Internadonal Experience In Decentralization and PrltaJe Sector Participation iEE-:iR E- . iES iERE: i--iEE.- EDERiEiE:- iER:.:E....... ........ ............ ....... ...:: .............. .:: ..... ...........: E .: ...-..:::.. :.. ..-: :.-:.-.- ......................~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~: ...: ........ ...... ... ... :::-..::.. .: . ..: .. ..... : . ...... . :,,:E .C::: :E:,ER::: iRRiL .,, :::0:-::: , ::: EE::! fE::i T Able1A 4 iA (cent.) Ovromn Cosrit .to PSP in India Political problems Retamn the assets in public Helps reassure the public, and May not satisfy all concerns. For example, unions with private ownership, contract out only their politicians will still oppose privatization of operations ownership operation. Emphasize thatathe Continued Government involvement may reduce public sector: efficiency retains responsibility for water supply, but has simply delegated its management; continues to control tariffs and service standards. Most countries which have involved the private sector have used this approach. Retain partial Government Helps reassure the public, and Continued Government involvement may reduce ownership of the operating politicians, efficiency company. Oseta in the zch By partially align ing May create a conflict between the Government's roles Repbhip,cois ragoo ea lyeio Government interests with as regulator and owner ownershipoperthis n.EmphasizetattheContthose of the private investors, may reduce risk for the private sector 17 Annex 1 International Experience in Decentralization and Private Sector Participation ~~~~~~~~~~~~~~~. . :: . . ........ . ... .. ..: ...... ...... :-::.-:,, ,,,,,, .- . ..... . ::........ . Ta. .. ble- . :( t.). vrcomi C.onstran t $ in kia:: . , ......... ........ - ... : . ,,, . - --.. ........ . .. -. . . ... ... . .. ........... ... . * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.--. .,,,,-:::.:::..-. . ....: ..:: . ^ . .... Desire to involve the Privatize by creating an operating Ensures a good balance More costly to implement local private sector contract for a municipally owned between international and local (there is often a concern operating company, then selling participation that international shares in the operating company operators will dominate, to local investors as well as an and a desire to ensure international strategic partner. opportunities for the Ostrava in the Czech Republic is local private sector) a good example of this Contract out a range of functions Allows participation of 100% Does not in itself address overall system management which local private operators can local firms problems bid for. These will include Promotes competition May lose the benefits of international expertise operating particular plants, meter installation, billing. these problems could be removed if small contracts of this sort were combined with private participation in managing the overall utility Lack of capacity in Provide external assistance Provides ready access to Expensive and time-consuming smaller municipalities through use of consultants in international and domestic Only a short-term solution. Municipality will still to manage private letting contract etc. experience and expertise lack capacity to monitor and regulate operator once participation contract is let Set up long-term assistance to Provides continuing assistance May hinder development of internal capacity municipality through twinning after contract awarded Requires careful selection of any expatriate staff arrangement etc. Select operator on basis of Requires limited capacity to Hinders new market entrants from competing reputation rather than through a select operator competitive bidding process Imotnefrpuaincs g Importance of reputation acts Lack of formal competition makes it difficult to pentiveor evaluate operators' proposals perform well 18 Annex I International Case Studies in Decentralization: South Africa 2. South Africa - Case Study in Decentralization The South African experience provides lessons in moving from a system where decision-making power is centralized to one where responsibility is held at the local level. India can learn from South Africa particularly in the areas of: customer consultation; reform of regional water boards; and assisting in developing municipal capacity without taking away responsibility. 2.1 The Old System in South Africa As is the case in India, South Africa has a tradition of strong centralization of control and responsibility throughout many sectors of the economy, including water and sanitation services. Under the old system, rules and regulations were set in Pretoria and services provided through a combination of the government department (the Department of Water Affairs), public water boards and municipalities. There was little public input into decision-making at any level and what little transparency existed was achieved through heavy reliance on statute and regulation. As a part of the political process, regulation-setting tended to be cumbersome and the decision-making underlying it, incremental. The system worked because of the technical (i.e. engineering) skills of the central administrators in the Department of Water Affairs and because there was little concern for the majority of the population. 2.2 The Water and Sanitation Law Review In 1994, the Government of South Africa initiated a fundamental review of the water and sanitation law. There has been strong political support for wide-ranging reform of the water and sanitation sector, particularly from the Minister of Water Affairs and Forestry. The key themes to emerge from the South African review are: (i) customer consultation though decentralization - devolving responsibility for provision of water and sanitation services to individual municipalities; (ii)reform of the regional water boards - strengthening the boards' commercial focus through making their functions and objectives explicit; and (iii) boosting municipal capacity without taking away responsibility for provision of services. 2.2.1 Customer consultation Under the new constitution, the provision of water and sanitation services is now a responsibility of individual municipalities. This means that the municipalities must ensure water and sanitation services are provided, not that they must physically supply water and sanitation services themselves.4 Each municipality will achieve this through a public consultation and planning process culminating in the publication of a document called a "development plan". The customer consultation process will involve: providing citizens with information on the implications of different service options; seeking the views of the community as to the cost/quality of services they wish to receive; entering into contracts with water and sanitation service providers, or where the services are provided by the municipality itself, some form of agreement of the services to be provided and costs to be incurred; and publicly reporting against the development plan. The development plan will set out: the cost and quality of the services to be provided, and who will provide them; and the processes by which these levels can be altered, such as tariff-setting mechanisms. 4 There will be a duty on municipalities to provide water and sanitation services to the agreed standard in the lowest-cost way. 19 Annex I International Case Studies in Decentralization: South Africa 2.2.2 Reform of the regional water boards The regional water boards are public bodies which currently fill a variety of roles that commonly include provision of: bulk water services; water and sanitation distribution services; employment services (that is, the boards will deliberately over-staff* to increase local employment); skill-building services to municipal water and sanitation providers; and catchment management services. Consequently, like traditional parastatals around the world, the boards tend to lack accountability for service delivery. Boards announce the services they will provide-there tends to be little consultation (let alone negotiation) and no effective reply when a board fails to deliver as promised. The Boards also lack governance. That is, they lack accountability for the scope of their activities and overall efficiency; and, consequently, there is likely to be considerable room to improve their efficiency in delivering water and sanitation services. Under the reforms, several key changes are expected: * the roles of the boards will be made explicit. Boards will be responsible for the efficient delivery of bulk water services, with any other distinct services being provided under contract. For example, where a board operates a distribution system, in future it will be able to do so only under contract to the municipality or municipalities responsible for those water and sanitation services; the boards will be accountable to their customers for the bulk water services they provide. Boards will enter contracts for bulk water supply with the municipalities and/or distribution service providers they serve; the boards will be accountable for their activities and efficiency through a governance relationship between the Minister of Water Affairs and the Board of Directors of each board. The Board of Directors will publish documents stating its intentions for the coming periods and, at end of each year, reporting against those intentions; and, boards will be given autonomy to make operational management decisions. That is, boards will be allowed to select the mix of inputs, such as staff levels, to produce their services as efficiently as possible. 2.3 Boosting Municipal Capacity A critical impediment to effective local empowerment is the widespread lack of managerial and technical capacity in the municipalities. This gap is a legacy of the previous policy of Apartheid and therefore it is not surprising that the most effective water and sanitation sector organizations are those at the center- the Department of Water Affairs and Forestry and the regional water boards. Many municipalities have called on their local regional water boards for capacity-building assistance. A key challenge in designing the reforms has been to facilitate provision of that assistance without transferring responsibility for provision of services back to the center and without diluting the water boards' new requirement to be efficient in the provision of bulk water services. Under the review proposals, boards will be required to agree to the scope and nature of their activities with the Minster of Water Affairs. This agreement could, (and is expected to), include the approach each board will take in responding to municipalities' requests for capacity-building assistance. Where the 20 Annex I International Case Studies in Decentralization: South Africa request for assistance is not of commercial interest to a board and the costs of providing the assistance would impact significantly on the board's efficient performance of its functions, the board would be able to enter into a contract with the municipality to provide the services. 21 Annex 1 International Case Studies in Decentralization: Brazil 3. Brazil - Case Study in Decentralization The Brazilian experience provides lessons for India in managing decentralization in a large federal country. 3.1 The Old System in Brazil Like India, and the former system in South Africa, decision-making authority in the Brazilian water sector was previously very centralized. The majority of the resources for the water sector flowed from the central agency which, in order to maintain adequate controls, provided the bulk of resources to state water boards. The state water boards, due to their better access to resources, in comparison with other providers, were able to gradually expand their functions into distribution services, consequently cutting out local involvement. But the state system didn't work and it was widely regarded as inefficient and non-responsive to local requirements. 3.2 Brazil's Reforms Following the 1988 Constitution, tariff setting responsibility was devolved from federal to state level, with guidelines for the sector which called for decentralization of the provision of services wherever possible. Most states now have or are in the process of devolving responsibilities to municipalities. In turn, the municipalities are meeting their responsibilities through letting contracts to providers (who are either state and/or private firms). The first contracts to private sector providers are now being let. To date, the financial health of the sector has gradually improved since decentralization began. Regulators at the municipal level have a clearer understanding of local needs and conditions (such as ability and willingness to pay tariffs), and are able to facilitate public participation in decision-making by regulatory bodies. There remain, however, a number of concerns associated with decentralizing regulatory functions in their entirety to municipalities. These include: the relative lack of resources and, in particular, the necessary skills at municipal level. Of particular concern is the likelihood of relatively inexperienced and under-resourced municipalities agreeing concession contracts with major international operators in the water sector; the potential for conflicts of interest in cases where the municipality has a direct or indirect link with the service provider, and is also the regulator; and the regulation of systems of common interest, for example, water networks that are greater in extent than any single municipality they serve. 22 Annex I International Case Studies in Private Sector Participation: Puerto Rico 4. Puerto Rico - Case Study in PSP 4.1 Introduction Puerto Rico introduced private participation in its water and sewerage sector in 1995 to improve efficiency and access to investment finance. This case is of interest to India because: it is an example of a situation where the private sector has been successfully introduced in a step-by-step approach; it is unusual for a management contract, inasmuch as some risk sharing has been agreed; and it is notable for the emphasis placed on good labor relations. 4.1.1 Information on the Country General background information on Puerto Rico is provided in Table A 1-4. 1. Table L-4A. vervie inforationon Puerto.R]io Indicator Value ............................................................................................ ................ ................................................................................................................ GNP per capita (1993,$) 7,000 ........................................I.................................................................... ................................................................................................................ Population (millions, mid-1993) 3.6 .............................................................. ................. ............................ ................................................................................................................ Urbanization (1993, %) 73 4.2 Rationale for PSP Until 1995, water and sanitation services were provided by the Puerto Rico Aqueduct and Sanitation Authority (PRASA), a state-owned utility. PRASA delivered a little less than a million cubic meters of water per day. There were over 1 million water connections, supplying water to 98% of the population. Fifty percent of the population had sewerage connections, and all sewage discharged by PRASA received at least primary treatment. Tariffs were regulated by the Governor. The US Environmental Protection Agency, supplemented by Puerto Rican agencies, regulated drinking water and effluent standards. Three deficiencies of the public system mainly influenced PRASA's decision to introduce private sector participation in Puerto Rico's water and sewage sector: * water shortages: during 1994 a drought led to severe water shortages, with many areas receiving water for only 12 out of every 48 hours; * environmental standards: many of PRASA's sewage treatment plants failed to comply with strict EPA and local environmental standards; and * finance requirements: PRASA was a financial drain on the Government. For example, in 1994 it made a loss of over US$64 million, in spite of an operating subsidy of almost US$30 million, a contribution of over US$79 million to service long term debt, and capital expenditure subsidies of $53 million. 23 Annex I International Case Studies b Private Sector Participation: Puerto Rico The root cause of these problems was poor management, itself a product of political appointments and lack of incentives for good performance. PRASA had fallen into a vicious cycle of low expectations and low achievement on the part of both managers and staff. Asset maintenance, productivity, commercial operations and investment planning all suffered. Unions eroded management prerogatives such as promotion decisions, and contributed to over-staffing and inefficient work practices. PRASA chose to let a management contract with the aim of overcoming these problems. The contract was let to Professional Services Group (PSG) of the USA with whom PRASA had developed a close relationship. A contract summary is provided in Table A1-4.2. able A -4.2- Summay -of the Co-tra ct Area Comment Objectives Improving efficiency and management of investmnent ....... .............. .................. .................. ....................................................................................... .............. IIpoigefcec ngreto Option Management contract ................................................................................................... .................................................................. Coverage Water and sewerage throughout Puerto Rico ................................................................................................... ............................................................................................................................. First let 1995 Fi stlet ......................................................................... Length 5 years 4.3 Industry and Market Structure and Details of the Contract The structure of the water sector in Puerto Rico is summarized in Figure Al_4. 1. Government of | Puerto Rico l Puerto Rico Aqueduct Management Professional Services And Sewage Authority Contract Group (PSG) (PRASA) (US) .-Operates Owns ... Ow-nership o Contractual Relationship … 24 Annex I International Case Studies in Private Sector Participation: Puerto Rico Under the management contract, PSG is responsible for operations, using existing PRASA staff. The fee which is payable to PSG is composed of two elements: (i) non-labor operating costs (some of which are tied to price indices); and (ii) a management fee. The management fee is a fixed sum to be paid each year, which declines over the 5 year period. As a substantial proportion of the overall fee is fixed, PSG has strong incentives to improve efficiency. PRASA continues to pay for labor costs directly, but PSG receives bonuses for labor force reductions in the form of a fixed sum paid for each additional worker that leaves over and above the agreed reductions. The unions agreed to a voluntary labor force reduction program in exchange for a salary increase and productivity bonuses. PSG is responsible for commercial operations and customer service. Money collected is paid to PRASA, but PSG receives a bonus for increases in collections: a 30% bonus is payable in the fourth and fifth years of the contract for any increase in collections from existing customers, at existing tariffs. The contract does not envisage a tariff increase, and existing government subsidies for uneconomic rural water and sanitation services are continued. PRASA and the government fund maintenance and capital improvements. PSG recommends a maintenance and capital expenditure plan for PRASA's approval. PSG is then responsible for implementing the maintenance program, while PRASA is responsible for engaging contractors for capital works. The contract sets detailed operational and service standards. PSG is required to comply with environmental and drinking water quality regulations, and is itself liable for the fines and penalties if it fails. The main exception is when additional capital expenditure is required to make compliance possible, in which case PSG must inform PRASA of the improvements required. Other customer service and operational standards are set as targets. PRASA will take PPG's performance against the targets into account in deciding whether to terminate or renew the contract. 4.4 Process of Contract Award PSG became significantly involved in the water sector in Puerto Rico when, in 1993, the collective labor agreement for PRASA came up for renegotiation and a major strike was expected. The PRASA management approached international water operators for help. Only PSG (a Houston, Texas, based subsidiary of Compagnie Generale des Eaux (CGE)) offered to step in as a mediator. They succeeded in negotiating an agreement between PRASA and the unions. Further to their involvement in assisting with labor relations, PSG became involved in the operation of wastewater plants. The development of the relationship between PSG and PRASA is summarized in Table A1-4.3. 25 Annex 1 International Case Studies in Private Sector Participation: Puerto Rico T abl AIAJ Lik BeWtwNG and PRAS Link Date Comment . ...................... ......... Support re strike 1993 PSG was the only company to respond to the PRASA's request for support in the event of a strike occurring during the renegotiation of its labor contract. .......................................................... ...........................................................I........................................................................................................ Negotiation 1994/5 . PSG acted as negotiator between PRASA and the unions over the labor contract. .................................................................. ............................................................................ Wastewater treatment 1994 PSG won a contract to operate a new wastewater plant with its own staff. .......................................................... .......................... ......................................................................................................................................... Wastewater treatment 1994 PSG won a contract to manage three existing wastewater plants using PRASA staff. .............................................. .......................... ..................... Il, .....411 ....."Il ... Il- ... Management contract 1995 PSG negotiated a five-year management contract for all PRASA's operations The management contract for PRASA was negotiated directly with PSG. PRASA preferred this to a competitive tender as PSG's involvement in mediating conflicts between PRASA and the unions led both sides to rely on PSG. Further, PSG had previously won two competitive tenders for the operation and management of wastewater plants and was thus perceived as the front-runner in a competitive bid. 4.5 Conclusions Puerto Rico suffered from common problems in its water sector, notably inefficiency, water shortages and failure to comply with environmental standards. Repeated attempts at reform within the public sector failed. The overall lesson from the Puerto Rican experience is that contracting out management may offer a solution to these problems. Three lessons stand out: * step-by-step approach. Many countries are uncomfortable with making a long term commitment to the private management of the water sector. In Puerto Rico, the relationship between PSG and PRASA developed over time to the award of a management contract, as both sides developed confidence in the credibility of the other party as a partner. The importance of building relationships also effectively regulates the private sector; * risk sharing in a management contract. Unlike a traditional management contract, the Puerto Rican model transfers risk to the private operator, and gives it performance incentives. In particular, the private operator bears the risk of (non-labor) cost increases, and of fines for regulatory non-compliance. The operator also has incentives to reduce staff numbers and increase collections; and * labor relations. Bringing in private managers can offer an innovative way to break the deadlock between managers and unions. In Puerto Rico, the unions welcomed the private sector managers. 26 Annex I International Case Studies in Private Sector Participation: Trinidad and Tobago 5. Trinidad and Tobago - Case Study in PSP 5.1 Introduction Trinidad and Tobago is one of a number of Caribbean islands that have sought to introduce the private sector into the water industry. Of particular interest in the Indian context is the two-stage process adopted for PSP in Trinidad and Tobago, under which an initial management contract is to be followed by a long-term concession arrangement. The intention is to introduce the private sector rapidly under conditions of limited capacity of the public sector and limited information (conditions which are likely to apply in much of India). 