WATER P-NOTES ISSUE 21 JANUARY 2009 47309 Key Topics in Public Water Utility Reform U rban water supply services have traditionally The tools to achieve these attributes vary, but been provided by state-owned, water utilities. In certain patterns of high potential practices are the past decades, many governments have tried emerging. Institutional measures to make public to turn state-owned water utilities into effective and utilities more effective include corporatization, viable organizations--with mixed success. Why have public-public performance agreements, consumer some public utilities become more efficient service accountability tools, and capacity building. providers, while others have not been able to break the vicious cycle of low performance and low cost recovery? The World Bank report "Key Topics in Pub- Corporatization lic Water Utility Reform" presents a framework of attri- butes of well functioning utilities and how they have Corporatization transforms a utility into a public introduced key institutional measures. It thus aims organization with its own corporate identity and to help water and sanitation sector practitioners to independent status, with a board of directors. This choose and apply public utility reform approaches. can be either a statutory body functioning under public law or a government owned company incorporated under company law. In both cases Attributes ownership remains public. Results of corporatiza- tion are mixed, but corporatized utilities gener- There is no perfect model for public utilities that ally outperform departments within a ministry or guarantees good performance. But well-functioning municipality. The effectiveness of corporatization utilities share common attributes: is determined by how some critical factors are · autonomy ­ being independent to manage legislated, and how consistently this legislation is professionally without arbitrary interference adhered to. by others. The board of directors acts as a buffer and a · accountability ­ being answerable to other bridge between utility management and its own- parties for policy decisions, for the use of ers, the municipality. The composition of the board resources, and for performance. and its mandate must be well defined and insulated against political capture. This can be achieved, for · consumer orientation ­ Reporting and "lis- example, through the use of fixed and staggered tening" to clients, and working to better meet terms and transparent criteria and procedures for their needs. board appointments. These attributes apply to the relationship between Asset ownership increases the autonomy of the utility and the environment in which it operates as corporatized utilities, as investment planning is un- well as to the internal functioning of the utility. disputedly their responsibility and managers have This note reports key messages from "Key Topics in Public Water Utility Reform," by Meike van Ginneken and Bill Kingdom (Water Working Note 17, World Bank, August 2008). Readers may download the complete paper from www.worldbank.org/water. WATER P-NOTES incentives to invest wisely and to increase the value tract plans are binding and thus--in principle-- of the company. Corporatized utilities use owned enforceable by law. They are somewhat similar to assets as debt collateral, rather than relying on im- private sector participation contracts. plicit state guarantees. In the past decade, some governments have Accounting and auditing standards are, or managed to change the use of their financing by should be, as rigorous as those used in private making their transfers conditional on the milestones companies. Some statutory bodies and government- in reform or performance of local governments of owned companies are exempt from government utilities. Other agreements range from short-term regulations on personnel and procurement. business plans and staff contracts to intergovern- Governments can be better owners by explic- mental transfer systems. Business plans are short itly prioritizing objectives and financing all man- term agreements--often focusing on the next year, dates and by clearly defining who within the public but within a longer term framework. Within the administration will carry out the ownership func- utility there are also opportunities to establish an tion and how. In some countries and cities, the incentive framework for the performance of manag- ownership role is centralized in a unit that holds ers and staff. This requires a robust performance state-owned enterprises in more than one sector. evaluation system. In others, a line ministry is responsible for owner- Performance agreements should be instituted ship. gradually, as part of a wider set of reforms. For- Diversifying ownership can reduce the risk that mal agreements that include sanctions should be the government, as sole owner, may try to bypass held back until performance evaluation systems the corporate oversight board. The São Paulo State are functioning properly. Another success factor Government holds just over half of the shares of is autonomy, or "room to deliver." Performance its water utility (SABESP), with 49.7 percent in the agreements can improve performance only if utili- hands of private stockholders. Alternatively, the mu- ties have the discretion to improve the efficiency nicipality can sell or donate some shares to custom- and effectiveness of their operations. For instance, ers. Such