5.2 Rationale for PSP Prior to the introduction of PSP, the state utility in Trinidad and Tobago, the Water and Sewerage Authority (WASA), was characterized by inefficiency and financial non-viability. Almost 40% of the population received water supplies for less than 12 hours a day, unaccounted-for-water was around 45% of the total supplied and the ratio of staff per 1,000 water connections was 12.8 as against 1.5-2 for efficiently-run utilities in developed countries. Following the 1991 elections, a new reforming government determined to improve the performance of WASA through a series of reforms, including the introduction of the private sector. The preferred option for PSP was a long-term concession arrangement. The Government, though, recognized that it was not possible to let such a contract rapidly, for two main reasons: (i) letting a concession would require amending the legislation governing WASA, which would be a time consuming process; and (ii) there was limited information available on the condition of WASA's infrastructure and operational performance. This increased the risk to private investors, and also made it difficult for the Government to develop an effective tariff-setting regime which would be required before letting a concession. However, the Government wished to obtain the benefits of PSP as rapidly as possible. Therefore, the decision was taken to let a two-stage contract, in which an initial management contract, the Interim Operating Agreement (IOA), would be followed by a long-term concession arrangement, the Permanent Operating Agreement (POA). Following a competitive bidding process, the management contract was awarded to a consortium of Severn Trent/Wimpey in April 1995. The contract did not actually take effect until April 1996, after a new government elected in November 1995 had had the opportunity to examine the contract. 5.3 Industry and Market Structure and Details of the Contract 5.3.1 The Interim Operating Arrangement Under the IOA, WASA remains a public utility under the direction of the Ministry of Public Utilities, and continues to own the water supply and sanitation infrastructure. WASA is responsible for planning new investment, billing and collection. Severn Trent/Wimpey provide a management team to WASA under a five-year management contract, and are responsible for operations and maintenance, and also meeting investment targets. The contract contains an agreed business plan, and a number of targets for service coverage and quality. As part of the 27 Annex I International Case Studies in Private Sector Participation: Trinidad and Tobago preparation for the POA, the operator is also required to collect the information necessary for the Government to develop a tariff regulatory regime. Failure to meet these targets provides grounds for the termination of the contract. The management fee paid by WASA to the operator is composed of two elements, a fixed element and an element paid as a bonus for meeting the specified performance targets. As an incentive to the operator to minimize WASA's operating deficits, any such deficits must be covered out of a non-guaranteed loan by the operator to WASA. Financing of new investment, and also additional funds to cover maintenance of the system, are provided by the World Bank through a loan to the Government of Trinidad and Tobago. Regulation of the sector is undertaken by the Government of Trinidad and Tobago, through a variety of bodies, notably the Public Utilities Commission which sets tariffs through a quasi-judicial process. 5.3.2 The Permanent Operating Arrangement The switch to the POA can take place any time after three years following a request by either WASA or the operator. Under the POA, the private operator will add the responsibility for the financing of investment, billing and collection to its current responsibilities, under a thirty-year concession contract. WASA will retain the ownership of the sector's assets as a public holding company. By the date of transition to the POA, it is planned that a new tariff regulatory regime, based on a price- cap approach, will be in place. This will be administered by the Public Utilities Commission, which will be freed from current constraints on tariff-setting. A new regulatory body, the Water Resources Agency, is also being established to oversee the private operator, including the regulation of water quality, although its relationship with the Public Utilities Commission has not yet been fully established. 5.4 Process of Contract Award In letting the management contract, the decision was taken to allow the winning bidder preferential rights to bid for the concession contract. In letting a two-stage contract, the key problem is how to run a properly competitive bidding process for the second phase when the incumbent has a clear informational advantage over potential competitors. By allowing preferential rights to the winner of the first phase, it was hoped to overcome this problem. An initial pre-qualifying round was held in 1994. Twenty-one firms submitted pre-qualification documents. Of these, 7 were water companies and 14 were consultancy firms. The focus of the government was on finding a partner for the longer-term concession contract, and the consultancy firms were therefore rejected as not having sufficient financial strength. Of the water companies, 5 firms were invited to make final bids, and were asked to submit three proposals - one technical, one financial and one supplementary. Evaluation of the proposals was undertaken in three stages. Firstly, the technical proposal was evaluated on the basis of: the business plan proposed; the candidates proposed for top management posts; a schedule for improving efficiency defined as the population with less than 24 hours service; and the split between the fixed and bonus elements of the management fee, with more points awarded for greater assumption of risk by the bidder through a higher reliance on the bonus element. 28 Annex I International Case Studies in Private Sector Participation: Trinidad and Tobago All those firms achieving a minimum score on the technical proposal (all 5 bidders did so) qualified for the next stage, where their financial proposal was evaluated on the basis of: the total management fee required; the amount of the loan to be extended to WASA; and the interest rate of the loan. In the supplementary proposal, bidders were asked to provide alternative options to the proposed management contract, and also responses to a request for proposals for a water treatment plant to serve an industrial town in Trinidad and Tobago. This proposal was intended to form a safeguard in the event that the management contract proved to be unattractive to all bidders. To preserve transparency, only the supplementary proposals for the top bid received was to be opened (or the top two if within 5% of each other). In line with the assignment of preferential rights to the winner of the management contract, once the switch to the long-term concession is made, the existing private operator will be invited to negotiate the terms of a contract with the Government. Only if there is failure to meet agreement will a competitive bidding process be undertaken, from which the existing operator will be excluded. 5.5 Evaluation of PSP As the management contract has only been in operation for a year, it is too soon to have much evidence on the impact of PSP on the sector. WASA's performance has improved, but this is primarily due to measures taken before the contract came into effect, including a 35% increase in tariffs in 1994 and continuing reductions in staff numbers through a process of voluntary redundancies and retirements. As the winning bidder for the first stage management contract would be granted preferential rights for the subsequent concession contract, the Government devoted almost as many resources to letting the initial contract as it would have to a longer-term agreement. An alternative approach which may well have reduced these costs would have been to exclude the winner of the first stage contract from bidding for the second stage, and awarding the management contract to a consultancy firm with no interest in the concession. 5.6 Conclusions Trinidad and Tobago offers three main lessons for India: overcoming uncertainty. In Trinidad and Tobago, the Government wished to introduce PSP rapidly, but the lack of information available on the sector prevented it moving immediately to its preferred option of a long-term concession. The two-stage process adopted allowed it to gain immediate benefits from PSP whilst providing time to reduce uncertainty and establish the requisite legal and regulatory frameworks for a concession; increasing competition for the market. The multi-stage approach, providing an opportunity to build a longer-term relationship, was very successful in attracting a large number of bidders who may have been less interested in a stand-alone management contract; and raising private finance. Evaluating bids on the basis of the amount and terms of the finance that the bidder was prepared to make available to WASA is quite a novel way of raising finance from the private sector. 29 Annex I International Case Studies in Private Sector Participation: Guinea 6. Guinea - Case Study in PSP 6.1 Introduction Guinea provides a good example of a French-inspired contract in operation in a developing country. 6.1.1 Relevance of Case Study We have selected Guinea as a case study for three main reasons: * it is a comparatively well-documented example of a lease contract that is seen to be successful; * the contract was successfully designed to overcome a number of potential problems. However, subsequent experience has raised further problems associated with the existence of perverse incentives and lack of appropriate penalties under the contract; and * the World Bank played a key role in the letting of the lease by providing a time-limited declining subsidy to the operator. 6.1.2 Information on the Country Table Al-6.1 provides basic overview statistics on Guinea. Table Al-6.1. Summary Statitics for GuS, 1 GNP per capita (US$ not-PPP') 500 Population (millions) 6.3 ....... ............................. ... ............................................................ .............................................................. Urbanization (%) 28 .................................................................................................................................................... ................................... Proportion of urban population living in capital city (%t 84 Annual withdrawal of water as % of total water resources 0.3 Notes: a Riviera 1996, p.15 'Purchasing Power Parity Source: World Development Report 1995 6.2 Rationale for PSP Until the late 1980s, Guinea had one of the least-developed urban water supply sectors in West Africa. Water service coverage was low, with less than 40% of the urban population having access to piped water supplies. Where supplies were available, they were frequently unreliable. Levels of unaccounted- for-water were high and other indicators of performance were poor. Tariffs failed to cover operating and debt service costs (operating revenues were only sufficient to cover 82% of operating costs).5 Brook Cowen 1996, p.1 30 Annex I International Case Studies in Private Sector Participation: Guinea Consequently, the state utility was unable to finance the necessary investments to expand service coverage and improve the quality of service. The Government initially sought to improve the financial viability of the sector through the restructuring of the state water utility. When these attempts proved unsuccessful the decision was taken to invite the private sector to participate in the sector. Two main obstacles to private sector participation were perceived: * the private sector was assumed to be unwilling to make significant investment commitments in a country with no experience of PSP in the water sector, and consequently limited Government credibility as a long-term partner and/or regulator; and * at the time of letting the contract, tariffs were significantly below cost-recovery levels. Increasing tariffs to cost-recovery levels immediately was unfeasible, given the degree of hardship this would have caused. However, to become involved the private sector required credible guarantees that sufficient additional revenues would be forthcoming in the interim. In response to the first of these obstacles, the Government decided to let a lease contract covering urban water services. The Government retained responsibility for investment in the sector. By limiting the risk to the private sector in this way, it was hoped that private sector involvement in the sector would be facilitated, offering the potential for immediate gains in terms of improved availability and efficiency of service provision. In the longer-term, such an approach also provided the opportunity for the Government to develop its credibility, and create an environment more conducive to private sector investment and risk taking. The second obstacle was overcome by the provision of an International Development Association (IDA)6 loan. This covered the difference between tariff revenues and costs in the initial years of the lease, and declined step-wise as tariffs were increased towards cost-recovery levels. The basic parameters of the contract are summarized in Table A 1-6.2 below. Tabe . S Gui Water iConta 0-tt- tiitt'.'.....-t .. :i-:-,' .:A .t' t 'L.Et0t. 0 . .'t.... .. .......t..'" . ." ::0.:0. -0.'t'' '.'. T. t:T. ... ... .......:t:::. Objectives Initially - improved efficiency and better management of investment Longer-term - accessing new sources of investment finance .............................................................. .............................................................................................................................................................. Type of Contract Lease Service Area Conakry (capital) and 16 smaller towns ............................... ....................................................................................................... Population Covered 1,500,000 .............................................................. ....................................................................................................................... . First Let August 1989 ............................................................................................................................................................................................................................. Length . 10years Source: Riviera 1996 (except objectives) 6 IDA is part of the World Bank group. 31 Annex I International Case Studies in Private Sector Participation: Guinea 6.3 Industry and Market Structure Overall policy for the water sector continues to be set by the Government. A new, wholly state-owned, national water authority, Societe Nationale des Eaux de Guinee (SONEG), owns the water supply infrastructure in the area covered by the lease. SONEG is responsible for sector development, including planning and implementing investment, and servicing the sector's debt. SONEG is also responsible for the regulation of tariffs. A separate water management company, Societe d'Exploitation des Eaux de Guinee (SEEG) is responsible for operating and maintaining urban water supply facilities, billing and collection, under the lease contract with SONEG. A proportion of tariff revenue collected is paid to SONEG as a lease payment (the relevance) and the remainder is retained by SEEG. The lease payment is intended to cover SONEG's costs, primarily financing investments. In addition, SEEG also acts as a service contractor to SONEG for rehabilitation and extension works, for which it is paid on a cost-plus basis. SEEG is jointly owned by the state (49%) and a private foreign consortium formed by the French water operators Compagnie Generale des Eaux and SAUR (51%). These companies provide management services to SEEG under a separate management contract. The degree of control exercised by the Government over SEEG is greater than suggested by its minority shareholding as it is also responsible for nominating the members of SEEG's Board. Figure A 1-6.1 illustrates the current structure of the sector. 32 Annex I International Case Studies in Private Sector Participation: Guinea Ka IGovernment of Guinea Ownershiip o (Ministry of Natural Contractual Relationship - - - Resources & Energy) 100% 49% Lease Contract Management' Owns -- Operates Contract Generale des EBaux ssets & SA UR Customers 6.4 Details of the Contract 6.4.1 Allocation of Risks and Responsibility Table Al-6.3 summarizes the allocation of responsibilities between the various industry players. By taking the responsibility for financing and implementing investment on itself, the Government significantly reduced the risk to the private sector. In addition, by taking a significant stake in the operating company, the Government both increased its credibility as a partner for the private sector, and gained some control over the decisions of the operating company in addition to its ability to regulate tariffs through SONEG. However, this does raise the potential for conflicts of interest to develop between the Government's various roles as manager, owner and regulator for the sector. 33 16.~~~~~~~~~~~~~~f. 0.d :~~~~~~~~~~~0 ti. f I-t U~~~~~~ 01 E §e| te|i3 4- . 0 X4X . o 0 z ~0 -~~~f. 0 .2- C > 0~~~~~4 o Ci~ ~~~~ - 0 .~~ 0 *-C~)0 0 C 4 Annex I International Case Studies in Private Sector Participation: Guinea 6.4.2 Price Regulation and Renegotiation Under the lease contract, SONEG is responsible for approving tariffs. The contract was awarded on the understanding that tariffs would be raised to cost-recovery levels over a number of years. In the interim, the World Bank Group provided a declining low-interest loan to cover foreign exchange costs, and the Government provided a declining subsidy to cover debt servicing costs, including dividend payments to foreign operators. The contract allows for indexation of tariffs by permitting: quarterly changes to reflect exchange-rate movements; and biannual changes to reflect domestic inflation. There is no requirement on SEEG to provide cross-subsidized water services for low income households. Tariffs are set on a cost-reflective basis for both residential and industrial households, although these do not meet cost recovery due to the continuing subsidy. SEEG has recently proposed a differentiated tariff structure to introduce cross- subsidization and the provision of a 'lifeline' block. The contract allows for price reviews to be held once every four years. The first price review in 1993 is discussed in Section 6.6.2, below. 6.4.3 Quality and Service Coverage There is no specific quality regulator in Guinea. Instead, the contract specifies performance standards. The operator is required to provide a $0.4 million performance bond against which penalties for not meeting these standards can be levied. Although this sum appears small, it is likely to reflect a significant element of the profits in any one year of a utility operating in a small developing country. 6.5 Process of Contract Award The contract was awarded through an international tender process. This commenced with an initial pre- qualifying round. Six firms were pre-qualified and invited to bid. In the end only two consortia submitted bids. Bids were evaluated on the basis of: the overall price level to be paid by consumers, relative to a benchmark price level established by consultants; and the proportion of tariff revenues collected that would be retained by the lessees (the lease contract rate) rather than paid to SONEG. The winning consortium offered a price reduction of 30% relative to the benchmark estimate, whilst the losing consortium offered a 13% reduction. Therefore, despite the small number of bidders the competition for the market would seem to have been successful in reducing costs. 6.6 Evaluation of PSP Table A1-6.4 below summarizes the impact of private participation through physical and financial indicators of performance. The following sections discuss the results of private sector participation in more detail and the problems that have been encountered. 35 Annex I International Case Studies in Private Sector Participation: Guinea Table A1-6.4. Performance Indica Befor and After PSP in Gu.iea Before PSP (1988) After PSP (1995) ............................................................................................................................... ....................................................................... Physical Performance .............................................................................................................................................................................................................................. Connections 16 500a 33 500a ....................................................................................................... .......... ................................... ........................................................................ Proportion of Population With Access to Safe 40%a 52%a Water ....................................................................................................... .............................................. ......................................................................... Production Capacity (million m3 pa) 7.5 28.7a ....................................................................................................... . ............................... ............................................................................................................ Unaccounted-For-Water 40%b 470/oC ....................................................................................................... ................................................................................. Metering (proportion of all connections) 5%`i 95 Financial Performance ..................................................................................................................................................... ........................................................................ Average Tariff (US$/m3) 0. 12c 0.90C ...................................................................................................... .............................................. ........................................................................ Operating Costs/Operating Revenues 122%c 71%/o' Sources: a Riviera, 1996 b LE c Brook Cowen, 1996 6.6.1 Physical Performance Service Coverage Under PSP the number of connections has increased rapidly, more than doubling over the period since the lease was let. As a consequence, the proportion of the population with access to safe water has significantly risen. However, the division of responsibility for new connections between SEEG, which provides construction services, and SONEG, which finances them, has led to disagreements between the two, and a slower rate of growth than could otherwise be achieved. High tariffs have also led to almost a third of connections (10,000) becoming inactive as a result of non-payment. Unaccounted-For-Water * Unaccounted-for-water has actually risen over the period of the contract, from 40% in 1988 to a level of 47% in 1995. These figures do not tell the whole story. UFW peaked in 1993 at 62% and has since declined. Reasons for the increase are not the fault of PSP itself, but rather the incentives contained in the contract: (i) payment for raw water. SEEG is not charged for the raw water it uses in line with the current over-supply of water. Consequently, it faces no incentives to minimize its use of water; and (ii) maintenance of the system. As SONEG is responsible for financing replacement investment, the incentive on SEEG is to cut expenditure on the maintenance necessary to control leakage. 6.6.2 Financial Performance Progressive tariff increases, beginning with an increase in the tariff from US$0.12/m3 to US$0.25/m3 at the start of the lease, have led to average tariffs that now more than cover costs. Since 1988, tariffs have 36 Annex I International Case Studies in Private Sector Participation: Guinea risen by 650%, to the current level of US$0.90/m3 and SEEG's revenues have risen tenfold7. As a consequence, the operating ratio (the ratio of operating costs to operating revenues) has improved from 122% to 71%. The new tariff level is extremely high in both developing country terms, and relative to developed countries. Domestic customers in Guinea are estimated to face average bills that are higher than those in Milan, Paris and London. This increase has led to 30% of connections becoming inactive. One factor driving high costs has been the small scale of the sector. For example, SAUR has stated that running SEEG effectively requires at least eight expatriate staff to be based in Conakry.8 With only 20,000 to 25,000 paying customers, this is likely to prove unaffordable. At the 1993 price renegotiation it was agreed that SEEG could increase the amount of the revenue that it retained by 50% owing to additional costs incurred because of delays in the renovation and extension program. This increase was not, however, passed on to the customer but was met through a reduction in the fee paid by SEEG to SONEG. Whether this is a sustainable solution depends on the ability of the relevance to meet the investment requirements of SONEG-SONEG uses its share of the tariff to finance its activities which are principally investment related. So, cutting its share could lead to future tariff increases-which have to be agreed by the government-or the need for government funds to meet investment needs. 6.6.3 Problems Encountered Problems have been encountered in several areas: government non-payment and enforceability of the lease contract; perverse maintenance incentives; and information provision. Each of these is considered in turn. Non-Payment The Guinean government is the largest single water consumer, accounting for 42% of SEEG's turnover. The government pays SEEG for the maintenance and operation of public standpipes. However, the government failed to pay its water bills throughout 1994 and 1995. This threatens the financial viability of the whole system. SEEG retaliated by withholding the relevance, breaching its contractual duties. This situation illustrates two problems: the impact of the dependence on a single customer; and the need for effective penalties for both the lessee and the government. The latter is important since the lessee needs to be able to either disconnect non-payers or be able to pass the problem to another agency-in Mexico where disconnection is illegal, a government agency deals with the problem of non-payment, not the private operators. Of course, the government may be a special case but the private operator does need some formal sanction, rather than being forced to break its contractual obligation. Similarly, if the operator breaches its obligations the government, or regulatory body, needs to be able to impose sanctions on the operator with the final sanction being the revocation, or suspension, of the contract-the on-going dispute in Tucuman in Argentina is an example of where the imposition of severe sanctions are being threatened. 7 Brook Cowen 1996, p. I 8 Riviera 1996, p.59 37 Annex I International Case Studies in Private Sector Participation: Guinea Maintenance Incentives There is the potential for conflict between SEEG and SONEG in relation to the maintenance of assets, as was briefly discussed in the section on UFW. The division of responsibility for maintenance and new investment is split between SEEG and SONEG respectively. This provides an incentive for SEEG to limit its maintenance expenditure, leading to a faster deterioration in the infrastructure and the requirement for SONEG to undertake replacement investment. This will always be a problem for lease contracts, although it is not a problem for a concession in which the private operator is responsible for both maintenance and investment. One solution that has been adopted in Guinea is to provide a detailed asset inventory and rehabilitation schedule. Monitoring One element of the contract that does not appear to have been successfully implemented is the requirement for SEEG to provide SONEG with detailed financial and operating information. This is required to inform the decision making process at the price reviews and ensure that the company is meeting its other obligations. SEEG does not appear to be fully complying with this requirement and SONEG has no real ability to enforce the provision of the information. It would be expected that the government, through its control of SEEG's board, would be able to monitor performance and enforce compliance with reporting requirements. However, the government appears to have preferred to play a passive role as co-owner. This problem is more marked in the Guinean case since SEEG also undertakes construction work relating to investment for SONEG on a cost-plus basis. SONEG is currently unable to separate the two roles of SEEG from the data provided and so unable to assess whether either of the operations is being undertaken efficiently. 6.7 Conclusions 6.7.1 Summary of PSP Experience The national water and sewerage contract let in 1989 has proven successful in meeting its primary aims and is often held up as an example of a successful case of private participation. This is true by most measures - service coverage has increased, UFW has reduced from its peak and tariffs now fully cover costs. There have been problems, however - SEEG has been unable to enforce government payment of bills, the split between investment and maintenance leads to problems of incentives, and SONEG has found it difficult to monitor SEEG's performance. This has resulted in a lower than potential service coverage (at 60%) and a still high UFW (of approximately 47%). Most of these problems could have been overcome through better design of the contract and enhanced regulatory and monitoring capability in SONEG and, as such, provide useful lessons for other attempts to involve the private sector. 6.7.2 Lessons to be Drawn for India In Guinea, the key problems faced in getting the private sector involved in the water sector were: * the uncertainty created by the lack of credibility of the Government as a partner and/or regulator; and * the private sector need for credible guarantees that sufficient additional revenues would be forthcoming whilst tariffs remained below cost. 38 Annex I International Case Studies in Private Sector Participation: Guinea Both of these problems are likely to exist in the water sector in India. Guinea offers two main lessons on how these problems might be overcome: * PSP under uncertainty - in Guinea, the lack of credibility of the Government as a partner/regulator, and the consequent uncertainty led to a high perceived risk to private operators. As it was considered unlikely that they would undertake large investments under these conditions a lease approach was adopted; and * PSP where tariffs are below cost recovery levels - the use of a declining subsidy provided by the Government and World Bank, to cover the difference between tariff revenues and costs whilst tariffs rise to cost recovery levels, offered a guarantee to the private sector that the necessary revenues would be forthcoming. By raising tariffs to cost-recovery levels, the private sector was also reassured about the future financial viability of the sector. The successes of PSP in Guinea have been undermined to some extent by a number of perverse incentives built into the contract. These could have been overcome by: * allocating responsibilities properly - in Guinea the allocation of responsibilities has led to a number of perverse incentives. Where perverse incentives are created, as was the case with maintenance and replacement investment in Guinea, solutions can be devised. As much as possible, however, these should be enshrined in the original contract rather than parties being forced to renegotiate once the contract has been let; * strengthening the monitoring and regulatory structures - absence of monitoring indicators in the lease contract impeded SONEG's ability to evaluate SEEG's performance, and resulted in insufficient encouragement to SEEG to maximize its operational efficiency. Concrete performance monitoring indicators, including the pace at which they are to be achieved, should be written explicitly into lease contracts. * charging for raw water - allowing a company access to raw water for free creates the wrong incentives. This may not be a major problem when an oversupply of water exists but it is still storing up potential problems for the future; and * effective, graduated enforcement systems - the government, or regulatory body, needs an effective penalty system with penalties that match the non-compliance. For example it is excessive to propose the revocation of a contract for non-compliance with information reporting requirements. However, in Guinea SONEG has no alternative means of enforcement. Building an effective penalty system depends on the regulatory body having a sufficiently significant hold over the operator to make the threat credible-performance bonds are one way of achieving this. 39 Annex 1 International Case Studies In Private Sector Participation: Ostrava (Czech Republic) 7. Ostrava (Czech Republic) - Case Study in PSP 7.1 Introduction Ostrava is the third largest city in the Czech Republic and a major industrial center. Ostrava offers a good example of the approach to the water sector adopted in the reforming economies in Eastern Europe, and also provides an example of what appears to be a successful institutional structure. 7.1.1 Relevance of Case Study Ostrava provides three useful examples for India: * as a country which followed a policy of 'municipalization' of its water sector (see below), the - Czech Republic shows how the approach recommended for India might work in practice; * the industry and market structure adopted in Ostrava seems to have succeeded in overcoming potential opposition to foreign involvement in the sector, and allowed for local private sector involvement; and o it offers an example of how a municipality can rapidly introduce the private sector, even where its capacity to run a competitive bidding process and evaluate bidders is low. 7.1.2 Information on the Country Table A1-7.1 provides basic overview statistics on the Czech Republic. Ta i1 -7.. n sts or t eCz e ubli c, 3 GNP per capita (US$ PPP-basis) 8,900 Population (millions) 10.3 ................................................................................................................................................... ........................................................................... Urbanization (%) 65 ............................................................................................................................................................................................................................... Annual withdrawal of water as % of total water resources .4.7 Source: World Development Report 1995 7.2 Rationale for PSP The introduction of the private sector into the water sector in the Czech Republic was part of the overall transformation of the economy to a market system. The two principal objectives for PSP were: access to private finance - years of under-investment meant new capital was needed; and efficiency - utilities were typically overstaffed and performed poorly. A private operator would have greater incentives to improve efficiency. Prior to privatization, the water and sewerage sector in the Czech Republic was state owned and organized on a regional level. The restructuring of the industry comprised two steps: 'municipalization', whereby the 10 regional companies were broken up to various extents and devolved to the municipal level; and private participation in some of the new companies. 40 Annex I International Case Studies in Private Sector Participation: Ostrava (Czech Republic) The water and sewerage companies were restructured in two main forms: 'mixed' companies; and separate ownership and operation. Mixed companies own and operate the water and sewerage assets. Shares in mixed companies are principally (80% to 90%) held by the municipalities served, whilst minority stakes were allocated to private individuals through the 'coupon privatization' scheme. The form of municipalization and privatization adopted was, in large part, determined by municipal officials and the management of the water and sewerage companies. In consequence, the level of municipal ownership and responsibility varies case by case. As an example, the following details the approach adopted in North Moravia (the region containing Ostrava). 7.2.1 Restructuring in North Moravia Prior to privatization, the 2 million people living in Ostrava City and the surrounding towns and villages were served by the state-owned North Moravian Water and Sewerage Company, SMVAK. SMVAK owned and operated the water and sewerage infrastructure. The infrastructure comprised the interconnected Ostrava regional water supply system, and a number of smaller systems. In 1990-91, SMVAK was divided along functional lines into: the production and bulk supply of water (OOV); the infrastructure distributing water to Ostrava City; a number of smaller parts based on the existing independent water and sewerage systems; and a distribution function covering those municipalities, except Ostrava City, served through the regional supply system. The infrastructure system serving Ostrava City was placed in the ownership of the municipality, and the right to operate and manage the infrastructure was assigned to an operating company (OVAK) under a thirty-year contract. The ownership of the remaining assets in the regional system (water production, bulk supply and distribution), and the perpetual right to operate them, were left with SMVAK. The ownership of SMVAK is split between the 170 municipalities served by the system. The shares of SMVAK were allocated roughly in proportion to the municipalities' use of the water production and distribution services offered by SMVAK. This decentralization is discussed in more detail in the relevant case study on the Czech Republic contained in the case studies on decentralization. Figure A1-7.1 provides a schematic illustration of the current structure of the water sector in North Moravia. Figure A 1-7.2 illustrates the institutional structure of the sector. 41 Annex I International Case Studies in Private Sector Participation: Ostrava (Czech Republic) Morvia (ilhaUtv'on1' - - - - - - - - - - - ---- -_---- --- - - -- --- -- -- / I~ ~~ ~ ~~~~~~~~~~~ I I ~~~~z\ I: . , Ostrava ~ ~ ~ usomr - --------- - ----- 42 Annex I International Case Studies in Private Sector Participation: Ostrava (Czech Republic) 7.2.2 PSP in Ostrava City At privatization, the share capital of OVAK was allocated to Ostrava City, investment funds and private individuals, including employees. The new municipal leadership in Ostrava had little experience of running municipal services, and, given the pace of change, had little time to learn. The lack of experience extended beyond the municipality itself. Other shareholders including individuals and investment funds also had little experience of managing municipal services. Hence, it was felt, a long term foreign partner would provide international experience, help institute best commercial practices following years of state owned operation, and thereby ensure efficient operation. The municipality therefore signed a shareholders agreement with Lyonnaise des Eaux (LDE), a leading French water operator. The basic parameters of the partnership are summarized in Table A1-7.2 below. -. .aeA7. .Sa..... ..r..a........ WaterContract Objectives .Introducing the experience lackn g in Ostrava .............................. ...... ........... .. . 2........................................................................................ Shareholders agreement (municipality and LDE) *Technical Assistance cont[ract (OVAK and LDE) Service Area . Ostrava Population Covered 332,000................... ...................................................................... ....................................................................................................................................................... FirstyLet 1994 Length 30 years lease 10 years shareholders agreement Source: London Economics' discussions with OVAK and Ostrava Municipality, November 1995 7.3 Industry and Market Structure The Government's role in the Czech water sector is limited. It continues to retain responsibility for overall sector policy, and also sets environmental standards and carries out limited tariff regulation (see Section 7.4.2). Outside this, the main role of the Government, through the Ministry of Privatization and the National Property Fund9 has been to foster potential investors in the water and sewerage sector. The water and sewerage business in Ostrava is governed by three sets of relations between OVAK, the municipality and LDE. These are: a shareholders agreement between LDE and the municipality; an operating contract between OVAK and the municipality; and a technical assistance agreement between LDE and OVAK. Figure A1-7.3 illustrates the current structure of the sector. 9 The National Property Fund is the main transitional custodian of Government assets being restructured or privatized. 43 Annex 1 International Case Studies in Private Sector Participation: Ostrava (Czech Republic) FigugeA Sfrut r of tW Sedor inQOta - - - Ostrava City Shareholders Lyonnaise des (Municipality) Eaux Lease TA 7 Contract Agreement - / 20%\ s - . /31% 8 ~OVAK p (Operating Company)l Owns Operates Key C Assets KOwnership Contractual Relationship--- The Shareholders Agreement Once selected by the municipality as a partner, LDE proceeded to buy shares in OVAK from investment funds and private individuals. Together, the municipality and LDE hold a majority share, with LDE -holding 31% and the municipality 20% of OVAK (the remainder are held by Czech investors including institutional funds, individuals and employees. A residual is held by the National Property Fund)'°. LDE and Ostrava's conduct as shareholders is governed by a shareholders agreement. The shareholders agreement is initially for 10 years, although it may be renewed for the duration of the operating contract between the municipality and OVAK. 1o Due to an error at the time of privatization, the infrastructure assets of Ostrava City were included in OVAK's books, making the National Property Fund by far the largest shareholder in OVAK with 92% of the shares. This was due to be corrected in 1995 by the transfer of the assets to the municipality and the cancellation of an equivalent amount of shares held by the National Property Fund. The figures for shareholdings given are for the period following this transfer. 44 Annex I International Case Studies in Private Sector Participation: Ostrava (Czech Republic) LDE and the municipality have agreed to vote together in the Annual General Meetings of OVAK. Under the Czech Commercial Code, the AGM has absolute jurisdiction over the articles of association, equity capital, and disposals of property. The shareholders agreement sets out LDE and Ostrava's rights to nominate Directors to the Board of OVAK, and members of the Supervisory Committee. Specifically, LDE have the right to nominate 2 out of 5 Directors and 2 out of 6 Committee members. These include the General Manager of the Board, and the Vice Chairman of the Supervisory Committee, whilst the municipality has the right to nominate the Deputy General Manager and the Chairman. Key decisions by the Board of Directors have to be made by a super majority; in other words, with the support of at least 4 of the 5 members. The areas affected include decisions on investments and budgeting, banking arrangements, water tariff recommendations to the municipality, organization and management structure, and all sales or contracts over CZK 1 million (approximately US$400,000). To date, the municipality and LDE have always managed to find a consensus position. The implicit pressure on both is significant. LDE stand to lose reputation by public disagreement. Given that reputation is considered paramount in winning and maintaining long term relations, LDE have a strong incentive to ensure that a compromise can always be reached. In the event of dispute, the agreement sets out procedures for arbitration. Both parties are bound by independent arbitration based outside the Czech Republic and France. Should arbitration fail, or either partner decide to divest, the agreement specifies that the remaining partner will have first refusal on the others shareholding. The price of the shares in these circumstances is to be determined by an evaluator who will set a 'fair' market price. The Operating Contract Under the lease contract, OVAK rents the assets in exchange for the right to operate and maintain the infrastructure. OVAK is responsible for all operational matters including water production, metering, billing and collection, and is expected to maintain the assets it rents. At the end of the contract period, OVAK is expected to return the assets to the municipality in as good a condition as it inherited. OVAK advises the municipality on its investment program, and recommends strategies highlighting the tariff implications. Ultimate responsibility for investment, however, remains with the municipality. The rent is re-negotiated annually between OVAK and the municipality." The rent has initially been set to cover the debt service costs of the infrastructure inherited by the municipality from the National Property Fund. Over the coming years, the rent will finance further investment in water and sewerage infrastructure. The Technical Assistance Agreement LDE's principal vehicle to instill change is technical assistance. Technical assistance from LDE to OVAK is governed by contractual arrangements. Under the contract, LDE provides manuals and advice 'transferring' LDE's international experience and skills to OVAK. In addition, LDE have recruited a l The choice of a 'rent' for the infrastructure assets was chosen due to specific tax advantages under Czech law. If and when the tax laws change, the form of this payment may change. Under a typical French concession, the operating company pays not a rent but a 'user charge'. This may be a one-off or an annual payment, and is not tied to the water and sewerage sector. 45 Annex I International Case Studies in Private Sector Participation: Ostrava (Czech Republic) resident expatriate technical adviser to OVAK, supplemented by staff from LDE's Prague office. OVAK are charged a fixed annual fee for these services. In addition, OVAK can offer, or LDE can suggest, further assistance to be charged on a time and materials basis. The latter mechanism has been used to help build accounting and financial management skills in OVAK. The technical assistance program has been successful in rapidly introducing LDE's well-developed integrated management system to OVAK, and has provided access to expertise in areas such as information technology. Some figures have suggested that a greater focus on Czech-specific problems would add to the quality of the program. It can also be argued that the technical assistance contract is a form of disguised profit-taking. It is difficult to assess the veracity of these claims. 7.4 Details of the Contract 7.4.1 Allocation of Risks and Responsibility Table A1-7.3 summarizes the allocation of responsibilities between the various industry players. 7.4.2 Price Regulation and Renegotiation The water and sewerage tariff is set annually by the governing council of the municipality on the recommendation of OVAK, following requirements laid down by the Ministry of Finance. These stipulate that tariffs must: reflect 'necessary' operating, maintenance and investment costs; allow 'appropriate' profits; and not fall below cost recovery levels, excluding profit. The Ministry of Finance is not proactive in enforcing these. 46 *r s ::.. .. : .... I.. 4 4~~~~~~. . . ....|. S .. . ...... .. .. .t. . ..... ; Y- .. .: :... : : :: 7 B . .; X S 41 :: . S t:::: ;:: S S S :::::::.. .. .S,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. u~ ~ ~ ~ ~~~~~~~~~~~~~~.. .... ...... .. . ...::::::::::::::::. . . ..... . ......... .. . . . . . .... .. .. 0 .0 ......0 . . 0 ;~~~~~~~~~~~~~~~~~~~~~~~~. .:::..::. :X~~~~~~~~~~~~~~~~~.... ......:: .~~~~~~~~~~~~~~~~~~~~~~~ ..... ........ ~~~~~~~~~~~~~~~~~~~. . . . . . . . . . . . . . . ._ ~~~~~~~~~~~~~... Si.....'.... t E~ ~ ~ ~ ~~~~. ...... .. .E I~~~~~~~~........ . . . . . . . . . . .. . .. . ... ........ . ........ .... ..... ... 211 .6 . ..... ...........4 .. ........e~ U .. .. ..... ..... ...... i~ * 4)1 4)C) Cu~~~~~~~~C 4-' 4- 4 - Z-Z ...........~~ 4) I .. .........-0. 0 0 0 ......... 4.~ .C u ............ ~ ~ ~ ~ ~ ~ tKt rA ~ = ..........-- - Annex I International Case Studies In Private Sector Participation: Ostrava (Czechoslovakia) requirements. In effect, municipalities and water companies are left to set tariffs. Consumers may appeal to the Ministry of Finance if need be, although this has not yet happened. It is expected that the Ministry of Finance's regulatory role will be abolished shortly. The annual tariff negotiation covers two elements: operating costs and 'reasonable' profit; and the investment program and rent. Operating costs are either indexed or are individually forecast. Determining operating costs has not been contentious as yet. Profits are set as a proportion of the operating cost. Effectively, Ostrava uses a variant of cost-plus regulation. Significant investment is required to rehabilitate and up-grade the infrastructure in Ostrava. The financing costs of this investment must be covered by the rent, which is raised through the tariff. To cover the investment required, average tariffs may have to rise as much as CZK 9 or 50% (at constant prices) over the coming years. In each tariff negotiation round, OVAK presents a range of tariff scenarios based on different investment programs and rent, and makes a recommendation. The governing council of the municipality then chooses the level of investment and tariff. Any surplus above the rent, operating costs and planned profit constitutes extra profit. In other words, any efficiency gains made by OVAK add to profits in the first instance. However, in the following tariff round, these efficiency improvements are likely to be built into lower budgeted operating costs. The gain in profits is therefore short lived. All indications are that profit is not a contentious issue in Ostrava. The municipality, OVAK and LDE consider 7% to 8% to be a reasonable profit margin. Under the current agreements, OVAK will not pay any dividends to its shareholders until 1997; retained profit is to be reinvested in upgrading OVAK's operating assets. Hence, the issue of profit is likely to become more contentious after this date. 7.4.3 Quality and Service Coverage Expansion of service coverage is not a concern in Ostrava. In 1993, coverage of both water and sewerage services was over 90%. The quality of service to be provided is not explicitly regulated, but levels are determined between OVAK and the municipality as part of the tariff renegotiation process. 7.5 Process for Contract Award Overview of Czech Republic Competition in the Czech water sector has primarily taken the form of competition for the market. However, such competition has been limited, and has generally taken the form of municipalities negotiating with a preferred partner after exploratory talks with a number of alternative potential partners, rather than a competitive bidding process. In the first privatization phase, foreign investors initially approached the Ministry of Agriculture, which was responsible for the restructuring of the water sector, and the Ministry of Privatization. The Ministries were generally supportive of foreign participation, and directed companies to potential investment opportunities. The Ministries believed that foreign expertise could significantly improve management in the restructured industry. Potential investors then negotiated directly with the relevant municipalities. Where successful, investors bought shares in the operating companies. 