efforts give consumers a stronger voice, the Government of Uganda provided considerable as in the case of Aguas de Puerto Cortés in Hon- autonomy to the National Water and Sewerage duras. Aggregating utilities in several geographical Corporation before introducing a performance areas is another way of diversifying ownership. The contract with the national utility. NWSC's debt board balances the needs of the various member service obligations were suspended in return for a municipalities. commitment to the operational and financial im- provements in the contract. Good contract design and effective implemen- Performance agreements tation round out our success factors. In some coun- tries, careful contract design has prevented many of Public utilities are often confronted with a range of the problems observed in the past. A good agree- objectives to consider--without clear guidance on ment is simple and short and outlines the responsi- how to prioritize them. Public­public performance bilities of each party, including performance targets agreements can clarify the utility's objectives and and measurable indicators for third-party evalua- priorities. Agreements can prompt parties to focus tions. Unfortunately, there has been little effort to on results and strengthen the relationship between develop standard contract clauses for public­public parties by giving them periodic opportunities to agreements. discuss progress and problems. The process of introducing, updating and monitoring an agreement Close monitoring using good data is the best is at least as important as the longer term account- way to guard against poor implementation of ability through formal enforcement. contracts. For instance, the performance contract between the government of Burkina Faso and A contract plan is a negotiated agreement its national utility ONEA includes 34 technical, between a government--acting as the owner of a financial, and commercial indicators, which are utility--and the utility that specifies the performance periodically submitted to the review of an external to be produced in a certain period of time. Con- auditor. 2 ISSUE 21 · JANUARY 2009 Consumer accountability A service provider can only be considered to be fully accountable if users have some way of calling Giving consumers the right to hold utilities account- them to account (recourse) and then, if justified, to able can help balance the accountability framework obtain an appropriate response (redress). Mecha- of utilities and can help prevent political capture. nisms can be internal to the service provider, or ex- For consumers to effectively participate in the WSS ternal such as public service ombudsmen. sector, they do not only need a mechanism to par- ticipate but also the knowledge and skills to use that mechanism effectively. Capacity building Reaching out to consumers is not benevolent per se. Consumer accountability mechanisms Capacity building imparts needed knowledge and that work in one context may not be feasible or skills to redress the skill shortages in government effective in another. The challenge is to choose agencies and utilities that prevent decisions from a "suite" of tools to ensure that all service users being translated into action. Capacity building can engage with the utility or at least have their programs are more successful when they respond concerns and views heard and responded to. A to demands expressed by those to be trained and well-functioning consumer accountability mecha- go hand in hand with measures to motivate staff to nism should be effective, inclusive, efficient and implement their newly acquired skills. sustainable. Traditionally training programs focused on for- A first step in consumer participation is the pro- mal training for personnel before they start their ca- vision of better information to individual consumers, reer. However, policy, legal and institutional reforms communities and consumers at large. Information require staff to gain new skills during their career. tools include publication of annual reports, informa- Often these skills can best be learned from other tion provided at service centers or with bills as well practitioners. However, training and knowledge in- as structured outreach programs. stitutions still have an important role to match sup- While information provision is a one-way pro- ply and demand and to develop standard tools and cess, consultation involves actively seeking and materials for public utility reform. listening to users' opinions. Surveys, if designed col- Probably the most common and arguably the laboratively for the purpose, can help utilities to un- most effective way of training is through working derstand and respond to users' preferences as well with colleagues on the job. While on the job train- as to chart their performance. Many companies use ing is an implicit capacity building tool in many customer surveys, focus groups or customer inter- organizations, its use can be optimized by sup- views, and feedback forms or suggestion boxes, but porting and rewarding them for investing time into too few actually apply the data to concrete efforts to mentoring and transferring knowledge. SANASA, improve service. in Campinas, Brazil, uses staff working groups to In the case of formal participation, utilities develop personnel, gradually providing them more oblige themselves to take into account consumers' responsibility and