48 Annex 1 International Case Studies in Private Sector Participation: Ostrava (Czechoslovakia) In the more recent privatization phase, foreign investors, such as Welsh Water and LDE have been involved in the privatization plan from inception. Following negotiations with municipalities and the Czech National Property Fund, shares have been reserved for foreign investors. In these cases, potential investors have been asked to commit finance in addition to taking equity stakes. In general, these commitments are small. The desire to avoid unfavorable public opinion has led foreign investors to take minority stakes in the privatized operating companies. Under the Czech commercial code, key decisions can only be made by a two-thirds majority. Hence, foreign investors have sought sufficient shares to have a right of veto in the company's affairs. In addition, foreign investors have sought co-operation agreements with municipalities or large shareholders to produce a majority voting block if and when required.'2 Competition between foreign investors has been limited due to the small number of investors, the large number of investment opportunities, and the absence of formal tenders. Foreign investment so far has been on a negotiated basis, though municipalities have often held exploratory discussions with more than one potential partner. In many cases, potential investors have avoided competing where another foreign investor has already reached an advanced stage of negotiations. As far as we are aware, the only instance of active competition was in Brno. LDE and Gelsen Wasser competed for a controlling stake in BVAK right up to the first Annual General Meeting. In this case, LDE prevailed and won a seven-year contract. Over time, competition is also likely to develop between the Czech operating companies. A number of small municipalities have already run tenders and switched operating and maintenance contracts between companies. Over time, there is likely to be some consolidation in the sector given that some operating companies serve very small supply and distribution systems, and that there are likely to be economies of scale available in these cases." Competition in Ostrava OVAK was among the first public service companies privatized in the Czech Republic. The municipality was approached by a number of international water companies, including LDE, Generale Des Eaux and Gelsen Wasser. A formal tender process was not run due to municipal time and capacity limitations. Instead, the municipality sought a long term partner on the basis of reputation and the quality of the investor's proposal. The key element was reputation - references were obtained from other municipalities, and, at the invitation of LDE, senior officials from Ostrava visited a municipality in France. Subsequent to LDE's investment, the municipality has sought to overcome its problems in monitoring OVAK's costs by the use of limited comparative competition (see Section 7.6.2). This has taken the form of comparison of tariffs with other municipalities in the Czech Republic. 12 Whilst this investment strategy has facilitated entry, the lower level of commitment would also allow smoother exit, if necessary. 13 Whether competition will extend to mixed companies is not clear. At present both asset valuation methodology and restrictions on the sale of assets limit the tradability of these companies. 49 Annex I International Case Studies in Private Sector Participation: Ostrava (Czechoslovakia) 7.6 Evaluation of PSP There is little evidence available at present on the impacts of private sector involvement in Ostrava's water sector. Following LDE's investment in OVAK, and with the agreement of the municipality, the management of OVAK was changed at the first Annual General Meeting. The former General Manager was opposed to foreign investment in OVAK and was replaced. The Finance Director and some other senior managers were also replaced soon thereafter. The new managers are Czech nationals. LDE provides support from their head office in Prague as well as a resident expert under the technical assistance program. The management have tried to instill a commercial culture in OVAK. For example: non-commercial activities, such as cleaning minor streams on behalf of the environmental authorities, were suspended; ten major industrial debtors were aggressively pursued; budgets and financial planning tools were introduced; and manning levels were closely monitored and a rationalization program begun.'4 OVAK intends to contract out some of its activities in the future. On the whole these measures appear to have been successful in increasing the efficiency and improving the financial position of OVAK, although financial appraisal and awareness continues to be poor. 7.6.1 Tariffs An eight-fold real increase in tariffs since 1990 (to an average of US$0.68/m3) has significantly helped in making OVAK a more financially viable entity. The majority of this increase, though, took place well before the involvement of the private sector. Of note, the tariff increases did not spark strong consumer protest. Reasons for this include: water bills remain a manageable share of household income; many other prices were changing at the same time; and consumers accepted change as part of the end of the old communist regime, which was welcomed in the Czech Republic. 7.6.2 Problems Encountered At present the structure adopted in Ostrava appears to be working well. However, there seems to be potential for problems to arise in three areas in the future: the dual role of the municipality as regulator and owner; weak incentives for efficiency gains by OVAK; and poor monitoring of OVAK's performance. The Municipality's Dual Role Under the structure adopted in Ostrava, the municipality is responsible for regulating the price charged and quality of service provided by OVAK, primarily through the annual tariff renegotiation. In fulfilling this role, the municipality will be expected to act as a representative of consumers' interests by, for example, preventing OVAK raising tariffs to the point where it makes "excess" profits. However, this potentially conflicts with the municipality's position as a shareholder in OVAK. As a shareholder, the municipality will receive a portion of any profits distributed by OVAK. This may create an incentive for the municipality to allow higher tariffs. 14 Prior to LDE's involvement, staffing levels were around 21 per 1,000 connections compared to about 1.5-2 in an efficient utility in a developed country. 50 Annex I International Case Studies in Private Sector Participation: Ostrava (Czechoslovakia) Weak Incentives for Efficiency Gains OVAK's profits are set as a proportion of operating costs as part of the annual renegotiation of tariffs. In effect, tariff regulation is through a cost-plus approach. Such an approach provides weak incentives for efficiency gains, as any increase in profits resulting from reduced operating costs will be short-lived. However, this is a consequence of the specific approach adopted to tariff regulation, rather than a weakness in the structure used to involve the private sector. At present, efficiency gains are easy to identify, and the tariffs set have allowed for large and obvious efficiency gains. The municipality plans to move towards a price-cap approach to tariff regulation, which will increase the incentives for efficiency gains. Poor Monitoring of Performance At present, profits are not a contentious issue as all profits made by OVAK are retained for investment in upgrading operating assets. Once this situation changes, OVAK may have incentives to overstate operating and maintenance costs so as to increase profits. The municipality's ability to scrutinize costs may be limited despite their membership of the Board of Directors. The municipality are aware that their ability to audit costs may be significantly strengthened by looking at the operating costs of comparable municipalities. The municipality has already begun to compare tariffs across the Czech Republic, using data on tariffs and other comparative information published by the Czech association of water utilities. Planned Move to Concession Agreement One of the aims of privatization was to attract private finance in new investment, preferably through concession arrangements. However, initially it was felt that political risks were too high, and private operators restricted themselves to buying shares in operating companies. Within Ostrava, both the municipality and LDE are now sufficiently confident with their relationship to move to a concession agreement. It is planned to let one in the near future. As part of this, the tariff regulation mechanism will be changed to one based on a price-cap approach, to provide greater efficiency incentives. Previously, it was felt that the Ministry of Finance's rules for tariff-setting would prevent this, by requiring tariffs to be set to earn an "appropriate" return. So, a company operating under a 5-year price-cap that made significant efficiency gains and was earning "inappropriate" profits after three years would be required to renegotiate its tariff at that point. 7.7 Conclusions 7.7.1 Summary of PSP Experience The experience of PSP in Ostrava has been positive. There are some problems, connected with potential conflicts between the municipality's role as regulator and owner, weak incentives for efficiency and poor monitoring of performance. However, the municipality has gained access to the technical expertise it sought, and this appears to be delivering gains in efficiency. Potential political opposition to the involvement of foreign private operators appears to have been successfully neutralized by the structure adopted. There has also been significant investment in rehabilitation works, and the planned move to a concession arrangement should provide access to private capital for investment. 7.7.2 Lessons to be Drawn for India The main purpose of involving the private sector in Ostrava was to provide the necessary expertise in operating a water utility, which the municipality lacked. In doing so, Ostrava faced three key constraints, 51 Annex I International Case Studies in Private Sector Participation: Ostrava (Czechoslovakia) which are likely to be similar to those faced by Indian municipalities: low levels of capacity at the municipal level to run a competitive bidding process for the contract to be let; political concerns over private sector involvement and foreign control of the water sector; and political uncertainty deterred the private sector's willingness to invest initially. The key elements in overcoming these constraints were: * reputation - in selecting a potential partner to negotiate with, Ostrava concentrated on reputation. This avoided the costs associated with running a competitive bidding process. Selecting a private operator on the basis of reputation also provides a powerful incentive for operators not to unduly exploit their advantages in information and capacity over the municipality; * partnership - by introducing LDE as a partner in the management of OVAK, with a minority stake, and retaining public ownership of assets, concerns over foreign ownership were eased. LDE's position as a minority shareholder is protected by the co-operation agreement signed with the municipality. By allowing 49% of the shares in OVAK to be held by other investors, the municipality and LDE further minimize concerns over LDE's position, and allow for participation in the sector by Czech private investors, including employees, individuals and domestic institutional investors; and * step-by-step approach - by initially only requiring LDE to buy shares in OVAK, the municipality allowed time for it to develop its credibility as a partner, and reduce the political risk to LDE. At the same time, it provided and opportunity for the municipality to learn about LDE. Subsequently, LDE and the municipality have agreed to move to a concession under which LDE will invest in new infrastructure. The approach adopted in Ostrava does offer fairly weak incentives for efficiency gains. This is mainly a result of the tariff setting regime adopted rather than PSP; the same industry structure could also be adopted with a price-cap approach specified in the contract, and longer periods between tariff reviews. This is likely to occur in Ostrava. Such an approach may lead to concerns that the private operator would exploit its strong position in negotiations on the contract to set a cap that allows it to earn significant excess profits. However, the incentives offered by the need to maintain its reputation as a "good" partner are likely to act as a constraint on this. 52 Annex I International Case Studies in Private Sector Participation: Buenos Aires (Argentina) 8. Buenos Aires (Argentina) - Case Study in PSP 8.1 Introduction The government of Argentina embarked in 1990 on an ambitious privatization program. As part of this effort, the operation of the water supply and sewerage systems of the large Buenos Aires metropolitan area was transferred in May 1993 to a consortium of private foreign operators and local investors on the back oT a thirty-year concession contract. It is the largest private water and sewerage concession in the world to date. 8.1.1 Relevance of the Case Study This case study is of interest as: it is the largest developing country concession contract let to date; PSP has been successful in improving services in Buenos Aires; and it provides a good example of the way in which a regulatory body can be created to interact with the concessionaire. 8.1.2 Information on the country Table Al -8.1 provides information on both Argentina and Buenos Aires. ti;2;|0;0t-l0: T able2-2 tth A14.1. Oerie o o A rgnial an; th e -uno Aie erplt Ae Indicator Value Argentina GNPpercapita)........ .... .. .. ............3) 7,220 Population (millions, mid-1993) .33.8 Freshwater resources, annual withdrawal as a 2.8 % of total water resources Buenos Aires .................................................................................................... ........ .................................................................................................................... Population (millions, 1991) 8.6 .................................................................................................... ............................................................................................................................ Population with access to safe water (% of 70 ftotal, 1991) eouce tot................................................. ......................................................................................................... Population with access to sewerage system 58 (%oftotal, 1 991) 8.2 Rationale for PSP The introduction of PSP was driven by a need for improved efficiency and financial position. Prior to PSP water and wastewater services in Buenos Aires were managed by the public-sector company OSN (Obras Sanitarias de la Naci6n). Under the OSN, the sector was heavily subsidized and inefficient; and the quality of services provided was of a low standard. Water/wastewater services under the OSN were inefficient operationally and administratively. Key problems included: (i) service coverage was limited, and investment needs to finance any significant expansion in coverage were massive. Unaccounted-for water was high, reaching estimated levels of 45%; (ii) most residents were not metered, and meter reading and billing were erratic; (iii) estimated water demand was in the high range of 400-500 liters per capita per day; (iv) the OSN was over-staffed, 53 Annex 1 International Case Studies in Private Sector Participation: Buenos Aires (Argentina) employing some 8,000 people, giving a ration of 8-9 employees per 1,000 connections, compared with a ratio of 2-3 for an efficient water company; and (v) sewage was returned to the water cycle effectively untreated, in some cases upstream of the water intake. In addition, the OSN made losses and required high levels of public subsidies, thereby imposing a substantial burden on public finances. PSP was seen as a solution to these problems. In particular, PSP was introduced to improve financial and operating efficiency, and thus to: attract private capital to fund increasing investment necessary to improve the level of coverage and the quality of services to final consumers; reduce the budget deficit by the elimination of massive subsidies to the inefficient public utility; and improve service and coverage. 8.3 Process of Contract Award Bidders were required to bid a proposed water rate to meet a set of defined water and efficient quality parameters, and also to meet various performance targets for service coverage, sewage treatment and rehabilitation of the network. Table A1-8.2 below details information on the process of awarding the concession. Table Ai-.8.2. Process for Awarding Contract Stage ................................................................................................................................................................................................................................. Number of rounds 2 Number of companies that pre-qualified 5 ............................................................................................................................................................................................................... ................. Number of consortia making final bids 415 ....................................................... ......................................................................................................................................................................... Basis on which contract was awarded overall price level paid by the customer for prescribed standard of service Of the four consortia making final bids, one proposal was deemed technically and economically unfeasible. The remaining bids, expressed as a fraction k of the current water rate, are given in Table A1- 8.3 below. TableAI-8.3. Relative Price Bids by Final Bidders in Buenos Aires Bidder Proposed k Winner 0.731 First Loser 0.739 .........................................................................................................................................................................I....................................................... Second Loser 0.885 There are two points to note about the price proposals. First, the winning bid was some 27% below the current water rate16 suggesting both the efficacy of the bidding process and the feasibility of the 5 Two of the pre-qualified bidders formed a consortium for the final bid 16 It should be noted that the government raised water rates by 8% just prior to the call for bids. 54 Annex I International Case Studies in Private Sector Participation: Buenos Aires (Argentina) concession. Secondly, the difference between the winner and runner up price proposals was small, suggesting all aspects of operating the concession were clear to bidders. 8.3.1 Information on the options and objectives Table A1-8.4 below summarizes the objectives for the contract, and the arrangement chosen. .~~~~~~ ~ ~ ... .. .. .. . .. .. . . .. ... .. ... .. ......bl I-8.. u mar. of thle' Contrac Area Comment ............................ .................................................................... ......."I....... ........ ....... ....... ........ ....... ...... .......................... Objectives To reduce fiscal burden, improve efficiency and quality of water provision and sewerage. ................................................................................................................................................................................................................................. Option Full concession granted where government remained owner of assets but concessionaire responsible for operating, maintaining and managing system. ................................................................................. .................. ............................................................................................................................. Coverage Water and sewage in Buenos Aires metropolitan area. ................................................................................................................................................................................................................................. First let May 1, 1993 .................................................................................I......................................................................................................................................... Length 30 years 8.4 Industry and Market Structure Aguas Argentinas is the private company which holds the concession for the Buenos Aires water and wastewater sector (the OSN remained in charge of some services until the concessionaire became fully established). The concession-holder is in turn wholly owned by a private consortium led by Lyonnaise des Eaux and partners (50.4%), local investors (39.6%) and company employees (10%). Its operations are regulated by ETOSS, a state-owned independent regulatory agency. This is described below in Figure A1-8.1. 55 Annex I International Case Studies in Private Sector Participation: Buenos Aires (Argentina) Fig A1-8.1. Iutry Structure in Argen a: Ownership - Contractual Relationship --- ( Assets Operates l l ~~~~~Concession A guas l Government --------------- l ~~~~~~~~Argentinas Appoints Regulates ETOSS Owns |Lyonnais e des Eaux & Partners Local Shareholders Employees In accordance with the central government's regulatory decree, a regulatory agency (ETOSS) was created as an autonomous, self-sustaining entity "to ensure the quality of the service and protect the consumers as well as monitor the compliance with the existing norms and the provisions of the concession contract." A staff of about 70 professionals were employed, primarily from OSN in the first instance. 8.5 Details of the Contract Under the concession contract, water rates would be reassessed every five years, based on the updated investment plan for the next five-years and updated estimates of expenditures. An inflation index formula specified in the contract enabled ETOSS to monitor cost increases. The contract stipulated that the rates could be revised only if cost increases due to inflation were above 7 percent. Within a year of the contract being signed a 13 percent price increase was agreed between the concessionaire and ETOSS, the regulatory agency. The reason given by the operator was the unexpected increase in costs, due to ETOSS bringing forward parts of the investment program. A set of water quality parameters was defined for the purpose of serving as standards for the potable water to be produced under the concession. Also, two sets of effluent quality parameters were determined for wastewater undergoing primary and secondary treatment. Standards with respect to improved coverage were also specified in the contract. In the first five years of the concession, water coverage was to be increased from 70 percent of the city's population to 82 percent, and sewage coverage was to be increased from 58 percent to 66 percent. 56 Annex I International Case Studies in Private Sector Participation: Buenos Aires (Argentina) The concession contract did not specify the investments that must be made. Instead, the concessionaire is free to make what investments he deems necessary to achieve specified performance targets. It was, however, specified in the contract that any single investment of US$1 Om or more had to be procured by international competitive bidding. Responsibility for different aspects of the provision of water and wastewater services was specified under the contract, as follows. The government was to retain ownership of the physical assets, and to retain charge of the definition of sectoral policies, the management of water resources, and of the definition of the legal- and regulatory framework. The regulatory body ETOSS was charged with the approval of the tariff system and water price, and with the supervision of water quality and service quality. The private operator Aguas Argentinas was to assume responsibility for all other key aspects of water services provision, including the planning and financing of new investment, supervision of new works including design and construction, and all aspects of direct customer contact and service provision including connection, operation and maintenance of installations, renewal of operating equipment, billing and collection, control of water and service quality, and public relations. 8.6 Evaluation of PSP The concession contract has been in operation for four years. Experience to date has been largely favorable. Some key results include: * coverage of both water and sanitation services improved markedly over the first three years, an additional 570,000 of the city's inhabitants having been connected to the water system (a 9% increase) and an additional 340,000 inhabitants to the sewerage system (a 6.4% increase); * for the first time in many years, Buenos Aires did not experience water shortages during the summer months of peak demand; X the number of pending complaints at the end of each month fell from several thousand to several hundred; - 40,000 meters were installed in the first year for large non-residential consumers. Also, 125 kilometers of water distribution pipes were laid, 2,600 valves rehabilitated, and 1,000 kilometers of sewage collection pipes cleared; * a major achievement was the increased staff efficiency. From a ratio of 8-9 employees per 1,000 connections the operator is fast approaching a ratio of 2-3 per 1,000 connections; * the operating budget of the regulatory agency is financed by only a fraction of water revenues, thus preserving its independence and sustainability; and, * the regulator granted an extraordinary price increase of 13.5% in July 1994, due to unexpected cost increases. The keen nature of the bidding suggests that the operators' calculations left little room for error. It is possible that, had the price increase been refused, the viability of the operator could have been in jeopardy. This increase, coming soon after the letting of the concession, provoked significant protest as the reasons were not well 57 Annex I International Case Studies in Private Sector Participation: Buenos Aires (Argentina) understood. However, even after this increase, the water rates were still 17% lower than the OSN rates before the concession.'' 8.7 Conclusions The principal lessons for India that can be drawn from the Buenos Aires water privatization experience include the fact that PSP can substantially improve financial viability, service levels and coverage. A clear understanding of the reasons for any extraordinary increase in rates, beyond that stipulated by the concession contract is important to maintain credibility of the proposed prices in the submitted bids. When an independent regulatory entity is established it should be strong enough to be able to confront an experienced intemational operator and should be able to call on specialized assistance, if needed. ' The price reduction is not quite so impressive when one includes the 8% rise just prior to the call for bids. In this case, the price reduction is 100/o. 58 Annex I International Case Studies in Private Sector Participation: Manila (Philippines) 9. Manila (Philippines) 9.1 Introduction In January 1997 the Metropolitan Water and Sewerage System (MWSS) awarded two 25-year concessions covering the West and East of Manila through competitive tender to two consortia. The Manila water and sewerage concession is a recent example of an attempt to introduce an element of competition into a major concession contract by awarding two separate parallel concessions to different companies. 9.1.1 Relevance of the Case Study The Manila experience is interesting, because: of the deliberate attempt to introduce comparative competition through the division of the concession area; it is among the first concessions in Asia; and it demonstrates the efficiency gains PSP can deliver. 9.1.2 Information on the Country General background information on the Philippines is provided in Table Al -9. 1. Table A1-19 .OverviewInfr ton the Philippines Indicator Value ............................................................................................................................................................................................................................ GNP per capita (1994, PPP) 1060 Population (millions, mid-1994) 67 .............................................................................................................. ................................................................................................................ Urbanization (1994, %/.) 53 Population with access to safe water (1993) . 81, (sanitation: 7218) .................................................................................................................... ................................................................................................... . Freshwater resources, annual withdrawal as a % 9.1 of total water resources (1970-94) Source: World Development Report 1996, The World Bank 9.2 Rationale for PSP The water and sewage services provided by MWSS is unsatisfactory. Water is only supplied for 16 hours per day on average, unaccounted for water amounts to 34%, on average, 12.8 staff are employed per 1000 connections. Water supply covers only 71% of the population with as little as 9% covered by a sewage connection. There is a considerable need for investment especially in West Manila. In response, the government of the Philippines took the decision to involve the private sector. The area of Manila was split into two concession areas, East Manila and West Manila. In January 1997 these were awarded to two consortia - Manila Water Company (MWC) and Benpres-Lyonnaise Waterworks Inc. Sanitation levels actually dropped from 75% in 1980. 59 Annex I International Case Studies in Private Sector Participation: Manila (Philippines) 9.3 Industry and Market Structure The MWSS, which is owned by the government and currently in charge of all operations, will delegate operation and investment responsibility to the two winning consortia, the Manila Water Company (MWC) and Benpres-Lyonnaise Waterworks Inc., under the two concessions, while retaining ownership of the assets. A regulatory office will be established within the residual organization of MWSS with the task of monitoring and enforcing the concession agreement. The structure of the water and sewerage sector is summed up in Figure A1-9.1. Figure A1-9.1. Industry Structure After Letting the Concessions Owneyship ~ Government of Ownership ON Contractual Relationship --- the Philippines e Metropolitan Water & Reue.1 Sewage System R Reulat e . (MW SS) ....................Reuas ' Concession Concession ' _ Benpres-Lyonnaise own Manila Water Company Waterworks Inc (BLWI) ..(MWC) .*operate operate.." own |own Ayala Corporation (Phi) Beupres Holding (Phi) West ast Bechtel Enterprises (US) Lyonnaise De Eaux (France) ts United Utilities (UK) 9.4 Details of the Contract Concessionaires are required to manage, operate, repair and upgrade the water and sewerage facilities in the service area. They are also responsible for billing and collection. Detailed standards of quality of service are established in the concession agreement with Philippine national drinking water standards compliance required from the start of the concession. Coverage targets increasing over the 25-year contract period. Water coverage should be increased from 67% to 98% and sewerage coverage from 8% to 54% by the end of the concession. 60 Annex 1 International Case Studies in Private Sector Participation: Manila (Philippines) By the year 2000 the contractors are expected to provide: uninterrupted 24-hour service, WHO water quality standards; DENR effluent standards for treatment plants; and a minimum water pressure of 16 psi. The joint infrastructure (from water treatment plant upwards) which is used by both companies will be managed and financed by a joint venture company established by the two concessionaires. Ihe concession fee paid by the operators should be sufficient to enable MWSS to service its aggregate long-term debt obligations and cover the regulatory operating costs. 9.5 Price Regulation and Renegotiation The bids for the concessions were evaluated on price. The initial water tariff is to reflect this bid. There are three categories of possible adjustment to this level: 1. Every year an inflation and foreign exchange adjustment will be made. 2. Every five years a regulatory review will be held by MWSS taking into account the concessionaire's historic and projected performance in light of rates of return for comparable concessions. 3. If the operating company can show it is in financial difficulties the regulator can award one-off increases in the nominal price level at the price review. The schedule of RPI adjustment would then be applied to this new starting price. 4. If the company is earning excess profits, the equivalent instant compensation of customers is not provided for. There can be no penal cuts in the nominal price level at the price review. The regulator can only lower the long term profile of price increases to ensure that customers will gain from increases in efficiency. 5. Further to the periodic price reviews, whenever a extraordinary event occurs (principally changes in service obligations, changes in law, continuing non-performance of the concessionaire or modification of the concession fee) a price review will be undertaken. As foreign investors were worried about the credibility of this scheme and the ability of the future regulator to keep to the agreement in cases of public or political pressure, the investment profile of the concession over time was designed to reassure the private contractor. While repairs to the water distribution system are necessary early on in the contract period, the bulk of capital expenditure, namely the investment required to build up a substantial sewage network, is not commenced until year 7. This will allow contractors to build up a surplus of funds in the first few years over the operating requirement, and for MWSS to establish credibility as regulator. The costs for the private participant from pulling out if the contract is breached by MWSS will also not be prohibitive before the sewage investment is committed, providing additional assurance to the private company. If price increases cannot be implemented as agreed, the government will pay the foregone revenue to the operator. 61 Annex I International Case Studies in Private Sector Participation: Manila (Philippines) 9.6 Process of Contract Award The concession was to be awarded to the company bidding the lowest tariff. However, to ensure comparative competition, bidding rules required that any consortium could only win any one of the two contracts but not both. When the winners were announced it transpired that MWC (consortium comprised of Ayala, the largest Philippine conglomerate, Bechtel of the US and United Utilities of the UK) had submitted by far the lowest bids for both supply areas. MWC's proposed average tariff for the Eastern part of the city (2.3 pesos/m3 ($US 0.09)) was little over a quarter of the current price (8.8 pesos/i3) and nearly half of that offered by the next bidder. The contract covering the western part was awarded to the local Benpres Holding and Lyonnaise des Eaux, the second lowest bidder at 5.0 pesos/m3 ($US 0.2), although their price bid was nearly twice that of MWC. Competition for the market proved extremely successful in reducing tariffs to consumers. However, some analysts have expressed concerns that the tariffs bid are unsustainable given the difference between current bid tariffs. 9.7 Lessons for India The concession agreements have still to be signed. However, the process of contract award offers a possible approach to increase the information available to the regulator, by ensuring the existing of two comparative companies. While the existence of comparators can in theory facilitate the role of the regulator, in the case of this contract, these benefits are not necessarily apparent. No clear rules for comparative competition have been put forward by the regulator. Even if the rules were clear, the investment requirement, which influences the major cost component, is very different in the two areas making comparisons more difficult between the areas. The Manila experience also shows that such an approach can be politically difficult to implement. Although consumers in both West and East Manila would pay less for their water under the concession agreements, the bidding rules presented those in the Western zone receiving the full benefit of the competition for the market in the form of the lowest offered price. The resulting differential in prices between the two zones has led to protests and may provoke a number of legal challenges to the award of the concessions. Despite these difficulties the Manila concession shows that a concession is possible for an Asian mega- city. The size of the tariff reduction stated coupled with the improved service indicates the size of possible gains from introducing private sector participation. 62 Annex 2 Indian Experience in Community Participation Annex 2 Indian Experience in Community Participation Introduction * This annex sets out six examples of Indian experience and one example of Pakistani experience in community participation in the UWSS sector. The case studies are: Urban Basic Services for the Poor (UBSP); Swabhiman Movement (Bangalore); Sulabh International; Orangi Pilot Project (Karachi, Pakistan); EXNORA International (Chennai); Report cards (Ahmedabad, Bangalore, Pune); and Express Groups of Citizens (Poona) Study 1 Urban Basic Services for the Poor (UBSP) - poverty alleviation through community action UBSP, a government program, integrates with other poverty alleviation programs focused on provision of basic services (UBS), slum improvement (EIUS), employment generation (NRY), and sanitation improvement (LCS) to improve quality of life of the urban poor. Community organization, self-help initiatives and involvement of women are the main principles. The Central and State Governments and UNICEF are main partners. Problems: * quality of services, including water and sanitation, is poor in urban poor communities; - women and children are the worst affected; - even existing services are not properly used; and * community has no role in improving environment. Organizational principles: - community organization, especially women; * bottom-up, need based, decentralized planning; * convergence of programs, services and resources; * participatory action; * emphasis on self help; * inter-sectoral, inter-departmental co-operation; * different steps in the process are: rapid appraisal, spatial mapping, need assessment, action alternatives, community action plans, need-linked credit, state training plan, state action plan, national action plan; * NGO involvement in service delivery, support services, technical assistance and out reach mechanism; and * monitoring mechanism at the national, state, district and city/town level. 63 Annex 2 Indian Experience in Community Participation Program: * neighborhood groups (NHGS) of 15-40 households, neighborhood committees (NHCS) of 7-10 NHGS and community development society (CDS) at the ward or city level are formed; * area specific plans are prepared by NHGS, NHCS and CDS; * NHC plans are consolidated into an area plan; * plans are matched with available resources. Gaps are filled through convergence with programs of other departments and agencies; and, * different activities related to mother and child-care, nutrition, primary education, water supply, environmental sanitation and shelter are undertaken to meet local needs through self-help and joint action. Scale: * towns and cities, 65000 women volunteers, 50000 Neighborhood Groups, 9000 Neighborhood Committees, 366 Community Development Societies; * one million urban poor covered. Impact: * empowerment of women besides improvement in services and living conditions; * decentralized organizational structure to plan and carry out neighborhood and area development plans and projects. Sources: UBSP, Revised Guidelines - 1994, GOI Best Practices Initiative of Habitat II Conference Study 2 Swabhiman Movement (Bangalore) - a citizen-government initiative Swabhiman, a citizen initiative, motivates and facilitates organization of resident groups to address neighborhood problems and offers a platform to civic authorities, NGOs, resident groups and service provider agencies to share information and work together to improve services, environment, planning and management in Bangalore city. Problems: * high level of dissatisfaction among people for the service provider agencies and civic authorities; * visible decline in environmental quality; and * frustration among concerned people with citizen inaction and agency non-responsiveness. Organizational Principles * lasting solutions to the civic problems can be found if citizens play more active roles; * also, that such a role is more effective when the civic authorities co-operate; and 64 Annex 2 Indian Experience in Community Participation * at the core of the effort is a belief that the governance must be improved. More crucially, the effort must be participatory. Organization: * launched in 1995, the Swabhiman movement is a two level operation. At the city level, the core group is a broad stake-holder committee which includes representatives from Bangalore City Corporation. and Bangalore Development Authority, prominent NGOs, corporate bodies, representatives of active resident groups, etc.; * its main functions are: assessment of situation, strategy formulation, plans for joint action, consultation, and co-ordination of work undertaken by member organizations; * at the neighborhood level, the resident group takes responsibility to identify, prioritize and seek people's participation to address local problems. Its representatives participate in deliberations and activities of the core group; and * Swabhiman's organizational strength lies in: * the composition of its core group which includes all stake-holders including representatives of civic authorities and service provider agencies which makes them transparent and accountable; * responsibility sharing arrangements among the members of the core group. Individuals and agencies lead activities in which they have recognized strength, experience and credibility; X active links with common people through resident groups; and * opportunity for the NGOs to work together and share responsibility jointly. Activities: * solid waste management - 35 projects in different localities; * planning - critiques of development plans such as of Bangalore's Comprehensive Development Plan; * consultation on investment and development plans; * demonstration projects; and * performance monitoring of authorities and service provider agencies. Outcomes: * Swabhiman is emerging as a model for citizen action for other cities to follow; * resident groups are formed in many neighborhoods; and * authorities and agencies are open to suggestions and prepared for consultation. Source: Swabhiman Newsletter Volume 1, Public Affairs Centre, Bangalore. Study 3 Sulabh International - innovation and entrepreneurship in sanitation Sulabh International, an NGO, converts dry latrines into sanitary latrines; constructs, operates and maintains community toilets; trains and rehabilitates scavengers; and undertakes action-research. For an 65 Annex 2 Indian Experience in Community Participation NGO, Sulabh's operational scale is vast. Its business practice of user charges for the service is setting a new direction for the local authorities. Problems: * only 20% of urban residents have access to water flush toilets connected to sewerage, a further 33% use dry latrines, while the rest have no toilet facility at home; * scavengers are condemned to unhealthy practice of manual scavenging of human excreta; and * public toilet facilities are poorly maintained in most cities. Activity: Sulabh International was started in 1970 by a sociologist, Dr. Bindeshwar Pathak, to address these problems. Sulabh's main activities are: * conversion of bucket/dry latrine to sanitary, pour flush or twin pit, latrine; * construction, operation and maintenance of community toilet complexes, which include bathing and laundry facilities, on pay-and-use basis for the slum and squatter settlements and also for the floating populations at public places (such as at railway stations, bus-stops and markets); * action research to develop practical solutions for solid and liquid waste disposal and recycling; - use and promotion of bio-gas plants; - vocational training, education and alternative occupation for the scavengers and their children; v staff and worker training; and * policy advocacy. Scale: e towns/cities covered - 1,175 * toilet conversion - 7,30,000 * community toilets - 2968 * scavengers' rehabilitation - 35,000 persons * sanitation facility - over 10 million people Strategy: * Sulabh works in collaboration with government. This strategy has contributed to the wider acceptance of Sulabh's work, its large scale operation, ability to influence policy and making sanitation improvement a national program and movement; * charging for services - this has not been very successful in permanent slum settlements but highly successful at public places; and * entrepreneurial approach to service delivery. In building and managing assets and operating and maintaining service, Sulabh, despite its NGO status, follows business principles in running a profit-making operation. Sources. Bindeshwar Pathak - A simple Idea that worked -- Amola Prakashan, Patna Best Practices Initiative of Habitat II 66 Annex 2 Indian Experience in Community Participation Safdi Vidyalaya (Environmental Sanitation Institute) Ahmedabad, with comparable objectives and programs, works differently. Education, awareness and participation of communities and NGOs in low cost sanitation is its objective (unlike Sulabh which delivers service, and does not place community awareness andparticipation high on its agenda). Safai Vidyalaya 's main concentration is on training. Study 4 Orangi Pilot Project (Karachi) Under the Orangi Pilot Project (OPP), the community organizers and research professionals have assisted communities in Karachi's largest squatter settlement, Orangi, to construct and pay for sanitary toilets, underground sewer lines and collector drains, thereby improving sanitation, health and community's self- esteem. The scale of operation, investment resources contributed by the poor communities and the nature of services offered by the OPP team are special features of the program. Problems: * most households in Orangi used bucket latrines and soakpits for disposal of human waste and open sewers for the disposal of waste water; * rate of water borne diseases was very high; and * lack of technical knowledge on sewerage system and organization for collective action, and unaffordable cost of conventional sewerage system prevented community action for improvement. Program: * between 1981-93 the urban poor communities of Orangi squatter constructed 75,000 toilets, laid 1.24 million running ft. of sewer lines and constructed 16 million running ft. of secondary drains. For this work the communities have contributed Rs. 55 million; * communities maintain the system constructed by them; and * the successful sanitation improvement program and the community organization developed around this activity triggered many model programs on health and family planning, shelter improvements, credit, primary education etc. Method: * a group of 20-40 households in a lane is organized as a basic unit of community organization; * OPP professionals provide technical assistance in survey of lanes, map preparation, cost estimates. Social organizers identify a lane manager who collects community contributions, manages construction, maintains accounts; * OPP organizes training program for small scale building contractors and undertakes research to lower cost of the system; and * regular information sharing on technology, cost, problems, design, etc. Impact: * strengthened position of women at home and outside; * incidence of sanitation related diseases have reduced; 67 Annex 2 Indian Experience in Community Participation * improvement in health - and reduction in medical expenses - has improved nutrition, education, housing; and, * however, government failure to construct the sewer mains and treatment plant has reduced the effectiveness of community action in the improvement of overall environment in the area. Source: Best Practices Initiative of Habitat II Study 5 EXNORA International (Chennai) - community partnership for clean surroundings EXNORA International, founded in 1984 in Chennai (formerly Madras), is a citizen movement in which neighborhood associations, called Civic EXNORA, take responsibility, and pay for, keeping their residential surroundings clean. EXNORA International has also developed city wide programs for solid waste management, recycling, vermi composting, water-ways monitoring etc. Awareness building on cleanliness, pollution and environmental issues, community motivation for self-help action, innovative ideas for problem solving and active collaboration with city authorities are its main functions. (EXNORA stands for Excellent, Novel and Radical ideas) Problems: * environmental deterioration: contamination of water, saturated sewerage, garbage dumps in the city; * inability of the civic authorities to handle the situation due to financial, administrative and bureaucratic constraints; and * rapid and visible downslide in the service and environmental quality in some parts of the city. Organizational principles: * community participation is essential for environmental improvement; * citizen participation can improve individual neighborhoods and the city; and * for result-oriented action working with city authorities, concerned agencies and government is essential. Work: * nearly 900 active Civic EXNORA groups, comprising 75 to 100 neighbor families each, contribute Rs. 10 to 25 per month to keep their area/neighborhood clean; * street cleaning - sweeping, washing, garbage collection and dumping in the municipal containers - is done by a street beautifier, usually a ragpicker, employed by the neighborhood Civic EXNORA; * the street beautifier is given a specially designed tricycle to facilitate his/her work; * EXNORAs have successfully introduced a "reduce, rescue and recycle" concept among their members. The street beautifier is trained to segregate the waste at the source and earn additional income by selling inorganic waste to the recycling agents; * an innovative vermi composting technology is developed to produce good quality manure from the organic waste; 68 Annex 2 Indian Experience in Community Participation * a program of lectures, demonstrations, visits, etc. has been developed to introduce community mobilization strategies and solid waste management practices and technology in other cities of Tamil Nadu and other states; * EXNORA's waterways monitoring program is run by a coalition of individuals and NGOs. It concentrates on sensitization, education and remedial action. Monitoring points and sources of pollution, dialogue with polluting entities, and lobby action with concerned authorities are main roles. EXNORA International has also submitted an action plan for the waterways management to the state government; and * providing water monitoring kits to the schools to measure pollution in neighboring water-ways. This is intended to involve schools in the program and sensitize students to water pollution problems. Impact: * the movement is spreading with more civil EXNORA being formed in Chennai and the movement is picking up in other cities, especially Bangalore. Source. Best Practices Initiative of Habitat II Study 6 Report cards (Ahmedabad, Bangalore, Pune) - a mechanism to measure public opinion on quality of public services A number of studies have been undertaken by various bodies to establish and monitor public opinion with respect to the delivery of public services. Report cards are a method of measuring public opinion in a structured way. Problems: * citizens have no effective voice to influence service delivery; * the quality of service delivery by public services (including UWSS) is very poor; and * public authorities have no effective way to assess public satisfaction. Methodology of studies: * random sample surveys of households, focus group discussions, brief case-studies of selected respondents, documentation of the information provided to the public by service providers and interviews with a sample of lower level staff of the agencies comprised different components of research methodology; * the cards attempt to assess, rank and benchmark the following parameters: overall satisfaction with service delivery (levels of service (LOS)); the extent and coverage of services; patterns of emerging problems; the response of agencies to reported problems and grievances; and the effectiveness of bribes ("speed money") in rectifying reported problems. Results of studies: * the administration of public services is uniformly low across the cities studied; * supply shortages are in many cases "man-made" and information is manipulated for personal gain; and 69 Annex 2 Indian Experience in Community Participation the popular belief that public services are "cheap" is a myth - when full account is taken of the real financial and economic cost of service provision. Some implications of study findings: * improvements in service delivery and consumer satisfaction can be improved at very reasonable cost; * consumers are willing to pay more for services - so long as the levels of service are assured; * it is essential for consumers to have an active role in the planning and monitoring public services; and * the non-responsiveness of UWSS (and other public services) is directly linked to their monopolistic status. Source: Public Affairs Centre Study 7 Express Groups of Citizens (Poona) The newspaper group, Indian Express, has recently provided a method for enabling the citizens and the Poona Municipal Corporation (PMC) to start dialogues on provision of services and other issues. For this an "Express Group of Citizens" (EGC) is organized as an informal association, for every municipal ward. Each EGC includes two representatives from every residents' welfare association/housing society, representatives from the slum settlements and local NGOs and prominent social workers. Each EGC holds a meeting once a month, which is attended by a senior officer of the PMC and the local councilor. The meeting provides a forum for people to raise grievances and for specific actions to be suggested. The actions are reviewed in the next meeting for their status. While the EGC process helps the RWA to monitor its own performance, it also provides an opportunity to the PMC to learn about the delivery problems as well as to put their constraints more directly to the people. While the (generally positive) PMC response to the EGC process may have begun partly out of the fear of the media (the newspaper gives these meetings a wide coverage), in the future PMC may well be able to use this forum to bring in important changes in tax and charges, if it can demonstrably improve its service delivery. Similarly, while the focus at present is only on delivery of service at the local level, it may well provide a forum to discuss major policy and planning issues. Source: NIUA, ongoing study on Decentralization of Municipal Administration - Based on discussions with Dr. G. Jha, as reported in Mehta, 1994. 