training. views in the process and content of policy-making. New professional networks generated in this Tools include giving consumer representatives way are powerful tools of capacity development. formal voting rights on utility oversight board or Using new technologies, partnerships between peo- regulatory committees. Involving in service provi- ple and institutions across the world can take place sion, by fixing leaks for instance, can be a way of directly without formal intermediaries. ensuring accountability as well as simply getting the job done. Consumer participation at the com- In recent years, a new generation of contracts munity level has a strong track record in areas and agreements are emerging which blur the lines where a tradition of communal organization and between private sector participation and public- collective action exists. An example of this is the public twinning arrangements. They increasingly PROSANEAR program in Brazil that has provided focus more on transfer of know-how. a million poor people with piped water supply and Sometimes municipalities need ongoing profes- sanitation. sional support for non-routine operations including 3 WATER P-NOTES securing external financing. After Estonia's national tariff structure followed. Only after these reforms WSS utility was liquidated in 1995, a new company, accompanied by capacity building, was the utility owned by the municipalities, was established to pro- able to expand its networks into poorer areas. vide municipal utilities with technical support. The company developed expertise in project manage- ment, network rehabilitation, and feasibility studies. From best fit to best practice The process of improving and Structural trends have altered the landscape in which water utilities operate. The transition of most institutionalizing performance utilities in the 1990s was not from public to private ownership or management, but from centralized to Improving performance will require implementing a decentralized public provision. In the 1990s a drop coherent reform program which is tailored to meet in public budgets significantly reduced opportunities the specific needs of a city or a country. Reform for network expansion and performance improve- involves an interaction between the utility and the ment. Under budgetary pressure, many public insti- institutional environment in which it operates. The tutions have adopted new management tools, often reforms that can be undertaken by a utility depend borrowed from the private sector, to complement on the opportunities available in the institutional more traditional bureaucratic tools. Many countries environment in which it operates. Similarly, improve- have democratized, and an emerging civil society-- ments in the institutional environment in which the including a consumer movement--has put pressure utility operates, are likely to have only a limited to deliver better services. impact if the utility has insufficient internal capacity to make the most of this (beneficial) situation. Public sector reform combined with sufficient investment in infrastructure can contribute to cost ef- Reform programs usually begin when utility per- fective, reliable and safe water supply and improved formance is declining and some specific event fo- sanitation. It is not a quick fix but a long process of cuses attention on the poor service and creates the limited, but sufficient institutional changes. Reform- momentum for change. Once reform is triggered by ers may have to put up with less-than-ideal solutions a crisis, it is an incremental process. Utility reform in the short term. Selection of reform measures may measures are interdependent. While many reform have to be based on the best fit rather than the measures should progress at the same time, circum- best practice. A closer look at both successful and stances seldom allow this. There may however, be failed reform process shows that what counts is not critical paths in that some reforms are prerequisites so much what measures are chosen, but in how far for others. A typical reform process features three and how they are implemented. Reforms need to main stages; crisis management, recovery & stabi- start with what can be done in practice. Many re- lization, and expansion. After these three stages, a forms have failed because their goals were too am- period of maintaining progress follows. bitious or not matched by the appropriate resources. Phnom Penh Water Supply Authority in Cam- Reform processes include technocratic mea- bodia went through these various stages. Firstly, the sures but are dialectic in nature. Change requires utility was restructured to become a government incremental steps--building managerial capacity, owned company and a new management team was raising confidence, and accumulating experience. recruited with performance based remuneration. By building a coalition for change, and by creating Secondly, customer surveys, automated billing, me- and locking up quick wins, meaningful reforms can ters and innovative technology to reduce leakage be implemented within one political cycle, even af- were introduced. A management system and a new ter decades of neglect. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. P-Notes are available online at www.worldbank.org/water. P-Notes are a synopsis of larger World Bank documents in the water sector. 4 THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org