70 Annex 3 Municipal Bond Experience from the USA Annex 3 Municipal Bond Experience from the USA'9 One of the most well developed systems of municipal bonds is found in the USA. While the US experience is very old and set within a far greater autonomy for local bodies, the recent trend in decentralization in India and the enthusiastic interest of local bodies in issuance of municipal bonds, suggests its possible relevance here. The ultimate potential of this system is evident from the well developed tax exempt municipal bond system in the USA where it finances a large proportion of the capital investments in infrastructure. (Refer Box A3- 1). It needs to be also highlighted that development of a municipal bond system will contribute to the debt market development in India by supplying a large number of securities at commercial, market determined rates. Most importantly, however, development of a municipal bond system will help to bring in market-based discipline for local borrowing for infrastructure investments. :Box A3- Siz andStrutr f theX USMuiplx Bo:nd System. The US municipal bond mariet has ded access to debt financing fbr state and local government entities for over a centuryanda Ihalf.The size of the :maket is lage even relative to corporate tsecurities.::The following observations ....'0. .4-E . V00 . ..-- ,! .. .0 X, ,. .,.4 , '''...... .0'E;0''V' il '-t' 0 ...' .. ..' 0 , " : uringthep: 15 yIea om 1970, the dolla vlum muicia debt issued was about double thelissuance of corporateddebit durn the same peid(abandI Rapat, 1987, p3). .The combined volume of new issue of longterm municipal ses was 0to it tue of $456 b d yeas 1993. nd:1994.0 -- ThetAIl outs anding1volume ofdebt isbestimaed at $988 billion with over 1.5 millin different securities (MG lrc,1995 n.df Faboziett l l9: ut io'an estimat'ed 83IO0liocalgovernmentori municip,'al entities, over 50,000 havh issued munipal securtes. In Eaddition, several thousand pMublic revenue authorities are also: issuers of municipalbonds. Th.M. e: growfmunicipal debt from 1980 to 1994 has beeniat manannual compounding rate, of 7.5 percent per annum i (Wong, 1995~~~~~~~~~. ...... As of:1,994 ther.e wereover. 770xegi'td deaesand over 262 ial advisors engaged in the municipal ond syste (Wng 199) U -st h.e.:on.gTi9)0 -E 041X1-0X-t1t: co:hI:.tX:-t :iE:diEiES-iLt- - :::i'..'thiEL--: I0 mu:t0:E::i i i: USA.4s the ..only outryin tthe 0world 0witWh falag taX exemp municipal bond system However,l it is not often, reconized. that ta 4exemption for mi bonds in Uthe USwas derived&6 fro i idicial decisi ois based on the: notion of &nrgyvrn M tc t muny. ore reetjdmnshv vru dtis, inte Orrelaton,-and therefore, ostiutionlM proteon: .is Mno.t mravailabrle tfortaxexeptiorns the has been considerable debat.e o.nthe wheer Hti continue withte tax exreampons. ______________________ 19 This section is adapted from Mehta (1996). 71 Annex-3 Municipal Bond Experiencefrom the USA Type of Municipal Bonds In a Municipal bond system there are essentially two main types of bonds, which are distinguished on the basis of how the repayment is secured. General Obligation Bonds: These are issued by an elected state government or a local body and are backed by its fullfaith and credit' with all of its taxing powers. Thus, all legally permitted taxes and general revenues of local authorities are used for debt servicing. Such bonds generally require a thorough assessment of the debt carrying capacity of the local authority based on factors such as the annual debt servicing ratio, tax collection efficiency, quality of the authority's financial management and the current and projected health of the jurisdiction's economic and tax base. Proceeds from these bonds are used largely for projects or services where direct user charges may not be possible or which have lower returns, such as health, education, recreation, streets, public buildings and general governance (see Box A3-2). Revenue Bonds: These essentially rely on specified sources of revenue from facilities or services which are financed from bond proceeds. Revenue bonds are thus largely secured by a pledge of the net revenues of the system and the 'money and assets credited to the special funds' like the water or sewer fund. They generally carry strong covenants regarding rate setting to meet the debt service coverage requirements. In the US, these bonds have been more commonly issued by special 'public revenue authorities', backed by specific service linked revenue streams. Some revenue bonds called 'double barreled' bonds are provided an additional guarantee from city government, backed up by its general taxing powers. These are generally used for projects which have community-wide benefits such as water and sewerage systems (Refer Box A3-2). The main underlying basis of a revenue bond is that only a specific identified stream of revenues, and not the full faith and credit of the issuer, is used as security. For this to be acceptable, the specific source of payment needs to be very clearly identified, its legality clearly ascertained and its reliability and adequacy rigorously assessed. The type of revenues which are actually used in this regard vary considerably across different sectors and agencies. For example, for water and sewerage, while it is generally the user charges which are used, these can also be further supported by other streams like tax increments resulting from property improvements, capacity allocation charges and service surcharges on user charges for water or sewerage. The important aspects here relate to both the legal power of the issuer to charge or receive these revenues on a continuing basis and, especially for user charges, the reliability of market trends assumed in projecting future revenues. An additional critical consideration is to ensure that the pledged revenue streams do not legally have other priority claims. In the US, municipal authorities are covered under bankruptcy laws. However, under a revenue bond arrangement, the special revenues pledged to bond holders can not be reached by the general creditors of a municipality in the event that the issuing municipality should file for bankruptcy (Fabozzi et.al., 1995, pp. 172-173). Quality of revenue bond credit may be enhanced through a variety of measures. Some of these are internal to the project or the issuer. However, it is also common to purchase insurance for this purpose. About 40 percent of the new issue volume is insured. Such insurance essentially provides for timely payments of debt servicing in case the borrower is unable to do so. Premiums for such bond insurance generally range from 0.10 to 1.0 percent of total principal and interest. In addition other state level supports are also often available for revenue bonds of local authorities (Refer Box A3-2). 72 M o L a - x ~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~n0P F p...... 0 ...... ~~~~~~~- ~ ~ ~ 1r 0~~~~~~~I :0.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~* cr~~~~~~~~~~~- m. ~~~~~~~~ ~~~ ~ - A~~~O CDr .. . . -:x~~~~ CD CD ~ -g f 0~~~~~ .- ~ -~ .....C0 0D 0 0 FD~~~~~~- UQ C ~~~~~~~01 < C CD = 0~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~c 0 ~~-+ - -~~~~~ ~~ 0 Ci~~~~ Q.. ~~W. Annex 3 Municipal Bond Experiencefrom the USA BOX~~~I 1O f . m- - B veColatraltionof : h st e e 1extet the delays or deique collfeCtioa ofu!ser- charges wihut advesel affectingtimlyeb seric-ing. G nerll aeb seriecvrg ra Cti 1 It 1.2 is required. t * *la of undsStruture Thebondresoutio mus clerly etftrth the order of priort inwhich the W: b oin:st r it revenues generated by the- ent e w allocated to va *-:-- Addit-al BonsTst other importn t cichhprohibits an issuer fom issuin parity bons withthe sam reeue streams unes ceti coeae reuiement with -----respect to outstingandnew debtre ".t * --- Other Related Cveants: -A wdditi t may r se sc s t uiret to opee nd -maita' the faril to o e ca ins , a Ist- ied i vestments r ke d --retentionad alloton of supue mfernet :th spcfied-flowo flds etc. -:- Do-Nuble Barreled Bonds: While the main secrity of revenue bond is tug user t chages, ta revues y - ;be used as a -back up securtyarnenticseo delys Scgurnees7a enhanc thecdiqult fconsiderbly. Whi e esuc may hene ini over t reln on such :-:be eliminated.: .......:. Oter. creditenhancere exrnalto te bod scUry s. tr ct ay i de, -: *.-. Bondinsurance or fini ' S,- -anci Ara omrai an mne * Letter..... of-Credit(LOC) fro banks, -:-- *i Sp cial creditenhancement arrangements suppord by theSte g ov n tments ,. : t * -.interc.ept of s.tate to:.local transfer of taxes or oter- gats, and... ----- -----..-.:-:. ~~~~~~~o ... sur u e : - e,. t,- .- -._...-----.--..--. - * Moal bligBatinrr pled geft bys6tate govnernments tOf replens bodebt isetrvice reserv fud.re a,eeie a Table A2-t Issuer,, Purpose and Inve sS Mun icipal Bod maret. .......~~~~~~...... ..... nh n e ; ;.;;;;;;;;;;;;;;; Issuers 1989 . Percent Share in new Investors 1994 Percent Share in total issue volume investments State Government .9.3 . Households 44.0 County 8.6 . MutualMoney Market .31.0 Government Funds Municipal 19.6 Commercial Banks 8.0 Government Special District .62.5 Property and Car Insurance 14.0 Pub. Revenue Companies Authority Other 0.0 Ot ers 3.0 ........................................ ....... .... . . . ... .. . .. . . .. .. . . ... . ... . . .. . . . Total lOp.0.0 Total 100.0 Sources: Public Securities Association (1991) and Wong (1995) as reported in Mehta (1h995). In India, municipal bonds can be issued by municipal governments to meet their capital investment needs. In addition, special state or metro level utility companies or boards like the water supply and sewerage boards, state transport corporations and state electricity boards may also issue municipal bonds. 74 Annex 3 Municipal Bond Experience from the USA It is also likely that such borrowing may be used by these agencies to support private participation in infrastructure provision and delivery through concessions, franchises or management contracts. It is possible, as has been done in some of the recent structured debt obligations, to set up a special purpose vehicle (SPV) in the joint sector to mobilize debt through the municipal bond route. This may have double advantages as on the one hand, the borrowing is 'off the books' for the governmental authority and, therefore, does not affect its debt ratios. On the other hand, the SPV may be able to use the strength of the other equity holders to mobilize debt more easily and at lower costs from the market. This route will of course be more appropriate in situations where the joint sector SPV is likely to have better creditworthiness and market image than the governmental entity itself. Such an SPV may also be used as a financing vehicle for financing specific projects where the creditworthiness of local entities may not be adequate for direct access, even though the specific project or service may provide adequate opportunities for commercial structuring. In such an arrangement, the strength of sponsors, the legal status of the SPV and the financial assessment of the project or service become important concerns for potential market access. Other Support Issues: Development of a municipal bond system in India will help to address the need for enhancing access to the capital market for infrastructure investments while simultaneously introducing market based discipline in such borrowing. This will help to provide the necessary incentives and motivation for various governmental entities to introduce the long needed reforms in service provision and delivery. In order to develop an effective system it would also be useful to draw upon the design of the Australian Loan Council, which co-ordinates the macro-economic fiscal policy with state level market borrowing. The states are given greater freedom to determine their own financial requirements which is, however, linked to stringent standards of financial reporting and the willingness to be subject to tighter surveillance and adherence to various fiscal indicators. Any explanations for variations from these indicators are made public to ensure transparency of the entire process (World Bank, 1995). For borrowing by municipal authorities, an appropriate regulatory framework with a mandatory credit rating, appropriate disclosure norms and adherence to strict financial norms will need to be introduced. It may be also useful to consider a ceiling on total municipal borrowing in relation to some financial potential measure. Even at present, some municipal legislation such as the Bombay Municipal Corporation Act provides for such limits in relation to the total property assessment. However, other measures linked more to the actual financial performance of the agency such as a cap on the debt service ratio may need to be introduced.20 A number of states also have financial intermediaries for financing municipal or industrial infrastructure which may also access the market through municipal bonds as illustrated by the state level arrangements in the US (Refer Box A3-4). Such state level support on commercial terms may be relevant for India. 20 For example, in Philippines the recent amendments to the local authority legislation provide for a cap of 20 percent on debt service ratio (Rosario, 1995). 75 & r-Q a, : g:   0. 4 Aon ;:1 F, A ft a-.4 tb It 5 rA 0 q to la, jw A V. x -  td i-f... J, M :1. - - ,,W rA 4m ryk. cs 4M. %J) 4M Po . J=, " . ,, ..M.. qi - 51.14M ., - . . t-. .r IM so. tb qo_ W.. P, CL eo rA 40 CO 00 CD 'A r*7 go 'A W fD tA M . . ..... -M UQ a CD In 9I CD gi R-  r-L C14.0 ..... .. Wa 0 Cb f's P) 00 O., rA (n 6 (10 -e 9 CD G-I= 0 r-L cr. KP 'I r-L L iL -, (7, 0- 0 5 0- Zs . ... .... CL 0 < a n O.. 4WM fb ZR E; Iil E: M K ... 7 O . -tr Z.. O 51 ,, X- 5o l - CP .00 CDCD do ,j 0 (D EL a. to Ln OQ -,I L;:11 ....... :Z CL W ,gOO CA 0- 0- ..gz - . I.. 5[ a . .10 ,Z ... CA tD (D rDit n 0 CD tA 4,t 0 O eA .-t 4: R.E 11 co fp N CD 4n . ....... ON CD 'M . . ......... . .... 0. . .. O 00 P 2 5 .M '', Z qQ, -5 ... ... 4) g M O fD CD - 5` W. r" , " R Wp CD (D 0CL ... Pu 1. W. . ..... 6 lw. CL < IO.. .  M. 0 iz. V4 O' it CO, 'M. 6 0 : IqQ W 0 0 5 0 ct R (D I M 0 eb .. W" tz ... 0;16 . ,, -n. ll-r aq Q = = =1 6 " 3t 'n CD IZL . 0 :, 03, Vi <-D 0 ... ... rA a '4 a . . .... .W a ct w tn 00". W. to OA CD JM ... ... .. 15 0 'O . . ...... . t4 iru ib ... . 44 : .......... .. Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) ANNEX 4 UWSS Workshop 11 & 12 April 1997 New Delhi, India Urban Water Supply and Sanitation Sector Review Proceedings and Output of Workshop 1. LIST OF PARTICIPANTS Name Designation Organization S. M. Sharma General Manager Uttar Pradesh Jal Nigam N. Parthasarthy Chairman & MD WAPCOS, New Delhi Vijay Kumar Chief Engineer WAPCOS Amit Mehrotra Project Officer Catholic Relief Services P. T. Gurnani Consultant WENCO Consultant Prof. Robin Turrell Consultant World Bank, Washington DC Shyamal Sarkar Sanitary Engineer World Bank, New Delhi Ian Curtis Head ODA- WSO Hamdy M. Eisa Head Agriculture and Water World Bank, ND Celine Benny Project Manager Kalakar Trust David Erhardt Water Sector Economist London Economics Kirtee Shah Architect Ahmedabad Mihir Bhatt Director Foundation for Public Interest, Ahmedabad Dr. P. S. Rana Executive Director HUDCO, New Delhi William Derbyshire Consultant London Economics B. S. Minhas Joint Secretary Ministry of Urban Development R. Sethuraman Deputy Advisor, PHED CPHEEO, MUAE, N. D. R. A. Ghodke Additional Commissioner Pune Municipal Corporation V. Ranganathan Principal Secretary Water Supply & Sanitation Dept. Earl Kessler Director USAID Sheela Patel SPARC Mumbai Keshav Varma Municipal Corporation Ahmedabad Kanwarjit Sigh Executive Engineer Delhi Water Supply Aung Chein Project Officer UNICEF, New Delhi Barbara Evans Sanitation Advisor UNDP/WB Water & Sanitation Program Renu Khosla Coordinator Urban Poverty National Institute for Urban Affairs Dr. Meera Mehta Consultant 77 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) 2. PROGRAM Dates: Friday 11th April & Saturday 12th April 1997 Venue: Conference Room, World Bank, 55 Lodi Estate Day 1: 11/04/97 9.00 Introduction Purpose (Mr. Ian Curtis) Background (Prof. Robin Turrell) Process 9.50 Stakeholder Analysis 10.30 Broad Framework for Analysis 10.40 Policy - UWSS & Ninth Five Year Plan I I Coffee Break 11.15 Problem Analysis in Groups 1.15 Lunch 2 .00 Checking the Problems 3.45 Coffee Break 4.15 Inclusion of additional Issues 5.30 Coffee Break 6.00 Objective Analysis 7.00 Checking the Objectives 8.00 Close Day 2: 12/04/97 9.00 a.m. - 8 p.m. Building the Problem Tree Facilitator (Days I & 2) Ms. Archana Patkar 3. WORKSHOP OUTPUT A. STAKEHOLDER ANALYSIS The participants produced an inventory of major stakeholders in the sector * Ministry of Water Resources * Ministry of Urban Affairs and employment * Ministry of Finance * Ministry of Environment and Forests * Central Public Health Environment Engineering Organization * Central Pollution Control Board * National Institute of Urban Affairs * Planning Commission * State Urban Development Departments * State Pollution Control Board * State Water Supply and Sewerage Board * Public Health Engineering Dept. 78 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) * City Water Supply and Sewerage Board * Municipal Corporation * Financing Institutions External (Bilaterals; Multilatcrals; Development Banks) National (IL&FS, LIC, H1UDCO) Private * Non-governmental Organizations * Elected representatives * Consumers Formal and informal coverage Domestic Serviced High/Medium/Low-Income Groups Women and Children Domestic Unserviced Low-income Groups Women and children Commercial Entertainment (water parks) Business Industrial * Consumer Groups - Ragpickers - Elected Representatives Municipal Councilors Mayors * Investment Bankers - Consultants * Water Supply Staff * ;Employees of WSS and Municipal Bodies Safai Karamcharis -- Unions and Associations - =Regional Development Authorities - City Development Authorities * Contractors * Institutions (Educational, Scientific, Research and Training) * Electricity Supply Agencies * Farmers * Polluters Industrial Polluters Cities * Manufacturers/Suppliers * Private Water Supply Providers Operators (International National, Private, Local) * Project Affected Persons * The Urban Poor * The Media * Lawyers 79 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) B. PROBLEM ANALYSIS In five groups of four/five each, the participants identified the real/existing problems and issues affecting Water Supply & Sanitation, as shown in Table A4- 1. T'&a. to A4--1. Prdm-b - ..i .a .... Al No incentives for conservation at Provide incentives to users to C 10 user level conserve water A2 System contractor -driven/nexus Reduce corruption A5, C4, X1I between politicians, professional and contractors A4 Poor access to credit for Provide access to a range of X8 development of new water supply funding and sanitation infrastructure 1. Create an environment which attracts private finance 2. Create financially viable structures 3. Provide information on sources of finance A5 Priority given to capital rather than Choose least-cost option for X14 rehabilitation investment new investment 1. Undertake least-cost analysis to inform choice between capital and rehabilitation investment 2. Ensure that all costs are accounted for in analysis A6 Prioritization of schemes not based Rationalize the planning X9 on felt needs (State-level) process 1. Prioritize needs-based planning 2. Technical rather than political planning process 3. Plans should meet basic minimum needs 80 Annex 4 UWSS Workshop 11 & 12 AprU 1997, New Delhi (India) ........ ............ ..... ..... . .... ........ . ...... ............... ...... '.'.... . .. . . - .. .. .. . .. . . .... .. ' " ''.. .. .... . .... A8 Limited autonomy for taxes/charges E8 in some states A9 Inadequate monitoring and follow- Improve monitoring of water B3 up of water quality quality B2 Limited and inappropriate training Build institutional capacity for E2, ES, D7, at all levels Human Resource Development F4 of the sector B3 Water quality problems at 1. Make systems accountable X49 household level 2. Create consumer courts 3. Awareness and education of households on water and health issues B4 Complexity in obtaining funds 1. Develop info system on A4 availability of funds 2. Make financial institutions more user-friendly B5 Deteriorating raw water quality 1. Institute pollution control B3 measures 2. Institute regulatory measures for groundwater exploitation B7 Lots of illegal connections and Improved water supply X16, X17, boosters X18 B8 Tariff structures are not equitable X46, X47, XSO B 10 Reluctance, due to high perceived A4, F10 risk, of private sector to participate C1 Water and Sanitation Systems 1. Incentives: Where grant D3, Xl, X22 Planning not integrated funds available provide increased incentives for sanitation 2. Sanctions: Against pollution by towns or cities C2 Over exploitation of Groundwater X24 C4 No incentives to staff to do UFW X14 maintenance work 81 Anniex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) ~~~~~~~~~. . . . . . . .... . . . . . . . . . . . - - . . . . . ........ ...::, . ,:...,,.. .... ,,.- . No. .. ' ... . i ".'.-'- C5 User agency (city-level) has no 1. Abolish monopoly of State Xl, X14 choice about executing agency Water Boards (WSSBs and (state-level water agency) PHEDs) 2. Link to building capacity at selected towns and cities for project management C6 Poor coordination between related Cl, Dl, G3, agencies XI C7 Multiplicity of authorities Cl, C6, DI, E8 C8 Tariffs are inadequate to cover real B1O, X16 costs of water and sewerage C9 Inadequate information on sources A4 and direction of funding CI0 Wastage X16 Di Lack of Proactive Settlement Xl, X9, X22 Planning and implementation D3 Priority to water supply not X23, X25, sanitation X26 D4 Increasing pressure on land for XI infrastructure D5 No resource management (surface X24 or underground) D7 Lack of technical expertise Provide technical expertise for Dl, F9, Xl, O&M along with proper XI1, X12, certification X 14 D8 Poor realization of revenue Improve revenue collection B10, X16 D9 Non-working meters CIO DIO Recontamination Provide safe water i.e. B3 minimize contamination in distribution system El Rural Bias in State Legislatures Constitution of Legislature X8 Committees to review water allocation issues E2 Poor Management Systems A7, C4, Fl, X12, X13 E3 High Turnover of Chief Executive E5 Officers 82 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) TabA4 t (c WONt). w P c' ..'. .. ..- Card. Proble dnfedOjc IId ~dLinkages. ~~~~~~~.-X.; ... 0 ' b'',,'00 0'S 0 0 0' V:00.ftt0. .:S4:'..'' gS0 0 0 - .c ... .. .. . .. ........ ... .. ........ 0 l '0 . .-.-. ..-.-} -----...... i--!-- -22-T.iT . . . . . . . :.. .. } .. ........ T . ..! ...i),X-E2--00 , 2- . .......22 .. .. .. . E4 Absence of professional city Cl, Dl, E5 managers E5 Lack of management expertise Bi, Cl, E2, E8, F4 E6 Inadequate delegation of financial Review roles, responsibility X14 powers to operational staff and authority at each level E7 Inadequate/erratic power supply Ensure reliable power supply XI 7, X24, X25 E8 Irrational local revenue structures Rationalize tariff structure, Al, C8, D8, in some cities/towns with cross-subsidy in view Fl, F2 El0 Groundwater contaminated by Standardize and strictly B3, X48, sewers implement construction and X50 maintenance of sewers F 1 No incentives for metering CIO F2 Inconsistency between obligations 1. Private contracts - B 10, X16 and money to meet them preference to competitive bidding 2. Cases where provider is separate from municipality there should be a proper "management fee" or tariff based contract 3. In municipal enterprise cases similar and binding arrangement (MOU) F3 Unresponsive Procurement Xl, X14, Procedures X19 F4 Unavailable/inappropriate A5, C4, D8 performance indicators (Capital vs. O&M) F5 Urban Water Supply and Sanitation C8, E3, E5, - highly politicized E8, D7 F6 Lack of Quality assurance X19 (Construction) F8 Financing: Long Lead Times X8, El F9 Rigid Application of Design Xl, X14 Guidelines (in some cases) 83 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) Tabe A4 (out~ Pc~bemAnalyw ~~~~~.... . .... . . . . . ... . . . .. - . , . . -. - .-.. .. S ~~~. . 1 -- ' ' ' : ''':'"'.' " " ' " " :-. ' - -.. . . . . . ................... ,, --. . . ,~~~~~~~~. . ., . - - ., . . . . . . . . : . . . F10 Financing: High Interest Rates X8 GI Lack of awareness/education in the B1, E3, E4, public and policy makers X3 G3 Lack of city infrastructure maps Cl, DI, X21 Xi Poorly designed infrastructure X17, X19 X2 Poor urban governance Bi, Cl, E2, X3 X3 Poor Human Resource B2, E4, E5, Development X5 X4 Corruption B2, E3, E8, F5, X3 X5 Inflexible staffing procedure E5, D7 X6 Limited autonomy for manpower E5, D7 augmentation X8 Scarcity of Capital Funds D3, F5, X19, (Operational Level) X21, X22 X9 Bias in service and quality of B8, X21 coverage towards privileged sections X10 Inadequate responsibility for public D3, X22 sanitation Xl1 Use of inappropriate technologies Use of appropriate technology Xl, X14 for sewage treatment X12 Insufficient or ill-used GIS - Cl, Dl, G3 management information systems X13 Inadequate management X14, X16 information systems (O&M, Financial) X14 Poor operations and maintenance B3, X19, X24, X25 X16 Scarcity of revenue funds E7, X14, X50 X17 Low Pressure D1O, X20 X18 Leakage X20 X19 Infrastructure in bad/poor condition DIO, EIO, X18 84 Annex 4 UWSS Workshop 11 & 12 April 1997, New Delhi (India) TaI A/a.4 con.4 x- . . .. -i... . l.i. . X20 Boosters X24 X21 Infrastructure provision is skewed X24, X25 X22 Infrastructure coverage is low X24, X25, B8 X23 No safe disposal of sullage/sewage X23, X49 water and solid waste X24 Not enough water for consumers X46, X47, X49 X25 Not enough sanitation for X46, X47, consumers X48, X49 X26 Poor Awareness of Good Hygiene X49 Practices X45 Absence of consumer orientation X50, X46 X46 Consumers unwilling to pay XSO X47 The poor pay more where not X48 formally covered X48 Environmental degradation X50 X49 Ill-health X50 Services not sustainable Notes: 1. The term "infrastructure" wherever used, covers both water and sanitation infrastructure 2. The objective analysis was developed only partially (in small groups) due to time constraints. As such it was not ratified by the larger group. 85 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) India - Water Resources Management Sector Review Urban Water Supply and Sanitation Report Annex 5 - Report from the World Bank/Government of India Workshop on Urban Water Supply and Sanitation Vigyan Bhawan, New Delhi. June 9-10, 1997 Group I: Delivery of UWSS - Institutional Reforms Chairman: Mr. V. Ranganathan, Principal Secretary, Govt. of Maharashtra, Water Supply and Sanitation Rapporteur: Mr. M. M. Dutta, Short-term Professional- Environmental Health, WHO Institutions Mean: 1. Consumers; 2. Public representatives; 3. Provider agencies e.g. Urban local bodies, State Water Supply & Sewerage Boards, PHEDs, Municipalities; 4. NGOs and Private Sector Broad Strategy The strategy is to change existing structures so that organizations and people in the sector will delivery sustained, efficient service improvements to customers. To do this we propose: * systemic changes, to set the new rules for the game; * encouraging and allowing local level innovations within the new framework; * responding to the demand for assistance which will emerge once players have the motivation to improve performance. Systemic Changes Suggested: 1. Involve three key actors namely; Customers, Public Representatives & Provider Agencies to improve UWSS services to meet demand on a sustainable basis; 2. Operationalize devolution of UWSS responsibilities to Municipalities in accordance with 74th CAA. Mandate key good practices e.g. commercial accounting system, accounting separation, long-term planning and consumer consultation; 3. Reform the State Utility Boards: separate policy and regulatory functions from operations; disagree operations into functional areas; and commercialize or privatize entities; 4. Rationalize tariff structures and tariff-setting procedures through legislative changes and a system of incentives and sanctions; 5. Reform of the financing systems to enable direct financial market access for local authorities and enterprises, and new forms of financial intermediation; supported by leveraging public resources; 6. Create a comparative competition facility; 7. Innovation through windows of opportunity: * Innovate locally, including involving the private sector in a variety of ways; developing new approaches to serve and involve disadvantaged groups: reform tariffs; increase efficiency, 86 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) improve technical and operational practices; introduce citizens' rights & duties, access new finance; 8. Demand Led Capacity Building * Provide technical assistance and training, in response to municipal and utility requests. Thirty-three- Step Recommendations for Action Objective: Create level and institutional structures which will encourage good practice at the local level. Allow for incremental opportunistic improvements within a framework which aligns organizational and individual incentives with the public interest. Recommendations: Develop State Water reform strategies: This should inter-alia provide that no scheme is taken up unless the Municipal bodies pass the resolution for the scheme to be taken up and besides all the participating Agencies accepted the financial responsibility. The Municipal Council can decide to: (i) Execute on its own (ii) Give to a private party (iii) Execute through State Water Authority Once the scheme is completed, the Municipal body should run it either: (a) On its own, or (b) By contracting out to Private Sector, or (c) By contracting it to the State Water Authority In all cases, there should be regular interaction between the Ward Committee and the Municipality and Service Provider. Where separate Statutory Authorities have been set up (e.g. Hyderabad, Chennai) there should be regular interaction with the local Municipal Authorities with the Ward Committees. * Take steps for creation of databanks on service levels and for- operational and investment planning implement action plans for improvement of services in existing schemes. Activities on preventive maintenance, leak detection, reduction of UFW and action on drinking water quality and monitoring should be taken. This is to create a climate favorable for reform. * Prepare model laws and procedures for devolution. * Pass state laws to devolve power for UWSS to municipalities (where this has not already been done) and implement institutions envisaged by the 74th Amendment. These laws should define the relationship between UWSS responsibilities and Town Planning Institutions. They should also provide for adequate service in urban peripheries. * Implement reforms of state water supply entities, including disaggregation into discreet functional units, commercialization, grant of full functional autonomy, execution of functions through contracting out and progressive privatization. * Implement institutions to develop and manage multi-municipality bulk schemes, such as planning committees and integrated competitive procurement. * A program of awareness creation at all levels should be undertaken. Note: Development of improved water resource management and regulation is essential. This topic is discussed under the "Intersectoral Allocation, Planning Management Report," (World Bank, 1998). The recommendations of the two exercises need to be integrated at a later stage. 87 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) Objective: Promoting good Municipal/Utility Practice * Undertake human resources development programs for WSS. * Institute integrated long-term municipal development planning, including integration of waste water disposal as well as water supply. * Commercialize municipal utilities, giving them management freedom and accountability for results. * Improve accounting and auditing practices. * Create cadre of skilled specialist Urban Managers. Key functionaries in Municipal Bodies and Municipal President, Chairman, Mayor should have a tenure of at least 3 years. * Wherever necessary, the Municipality should be permitted to recruit the minimum staff required for O&M schemes. * Develop Sample methods and procedures for all the above Objective: Promoting Civil Society and Consumer Association * Programs of awareness creation in the community should be executed wherever possible with the assistance of NGOs and consumer associations and regulate inter action should be held by the Municipal Bodies with these organizations. * Develop business - community - civil society - government partnerships, emphasizing empowerment of women and inclusion of poor and disadvantaged groups. Rights & duties of citizens for water and sanitation services should be spelt out. Objective: To improve customer responsiveness * Require customer consultation on state laws - consultation means an active duty to seek views and to take those views into account, not a passive duty to publish. Require consultation with disadvantaged groups. * Institute consultation through ward systems and other mechanisms, including NGOs and customer associations, over customer priorities, and service level/tariff trade-offs. Objective: Serving disadvantaged groups * Develop effective basic universal service obligation * Develop and implement contracts with UWSS delivery agencies which ensure universal coverage. * Develop integrated schemes, in which service for poor areas is planned and implemented at the same time as service to better off areas, through participatory approaches. * Cross subsidies of water supply and sanitation to poor groups and those disadvantaged should be provided and made transparent. 88 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) Objective: Inducing comparative competition * Develop models for comparative competition, including data definitions, analytic techniques and Institutions to ensure sustainability and effectiveness, for example, through contracting out. * Set up institutions to collect and disseminate comparative information and assist municipalities, utilities and citizen's groups in interpreting it. * Develop approaches which will inform the public and citizens' groups. These include setting service standards, reporting actual performance against standards and publishing tables which compare performance between municipalities. Objective: Application to Smaller towns - the basic principles listed above apply to small as well as large towns. However, for small towns the principles may need to be interpreted in specific ways. These include: * Small towns should be able to delegate their responsibilities to State-level bodies. * State governments should provide outreach technical assistance to support small towns. * Financial intermediaries should offer loans to small towns when they are financially viable. Procedural requirements, PSP and restructuring options need to be flexible and applied in ways which are appropriate to each Municipality's size and circumstances. Objective: Mobilize World Bank/Other Agencies support to Institutional Reforms • State-Level UWSS Sectoral Reform Programs (e.g. from other sectors Orissa Power Sector Project, Water Resources Consolidation Projects: Orissa, Tamil Nadu). * Demonstration/Pilot Projects in committed cities undertaking Reform Programs (e.g. under the proposed Hyderabad II, Madras III, etc.) - Technical Support Project, through the center, to catalyze and facilitate in developing policy guidelines and implementation guidance for institutional reforms at central, state and municipal levels (e.g. model statutes, model contracts, consultation procedures, comparative competition, guidance for tariff reforms, institutional restructuring, etc.) 89 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) Group II Financial Management and Financing of Urban Water and Sanitation Chairman: Shri V. Suresh, CMD, HUDCO Resource Person: Prof. K. S. R. N. Sharma, IIPA Consultant: Dr. Meera Mehta After an introduction of the subject by the Chairman and presentation of the key elements of the financial reforms by the consultant Dr. Meera Mehta, detailed discussions were held in the group. Based on these deliberations, a summary of key recommendations, in addition to those included in Section 5 of the Report, in the field of financial management and financing of urban water and sanitation is presented as under: 1. Pricing Policy and Tariff Reforms A national policy towards full cost recovery in respect of water supply and sanitation sector was adopted in March 1993. Further, economic liberalization and commercial orientation in the sector at the State level needs introduction of cost reflective and realistic tariff structure with a transparent framework for tariff-setting. Tariff (covering connection charges, infrastructure development and consumption charges as well as apportioned or dedicated tax or cess for water supply and/or sewerage/sanitation scheme) should be set primarily on efficiency criteria. However, explicit financing programs, including subsidies, targeted at disadvantaged groups should be provided to ensure fulfillment of basic needs at affordable rates. Financing of programs should be as much as possible through non-budgetary sources, such as lifeline block tariff structure, community credit systems, and installment plans for payment of capital and connection costs. To ensure water and sanitation facilities to the urban poor at affordable rates, a variety of measures are possible. These include: i) varying rates for different consumption slabs with the lowest slab up to 5 kl per family per month being charged at rates affordable by the poor. ii) explicit subsidies targeted for the disadvantages groups should be provided to ensure fulfillment of basic needs at affordable rates. Such subsidies will need to be internalized at appropriate levels: iii) In addition, development of community based saving-cum-credit system need to be promoted extensively. Regulatory tariff mechanisms should be instituted to ensure that tariff reflect efficient delivery of services. This would ensure that efficiency (including unaccounted for water) leading to high cost is controller so that the high cost due to operational inefficiency is not passed on to the consumer. Separate accounts and budgets for water supply and sanitation sector be maintained by the local bodies to ensure transparency in costing of the services and tariff rates. Introduction of rationalized tariffs and planned achievements for cost recovery should be considered as a prerequisite for borrowings from the financial institutions and transfer of funds from state or central government to the local bodies. For a rationalized tariff structure to ensure equity to various groups and conservation of water, introduction and maintenance of an efficient metering system is necessary. 90 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) In areas where full metering is difficult, alternate appropriate measurement should be evolved. Moves to improve efficiency of billing and collection system need to be given utmost emphasis. Public awareness about the costs of providing UWSS Services and the need for recovery has to be improved through appropriate, innovative and sensitive public campaign. It is essential to disaggregate/unbundle the regulatory and operation functions for providing water and sanitation services. This may be done through a tariff regulatory authority or an urban utility commission to ensure a fair price to the consumer as well as to the service providers. More inquiry is necessary in this area incorporating the lessons from the power sector in India and experience of such commissions in other countries to develop appropriate regulatory structures for UWSS. 2. Financing System Changes and Sourcing of Funds The direct market access for service providers needs to be facilitated through fiscal incentives and required legal reforms. Fiscal incentives need to be instituted to foster direct market access by municipalities. In addition, a project development fund to reduce the risks along with investment banking needs to be supported. Development of a municipal bond system needs to be set within a proper regulatory system. For supporting the smaller municipalities and corporate entities financial intermediation will be needed to ensure better access to the capital market. Such intermediation needs to be through market, oriented financial intermediaries. Legal reform and regulatory frameworks to enable this should be implemented. Credit enhancement facilities need to be introduced and provision of financial guarantees need to be facilitated. The limited public resources need to be effectively utilized for leveraging larger funds from the market. Some of the measures for this include: a project development fund, contributing equity to the development of commercial credit enhancement/guarantee facilities and equity in developing market oriented financial intermediaries. A major concern in the domestic debt market is the short tenor of securities. To overcome this, some of the measures which need to be supported include: support market making to enhance the secondary market operations through liquidity and back stop facilities, as well as new financing products such as take out financing. Urban development FIs particularly as State levels should be evolved into more market oriented agencies. Mechanisms need to be developed to facilitate creation of a niche for UWSS and urban infrastructure in financing programs of the FIs. Expanding access to infrastructure through various initiatives in partnerships is an urgent requirement. Since access to capital markets for raising resources, be it through the municipal bond market or through raising of infrastructure bonds for water supply and sanitation etc., is also depended upon large number of structural and organizational reform in the agencies and the working system and also forging of partnership, it is essential for national/ international development institutions like the World Bank to come up with programs for creating capacities and minute details of the reform transformation so that over a phased period of 2-3 years time period, substantial capacities and reform in the systems get established. This, to a large extent, would also help create an enabling environment to have increased access to resources 91 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) Group III Private Sector Participation in Urban Water Supply & Sanitation Chairperson: Mrs. S. S. Nair, CMD, Chennai WSSBl Resource Person: Avdhesh Kumar, TCE Consultant: Prof. Robin Turrell The Action Plans, proposed in the Draft Consultants' Report Identifies a number of actions and sequences for promoting private sector participation; which are as follows: 1. Promoting Private Sector Participation * Develop and adopt an incremental opportunistic strategy, starting with: * financially viable areas; * progressive municipalities - state governments and development agencies work with them to develop best practice; and * easier types of PSP, such as management contracts, service contracts and BOTs. * Develop models - for example, procurement guidelines, model contracts, toolkits to help Municipalities in a range of situations. - Assist selected Municipalities to develop and conclude contracts with the private sector. These actions were discussed by the group and endorsed. In view of the experience enumerated by the delegates in private sector participation, it is proposed to add the following to the Action Plan. Review of existing private sector participation experience in India and overseas in addition to what is already in the report, should be carried out to form a useful database. The responsibility for the action on the above issues would be that of water board/municipal corporations/municipalities within a policy framework established by the state and the central government. Therefore, there is a need for clear statement of policy with respect to private sector participation both by central and state governments. As a result of discussions on these proposed action plans, the following main issues were debated: 1. Whether reforms are necessary to break the existing vicious circles? 2. Whether private sector participation is seen as a viable option? 3. The areas where private sector participation can be introduced. 4. What are the key constraints in introduction of private sector and suggestions for their alleviation? 5. In what way the World Bank may assist in encouraging private sector participation in the sector in conjunction with central/state government/water boards/municipal corporations etc. 2. Need for Reforms It was generally agreed that the maintenance of the current situation was not a viable proposition as the need of the UWSS sector are far greater than that public sector alone are able to deal with satisfactorily using their own resources, these being technical, financial, management and general human resources. 92 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) Recommendation: Efforts should be made by all Sector Parties to encourage Private Sector participation wherever possible. 3. Viability of Private Sector Participation It was a general feeling that private sector participation (including public private partnership) should be started in areas where water entities and municipalities were more receptive and a start could be made on easier forms of private sector participation, such as: operation and maintenance of water and wastewater treatment plants; pumping stations; billing and collection; supply of water by tankers; making water and wastewater connections; project management; low cost sanitation; operation and maintenance of community toilets; bulk supply of water; recycling of wastewater to industries; general engineering services; and laboratory services. The whole idea is to establish a demonstration effect of private sector participation in the sector thereby encouraging other forms of Private Sector involvement and the wider application of the principles and practices of private sector management in the water supply and sanitation sector at large. Development of collaboration between Indian and foreign manufacturers of goods and equipment should be encourages to bring in the latest technology to the country. Recommendation: Demonstration Projects should be established to show the benefits of private sector participation. 4. Constraints in Private Sector Participation * lack of clear government policy with respect to private sector participation in the sector; * there is little accurate information available about the unit cost of operations for various utilities throughout India or operative data available from overseas; * administrative, financial and legal requirements for private sector participation are not clearly stated; * there are no guidelines or standard documentation to assist in preparing for inviting offers for private sector participation; * the tariff reform is a political subject and it is extremely difficult to revise tariffs to cover full cost; * in some of the service contracts which are awarded in the private sector, like supply of water through tankers, formation of cartels could create hurdles for Water providers; and * generally there is much more manpower in water boards/municipal corporations than the Private Water providers would like to keep for operation and maintenance of the systems. To deal with the excess manpower, would be an issue to be considered. 5. Alleviation of Constraints * it is recommended that the government of India provides a clear policy statement in conjunction with the state government on the potential roles for private sector participation. The procedures to be followed by water entities/private sector participation operations in adopting PSP models should be clearly outlined by the central/state governments; 93 Annex 5 UWSS National Workshop 9 & 10 June 1997, New Delhi (India) * the government should outline an incentive framework/package to encourage private sector participation in the UWSS sector; * a database, both at the national and international level, needs to be developed. The data at the national level could be coordinated by the central government while that at the international level by the World Bank, to get an idea of the prevailing cost structure; * the central government in conjunction with the external agencies should guide the State governments in formulating the legal, financial and administrative framework for private sector participation. This should include the establishment of an effective monitoring/regulatory mechanism to ensure efficiency improvement; * guidelines and standard documentation for inviting offers for private sector participation may also be developed by the same group; * there is a need to make the water sector self-sustaining by making full cost recovery and towards this end policy decision by state governments is a pre-requisite to ensure that the water providers run as viable entities; - it is recommended that the Water entity should have a failback capacity to deal with monopoly or cartel formation; and * it is recommended to initially contract out new installations to minimize labor problem. In respect of existing installations, contractors should be obligated to deploy the staff in case the staff is willing for transfer to private sector. Otherwise, the surplus staff will have to be absorbed on other existing installations of the water entity. A special fund could be created to pay for the redundancies or for retraining surplus staff. 6. Expectations for The World Bank with Respect to Private Sector Participation * it would be very helpful if the World Bank makes a clear policy statement with respect to its financing strategy in the water sector participation; * the World Bank should develop project evaluation processes which would match the time scales of the private sector; * to establish viable water entities tariff adjustment would be required. In some cases, this may be quite significant. Therefore, tariff support mechanism may be required and the World Bank's participation could be very useful; * the Bank may consider providing guarantees to cover risks to encourage private sector participation in the UWSS sector; * the Bank could also consider creating a fund so that the interest earned on the fund could be used to part cover certain project risks; * World Bank may consider taking equity in conjunction with water entity and other financial institutions to encourage private sector participation; * to help develop technical, financial, administrative and project management requirements including project preparation leading to tender documentation, The World Bank may provide technical/financial assistance to encourage private sector participation; * a global database on private sector participation needs to be developed to demonstrate experience of private sector participation world-wide; and * The World Bank should identify and work with selected states and water entities so that progress can be made quickly. 94 Annex 6 Supplementary India UWSS Statistics India - Water Resources Management Sector Review . Urban Water Supply and Sanitation Report Annex 6 - Supplementary Indian UWSS Statistics Table A6-1. Plan outlays on UVWSS (current prices in Rs. billion) Plan Period Total Plan Urban Water As a % of total Outlay Supply and outlay Sanitation First Plan (1951-56) 33.59 0.43 1.28 .............................................................................. ...................... ......................... ...................... Second Plan (19956-61) 67.69 0.44 0.65 .............................................................................. ..........ii........... ......................... ...................... Third Plan (1961-66) 85.93 0.89 1.04 ............................................................................. ...................... ......................... ........................ 3 Annual Plans (19966-69) _ NA NA Fourth Plan (1969-74) 159.32 2.82 1.77 ............I............................................ ........................................... ......................... ........................ Fifth Plan (1974-79) 392.46 5.49 1.40 ......................................................................................................................................... ........... Annual Plan (1979-80) 125.27 1.98 1.58 Sixth Plan (1980-85) 976.07 17.67 1.81 .............................................................................. ...................... ................... . ..... ...................... Seventh Plan (1985-90 1797.42 29.66 1.65 .............................................................................. ....................... ........................ ....................... 2 Annual Plans (1990-92) 1366.17 17.21 1.26 .............................................................................. ...................... .......i................. ...................... Eighth Plan (1992-97) 4334.84 59.82 1.38 Ninth Plan (1997-01) 7800.00 117.00 1.50 Notes: For the Ninth Plan period UWSS share in total outlay is assumed at 1.5 percent of total outlay. Sources: MOUAE (1996); For Ninth Plan - GOI (1997). 95 Annex 6 Supplementary India UWSS Statistics Tal 62 ihhPa otM n xedtr for UWSS (current Rs. billi Central Plan State Plan Total ............................................................................................................................................... ....................................................................... Agreed Outlay (1992-97) 2.63 54.94 57.57 1992-3 - Actual Expenditure 0.26 8 94 9.20 ..................................................................................................... ............................................................... ......... ................... 1993-94 - Actual Expenditure 0.56 9.94 10.50 1994-95 - Outlay 0.56 14.77 15.33 ....................................................................I................................ .................................1 1994-95 - Anticipated Expenditure 1.05 13.87 14.93 ...................~.......................................................................................... ..... .......................................................................................... 1995-96 - Approved Outlay , 0.64 16.84 17.48 ............ ................................................................................................................ ............................................. .. _ .. .... _ . _ . . ... . .~~ ~~~~~~.......... ................... ...................... 1992-96 - Total for 4 years 1.96 39.66 41.62 Notes: The total outlay at Rs. 57.6 billion is less than that in reported in Table A6-1 as it is based on actual outlay agreed in the Annual Plans. Source: Housing and Urban Division, GOI Planning Commission, New Delhi, as reported in NIUA (1994). Table A6-3. Total infrastructure investment projections (Rs. billion) Year Urban Total Percentage of Urban Infrastructure Infrastructure Infrastructure in Total Infrastructure Investments ....... ................ ........................................... ................................. . ....... ................................... 1996-97 85 675 12.6 1997-98 101 759 13.3 1998-99 121 852 14.2 1999-2000 153 956 . 16.0 2000-01 189 1076 .17.6 Total 650 4318 , 15.1 Source: Derived from EGCIP (1997) 96 Annex 6 Supplementary India UWSS Statbts Table A6-4. Performance of Water sector in selected Indian cities (1993-94) City Source Population Revenue Expenfiture Extent of cost in 1991 Income on water recovery % (million) WS Of costs) O&M O&M O&M, O&M Debt Debt Sev. serv. Bangalore W A 4 13 776 7 604.7 875 8 128 88 Ahmedabad FIRE 3.31 152.5 251.8 324.2 61 47 ............................................. ........................ ............................. ...........................;..................... Pune FIRE 2.49 221.2 216.5 226.3 102 98 ....................... ............................................................ . ............................................. ................... Baroda IHSP 1.13 78.1 94.0 146.3 83 53 ............................................. ......................................... ........................ ..........,......... .......... Vijayawada FIRE 0.75 265 273 282 97 94 Tiruppur FIRE 0.31 28.3 114 280 248 101 ............................................. .......................................... ........................ ......... ........ ............ Delhi ORG 8.41 688.7 800.0 86 ............................................. ....................................................... ............................. .......... Madras ORG 5.42 66.3 509.1 13 ............................................... ........................ .................................. .......................... ................... .................... .......... .............. Lucknow ORG 1.67 73.8 181.7 41 ............................................ ....................... .'. .i.......................,.........,,.... , ,........................3... Surat ORG 1.52 23.8 800 30 ............................................. ........................ ................... ..................................... .......... .......... Vishakapatnam ORG 1.06 170.9 100.9 169 ~~~~~~~~~..................................................... 46' '57'3' Aurangabad NIUA 0.59 26.4 46 7 57 ............................................ ........................ ........................ ............... ............ ................... ....... Mangalore NIUA 0.43 12.0 218 55 Solapur ORG 0.62 40.3 62.9 64 Raipur ORG 0.46 13.2 181 73 Bhubaneshwar ORG 0.41 18.4 21.8 84 Notes: For Ahmedabad, the values correspond to the financial year 1992-93 and are based on the water sector results. For Mangalore, the values correspond to the financial year 1994-95 and for Baroda, to 1992-93. Sources: NIUA (1997), Mehta and Satyanarayana (1994a, 1996a, 1996b, 1996d), ORG (1995), Kirlosakr Consultants Ltd. (1997a). 97 Annex 6 Supplementary India UWSS Statistics Table A6-5. Water bills and coping costs of intermittent water supply, Dehra Dun (1996) Parameter Public Tap Individual Total ..................................................................................................................................... .................................................Y!~ q ndvda oa Average income (Rs./month) 1969 5908 4862 Average coping costs (Rs./m3) 33.2 2.32 10.5 A eaewtrb lp................. ......... ...... .....................0.6 .8...... ... .......... ......................... ................................................ ................................................................................................ Average waer bilipad 331m) .6 . Average total price paid (Rs/m3) 338 6.12 13.5 Estimated quantity of water consumed 3.9 15.9 8.4 (m3/montb/bhh ................................................................. ..................................................................................................................... Average monthly costs for water 132 97 113 (Rs. /monthlhh) Average percentage of income spent on water 6.7 % 1.64 /% 2.33% Notes: "Coping costs" include the value of time spent on collection of water as well as for pumps and filtered water, even including the operating costs of pumps, filters and occasional purchases from a private tanker. Source: Choe, et. al. (1996), p. 44. Table A6-6. Tariff increases through HUDCO influence (Rates and Costs in Rs./KI) ....................... .............. ............ .......................................................................... .......................................... ................................................. . .................. State/Town Domestic .Non-Domestic Existing Proposed % Existing Proposed (1993-94) Increase (1993-94) Increase K=arnataka Tumkur 8-10 210 75/ 420 /Month Month Araskire Free 712 Hubl 1.5 2 03 35.3 3.0 4.6 33 Dharwad Hassan 1.9 3.18 67.4 3.8 6.36 67.4 Tiptur Free 4.82 Free 964 Kerala Telicher . 0.4 15 2750 08 30 275.0 .......................... ....... ...... ................................................................................. ............................................................................................. Cannanore 0.4 1.5 275.0 1.8 3.0 66.7 ..................................... .......................... ................ .............. ................ ................................ Malapuram 0.75 1.5 100.0 2.0 3.0 50.0 Iranial Kudu 0.5 1 5 200.0 1.0 3 0 200.0 Tiruwala 0.6 1.2 100.0 Orissa Bhuba 0.71 i 0.90 26.8 neshwar Assam Guwahati 0.40 3.0 650 0 Guj arat Baroda 0.60 1.2 100.0 1.8 to 2.4 3.6 to 5.4 . 200.0 Sources: HUDCO Project Files, 1990-91 as reported in Mulkh Raj (1992). For Baroda: V. Satyanarayana (1992). 98 Annex 6 Supplementary India UWSS Statistics Table A6-7. Prevailing rates for consumption based charges - Domestic use State City Reference Minimum Flat Rate Volumetric Volumetric Rate (Rs./kl) - Variation by Consumption blocks - * . year ('Rs./mnth~) ,Rate fRs. kl . kllmonth .......................... ........................................................................................................................................................................................... (To be levied if meter reading (No Mininum Block By Consumption blocks - Rates in Rs./kl is inappropriate) variation). ............................................................. _... ...................... ........ ................ Rate Variation kVl Rate Up to 25 Up to 50 Up to Above (Rs./month) b size month (R./l)10 100 Andhra Hyderabad I1997 55.0 . 15 I 55.0 I 3.75 6.00 14.00 (Rs./ (above ................................------....... .m onth . ... ... ... ... ............. , , f v ;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. . .. . .. . .. . Vha.h 1993 I150.0 5.0 Gujarat Baroda I 1996 150 to 12100 yes1.5 ........ .... ................................ .......................... .................................. ................... .............................. ...................... ............ .......... .............................................. .............................................. . Rajko t 1996 72 to 4800 yes 1.2 ............................. .................................... ....................... ..........L.Ye....................... .............................. ...................... ....................... ....................... ......................4.................................... .......... IGandhinagar 1990 INA 25 5.0 5.35 5.50 (above ~~~~~~~.................................. ............... ............. ..................... ...................... ........................... . ................... . . ........................ ............................. .............................................. ...... Himach P Shimla 1990 NA090 1.20 Karrataka Bangalore 1996 I 60.00 25 2.4 5.00 I 20.00 I 25.00 ............................ ........;---------- ........................... ....................................... ..... ..... ....................... ............ ........... Mangalore 1992 30 1.0 1.75 3.0 (above 100) ~~~~~~~~.. . .. .. . .. . . . ....... .. . .. .. . . .. . . . ... .. . .. .. .. . .. . .. . . Kerala Trivandrum 1990 NA I 0.75 I 10 free Note: NA - Not Available Sources: I Aurangabad, Mangalore - Pathak, Pushpa (1996), "A Case Study of Four Indian Cities." Paper presented at the Seminar on Pricing and Cost Recovery of Indian Cities. New Delhi. 2 Bangalore - Pillai, A. Ramaswamy. (1996). "Case Study of Bangalore Water Supply and Sewerage Board." Paper presented at the Seminar on Pricing and Cost Recovery of Urban Infrastructure and Services. New Delhi. 3 Dehra Dun - (1996) Activity Report - No. 26. Coping with Intermittent Water Supply - Problems and Prospects. Environmental Health Project. Dehra Dun, Uttar Pradesh, India. 4 Delhi, Jaipur, Chandigarh, Simla, Trivandrum, Amritsar, Gandhinagar - (1991) Domestic Tariffs for Water Supply, compiled from Krishan. 5 Hyderabad - The Andhra Pradesh Gazette (1997). Public Works Notifications. Hyderabad Metropolitan Water Supply and Sewerage Board, Hyderabad. 6 Indore - Scope of Practice of Privatization of Urban Services in India, NIUA. New Delhi. 7 Nagpur, Kolhapur, Pune, Ahmedabad, Rajkot, Baroda. -(1996) Cost Analysis of Infrastructure Projects (Draft Report). Ilousing and Urban Development Corporation Ltd. 8 Visakhapatnam - Mehta, Dinesh and Y Srilakshmi (1996), "City Case Study - Visakhapatnam." Paper presented at the Seminar on Pricing and Cost Recovery of Urban Infrastructure and Services. New Delhi. 9 Pune, Mumbai, Ludhiana, Chennai - Turrell, R. P. J., J. L. Kooijmans, P. T. Gurnani (1996), India Water Resources Management Sector Review-Urban Water Supply and Sanitation Sector Report: Volume 11 - Annexes (draft). 99 § '5 , ~~~~~~~~~~~~~......... ....... ,, .... c................ ; . . , , , ' , , ,;~--- --------- ..... ........ . . ........... Q - ,, .......... . ',.~~~~~~~~~~~i ,i X.,1+. ,,' . .°- 3 m ~~~~~~~~~~~~~~~............... .. ... ...................... E . Q ti 't .. X., m > ' 4 $ , ' l, , ~~~~~~~~~~~~~~~~~~~~~~~~oiIro .......... ..... . . ........ ........c...-._.-. O ' i . t ~~~~- i- - - - - - - .- --- - t- - - . . . . . . . . . . . ... ... . .. .. . ~~~~~~~~~~4 : 11a t- : . . .ii|e|e3E3z° Annex 7 Selective List of Persons Met India - Water Resources Management Sector Review Urban Water Supply and Sanitation Report Annex 7 - Selective List of Persons Met The following is a list of people and organizations consulted during the course of preparation of tlis report. While every effort has been made to include all those who made their valuable time available to the consultant team, any omissions are regretted, but their contribution was gratefully received and due account taken in the final text Ministry of Urban Development and Employment, GOI Mr. B. S. Minhas, Joint Secretary to G00 Dr. S. R. Shukla, Adviser PHEE-CPHEEO Mr. V- B. Ramaprasad, Deputy Adviser, PHEE-CPHEEO Mr. Y. Tripathi, Deputy Secretary to GOI Govt. of Maharashtra and Maharashtra Water Supply & Sewerage Board (MWSSB) Mr. V. Ranganathan, Principal Secretary, Water & Sanitation Dept. Mr. D. K. Bhasale, Chief engineer, MWSSB Mr. M. D. Kelkar, Executive Engineer, MWSSB Mr. A. N. Alawani, Superintending Engineer, MWSSB Mumbai, Municipal Corporation Mrs. Sharwaree Gokhale, Add'I Commissioner Municipal Corp. of Greater Mumbai Mr. V. D. Muzundar, Chief Engineer Sewage Operations Mr. V. K. Kadam, Chief Accountant WSSD Mr. C. D. Kotnis, Dy. MC (Special Engineering) Mr. I. C. Gandhi, Dy. MC (Engineering) Mr. S. N. Turkan, Hydraulic Engineer Municipal Corporation, Pune Mr. Ramanath Jha, Municipal Commissioner Mr. Madhukar Wadke, Additional Municipal Commissioner Mr. R. A. Godke, Additional City Engineer Mr. Ambarish R. Galinde, Chief Accountant Mr. Madhav Harirar, City Engineer Mr. Dhadphale, Dy City Engineer WSS Mr. Jawadekar, Dy City Engineer Govt. of Andhra Pradesh Mr. C. Arjuna Rao, Principal Secretary, Municipal Administration and Urban Dev. Mr. Rajiv Sharna, Special Commissioner and Director Municipal Administration Dept. Mr. B. Rama Krishna Rao, Chief Engineer (Public Health) 101 Annex 7 Selective List of Persons Met Hyderabad Metropolitan Water Supply & Sewerage Board (HMWSSB) Mr. V. Bhaskar, Managing Director Mr. G. K. Rao, Chief General Manager Mr. M. Imtiaz Ahmed, General Manager WB Construction Division Mr. Kursheed Ahmed, Chief General Manager Engineering Mr. P. V. R. Ravindra, Chief Engineer, Director (Projects) Andhra Pradesh Municipal Corporations, Hyderabad & Visakhapatnam (Vizag) Mr. Deepak Kumar Panwar, Commissioner and Special Officer, Hyderabad M. C. Municipal Administration & Urban Development Department, Hyderabad M. C. Mr. P. Satyanarayana, Chief Engineer, Hyderabad Municipal Corp. Dr. B. Nagabhushanam, Chief Medical Officer, Hyderabad Municipal Corp. Mrs. Y. Srilakshmi, Commissioner, Vizag Municipal Corp. Mr. R. R. Devara, Chief Engineer, Vizag Municipal Corp. Mr. R. Ramachandra Rao, Superintending Engineer, Vizag Municipal Corp. Mr. P. Panduranga Rao, Executive Engineer Water Supply, Vizag Municipal Corp. Mr. Q. Q. V. Subba Rao, Superintending Engineer, Vizag Municipal Corp. Mr. K. L. Bhushantan, Executive Engineer, Vizag Municipal Corp. Dr. K. Sambasiva Rao, Chief Medical Officer of Health, Vizag Municipal Corp. Govt. of Uttar Pradesh (GOUP) and UP Municipal Corporations Mr. R. B. Baskar, Secretary, Urban Development Department, GOUP Mr. C. B. Paliwal, Joint Secretary, Urban Development Department, GOUP Mr. Hausila Prasad, Special Secretary, Urban Development, Lucknow Municipal Corp. Mr. V. K. Mittal, Principal Secretary Finance, Lucknow Municipal Corp. Mr. K. S. Sidhu, Commissioner, Ludhiana Municipal Corporation Mr. Arun Goel, Deputy Commissioner, Ludhiana Municipal Corporation Mr. K. R. Narayana Iyengar, Superintending Engineer, PWSSB Jal Nigam and Jal Sansthan, Lucknow, Uttar Pradesh Mr. V. N. Channa, Chairman, Jal Nigam Mr. H. C. Dangwal, Finance Director, Jal Nigam Mr. V. K. Gupta, Chief Engineer, Jal Nigam Mr. B. S. Mathur, Chief Engineer, Jal Nigam Mrs. Hira Sharma, Chief Engineer, Jal Nigam Mr. H. S. Jethwani, Chief Engineer ElM, Jal Nigam Mr. J. A. Joshi, Superintending Engineer, Jal Nigam Mr. S. Sanyal, Secretary (management), Jal Nigam Mr. R. K. Khanna, Manager (Monitoring), Jal Nigam Mr. R. C. Verma, Hydrogeologist, Jal Nigam Mrs. Hira Sharma, Chief Engineer, Jal Nigam UP Mr. Rashid Ahmad Khan, General Manager, Jal Sansthan Mr. R. P. S. Parihar, Executive Engineer, Jal Sansthan 102 Anne-x 7 Selective List of Persons Met Punjab Water Supply & Sewerage Board (PWSSB) and Local Govt. Punjab. - Chandigarh. Mr. N. K. Arora, Principal Secretary, Local Govt. Punjab Mr. A. S. Dhami, Managing Director, PWSSB Mr. P. K. Verma, Director Planning & Design, PWSSB Mr. Shukal Kumar Goel, Executive Engineer, PWSSB Ludhiana Circle Mr. Ashok Kumar, O&M Cell, PWSSB, Ludhiana Govt. of Tamil Nadu (GOTN) and TN Water Supply and Drainage Board (TWAD) Mrs. S. Malathi, Secretary, Municipal Administration and Water Supply, GOTN Mr. L. Palamali, Managing Director, TWAD Mr. C. Subramanian, Joint Chief Engineer, Material Management, TWAD Mr. K. Gamesan, Dy Chief Engineer Planning & Design, TWAD Mr. G. Karuppiah, Joint Chief Engineer Programme Management, TWAD Mr. R. Kamppanan, Joint Chief Engineer Planning & Design, TWAD Mr. K. Karuppannan, DCE (Urban), TWAD Chennai Metropolitan Water Supply & Sewerage Board (CMWSSB) Mrs. Santha Sheela Nair, Chairman & Managing Director, CMWSSB Dr. S. Sundaramoorthy, Engineering Director Mr. R. M. Gandhi, Chief Engineer CMWSSB Mr. Sivakumaran, Executive Engineer Mr. R. Ramakrishnan, Senior Hydrologist Mr. Annamali, Hydrologist Coimbatore Municipal Corporation Mr. V. Gopalakrishnan, Mayor of Coimbatore Mr. S. K. Prabakar, Commissioner Corporation of Coimbatore Mr. C. A. Lakshmi Narayanan, Executive Engineer Coimbatore Mr. K. Narayanasamy, SE TWAD, Coimbatore City Mr. A. Nagaraju, EE TWAD Urban Division Coimbatore Mr. M. Sundaran Mahalingramn, Assist. EE TWAD Tiruppur Exporters' Association (TEA) and Tiruppur Municipal Corporation Mr. A. Sakhivel, President TEA and Managing Director Poppys Knitware Mr. R.M. Subrimaniam, Executive Secretary, TEA Mr. B. Balachandran, Municipal Commissioner, Tiruppur NGOs Mrs. Sheela Patel, Director, Society for Promotion of Area Resource Centres (SPARC) Mr. A. Chandra Mohan, Vice-Chairman, Urban Poor Service Syndicate, Hyderabad. Mr. Syed Razam Hussain, Director, Urban Poor Service Syndicate, Hyderabad. 103 Annex 7 Selecfive List of Persons Met Financial Sector Institutions Dr. P. S. Rana, Executive Director, Housing and Urban Development Corporation, Ltd. Mr. S. Desai, Vice-Chairman & M. D., Merrill Lynch-DSP Financial Consultants, Ltd. Mr. Dhananjay Mungale, Merrill Lynch-DSP Financial Consultants, Ltd. Mr. Ravimohan, Managing Director, Credit Rating Info. Services of India Ltd. (CRISIL) Mr. Hari Sankaran, Chief Executive (Ifrastructure), Infrastructure Leasing and Financial Services Ltd. (IL&FS) Mr. K. Ramachandran, Asst Vice President, Head, Northern Region, IL&FS). Mr. S. D. Rajhansa (Retd.), National Bank for Agricultural and Rural Development DFID-UK & Other Individuals Consulted Mr. Ian Curtis, First Secretary, DFID-UK Alexander Wray, India Program Director, DFID-UK Christopher M. Athayde, Program Manager, DFID-UK Tamsyn Barton, Social Development Advisor, DEID-UK Richard P. Jones, Sr. Engineering Advisor, DFJD-UK Mr. L. K. Agrawam, Director Central Water Commission Mr. MX L Arora, (DWS & SDU), New Delhi Ms. Celine Benny, Proj. Mgr. Kalakar Trust Mr. J. P. Sharma, Chairman, Bangalore WSSB. Mr. K. R Narayana Iyengar, Snr. Eng., Bangalore WSSB Prof. 0. P. Mathur, National histitute of Public Finance and Policy Dr. Dinesh Mehta, Director, National Institute of Urban Affairs Dr. Rakesh Mohan, Director General, National Council of Applied Economic Research Mr. B. S. Naidu, Proj. Mgr., AP Industrial Infrastructure Corporation Ltd. (APIIC) Mr. B. B. Samantha, Proj. Coordinator (Sanitation & Communication), UNICEF Mr. K. S. Varma, Municipal Commissioner, Ahmedabad Municipal Corporation Dr. S. Cairncross, London School of Tropical Medicine and Hygiene. Ms. Barbara Evans, Sanitation Adviser, TNDP-World Bank Water & Sanitation Programme World Bank, India WRM Review Team Members Mr. Vagn Rehoj, Team leader, Rural WSS Team Ms. Elaine Glennie, Financial Analyst & Management Specialist, Rural WSS Team Ms. Shyamala Abeyratne, Development Sociologist, Rural WSS Team Mr. S. Rajagopal, Leader, Water Allocation, Planning and Management (WAPM) Team Mr. Ariel Dinar, Economist, WAPM Team Dr. M. S. Reddy, Water Resources Specialist, WAPM Team Mr. E. V. Jaganathan, Consultant, WAPM Team Ms. Katia Medeiros, Environmental and Health Specialist, WAPM Teamn Dr. J. M. Dave, Environmental Specialist, WAPM Team 104 Annex :7 Selective List of Persons Met World Bank and International Finance Corporation (1FC) Mr. Keith Oblitas, WRM Task Manager Ms. Christina Wood, WRM Task Manager Mr. John Briscoe, Water Resources Specialist Mr. Chris Couzens, Sanitary Engineer Mr. Michael Whitbread, Financial Analyst Mr. Chandra Godavitame, Sanitary Engineer Mr. Robert Burns, Urban Sector Specialist Mr. Guillermo Yzpes, UWSS Specialist Mr. Jan Janssens, UWSS Specialist ,Mr. Shawki Barghouti, Chief, Agriculture and Water Division Mr. Carl Bartone, UWSS Specialist Mr. Mansour Dailami, India Program Coordinator, Economic Development Institute Mr. Tauno Skytta, Economist, Operations Evaluation Department Ms. Penelope Brooke Cowen, Private Sector Specialist Mr. Paneer Selvam, Enviromentalist Ms. Joelle Chassard-Manibog, Financial Analyst Mr. Mike Garn, Economist Mr. Shyamal Sarkar, Sanitation Engineer Mr. J. R. Malhotra, Irigation Engineer Mrs. Catherine Commander 0' Farrell (IFC) Supplementary to the consultation process, the consultants participated in: Workshop: '"Urban Water Supply and Sanitation Sector Review," New De&liL April 1997. Seminars: "Private Sector Participation in Urban Infrastructure," New Delhi. Oct '96. "Pricing and Cost Recovery of Urban Infrastructure and Services," Madras. Nov. '96. 105