noTE no. 53 ­ MAR. 2010 GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Corporatizing a water utility A successful case using a performance-based service contract for ONEA in Burkina Faso Philippe Marin, Matar Fall, and Harouna Ouibiga 56744 T hanks to a corporatization process Corporatization in the 1990s spanning two decades, Burkina Faso's national water and sanitation utility In 1994 ONEA was transformed from a quasi- ranks among the few well-managed public public agency with little autonomy into a limited water utilities in Sub-Saharan Africa. Key liability company, 100 percent owned by the to its success has been the government's government and essentially governed by private unceasing commitment to reform, which law. An arm's-length relationship was established included the successful implementation of between ONEA's management and the govern- an innovative performance-based service ment, supported by three-year performance contract with an international operator from contracts (contrats plans) with explicit operational 2001 to 2006. The experience shows that it is targets. The board of directors is responsible for possible to establish a well-performing public the supervision of ONEA's performance and water utility in a poor developing country-- for all strategic decisions. It has the authority as long as the governance framework to appoint (and fire) the general manager and ensures the autonomy and accountability determine employees' pay scales. The general of the service provider and the government manager makes day-to-day operational deci- supports the sector's long-term financial sions. Most important, the utility is allowed to viability through an appropriate tariff and cut off service for nonpayment of water bills, and investment policy. its workers are subject to private sector (not civil service) rules. In Burkina Faso, as in many other West African countries, the provision of urban water supply The first decade of corporatization was quite services is the responsibility of a state-owned utility, successful. By 2001 ONEA's operational perfor- Office national de l'Eau et de l'Assainissement mance was good by regional standards. Water (ONEA).1 Historically, until two decades after losses, measured by the percentage of nonrevenue independence, water services had been provided water, stood at a low 16 percent. Water rationing by a private operator, which focused on a few rich was limited, with service averaging 21 hours a day neighborhoods of the capital, Ouagadougou. The nationwide. Thanks to a high average tariff (close contract was terminated in 1977, and responsi- to 1 per cubic meter), ONEA enjoyed a healthy bility for water services was transferred to munic- financial situation. With yearly revenues of more ipalities until 1985, when ONEA was established than 25 million, it was cash positive and reported as the new national water utility. Its early perfor- an accounting profit every year. mance was typical of inefficient public enterprises, and by the early 1990s the sector had made little progress. More than a third of the urban popula- tion had no access to piped water, and household Philippe Marin is a senior water and sanitation specialist connection coverage stood at only 24 percent in in the World Bank's Middle East and North Africa Region. urban areas. Service quality was poor, and ONEA Matar Fall is a lead water and sanitation specialist in the was unable to cope with the growing demand that World Bank's Africa Region. Harouna Ouibiga is managing came with urban expansion. director of ONEA. Helping to eliminate poverty and achieve sustainable development P U B L I C - P R I VAT E I N F R A S T R U C T U R E A D V I S O RY FA C I L I T Y through public-private partnerships in infrastructure 2 New challenges in the 2000s at stake. Even when professional operators were contracted, they tended to send consultants who Despite these achievements, ONEA remained a were not part of their operation and often had small utility, essentially devoted to serving the limited operational experience. Instead, with richest part of the urban population. Urban water the assistance of the World Bank, an innovative coverage through household connections stood approach was designed based on the concept of a at a mere 32 percent. ONEA had only about performance-based service contract. 73,000 active water connections (half of them in Ouagadougou), which served less than 700,000 A professional operator would be contracted to people nationwide--with 1,600 standpipes manage ONEA's commercial and finance depart- serving another half a million people. Rather than ments while at the same time completing a series financing further expansion of access, the high of preidentified tasks (including setting up new tariffs were actually compensating for significant accounting and customer management systems). operational inefficiencies: only 85 percent of resi- The operator would be paid a fixed monthly fee dential water bills were collected, and with about for management services along with a bonus or 8 staff per thousand connections, labor produc- penalty based on its achievement of contrac- tivity was mediocre. tual targets, plus a fixed price for each specified output. Progress against contractual targets was At the same time, water resources in Ouaga- regularly monitored by an independent consul- dougou were becoming severely stretched, to the tant so as to calculate the variable remunera- point that service interruptions and rationing had tion, set at a maximum of 5 percent of revenues become the norm during the dry season. The lack corrected by yearly bill collection target ratios. of water also prevented further expansion of the This created a strong incentive for the profes- network to the many still without access. Solving sional operator to improve performance. Another the production constraint required the construc- feature of the contract was an operating invest- tion of a major dam together with a treatment ment fund (about $3 million) to provide the plant with a capacity of 65,000 cubic meters a day private operator with the flexibility to rapidly and a 50-kilometer transmission line. This would acquire equipment and meters. be a very costly investment, and given the already high tariffs, financing it through additional tariff hikes was out of the question. To make the project Significant gains by 2006 financially viable without major tariff increases, Following an international tender involving three ONEA had ONEA had no choice but to make significant bidders, a private consortium led by the French gains in operational efficiency (especially in labor private operator Veolia was contracted. During no choice productivity and bill collection) while doubling its the five years of the contract (from 2001 to 2006) but to make customer base over six years. ONEA continued to operate as a publicly managed utility. The private consortium sent two perma- big gains in nent staff members, initially to serve as directors A performance-based service contract operational of the commercial and finance departments. But Donors were willing to finance the investment the parties soon agreed that because of sensitivi- efficiency program, but how to achieve such efficiency gains ties, the expatriates should instead act as depu- and double was a question. Commercial management was ties to local managers. Many other foreign staff were sent on short-term missions as advisers. Thus clearly a weak point, one where sizable improve- its customer ments could be achieved rapidly. Problems in the the international operator had mostly an advisory role. Yet because of the performance-based nature base billing chain (cadastre, meter reading, bill collec- tion) were numerous. Customer service left much of the contract, it also had a clear financial stake to be desired, with poor processes and antiquated in the success of the technical assistance provided. facilities. While the government was unwilling to delegate management of the utility to a foreign The staff sent by the international operator private operator, it recognized that there was a proved to be seasoned professionals with many gap in know-how and that it could benefit from years of hands-on operational experience. Under outside professional help. their guidance, ONEA's commercial performance improved markedly, in line with the contract's The traditional technical assistance approach, objectives (table 1). Bill collection for residential involving a service contract or twinning, was customers increased substantially, although this rejected because of the many disappointing past took some time. Progress started to appear only experiences in the region. In most cases such in year three, and the collection ratio continued arrangements had had little impact on opera- to improve afterward, reaching 93 percent in year tion, because the contracted firm had had little four and 95 percent in year five. The international Corporatizing a water utility 3 TABLE 1 Coverage and operational performance of ONEA during the contract period (2001­06) and in 2008 Indicator 2001 2002 2003 2004 2005 2006 2008 Household connections 72,500 78,500 84,000 90,000 100,000 125,500 168,000 Connection coverage (%) 32 33 33 34 36 43 50 Improved coverage (%) 53 54 54 54 56 63 73 Two years Estimated population 1.2 1.3 1.4 1.5 1.6 1.8 2.4 after the end served (millions) of the service Nonrevenue water (%) 16 14 15 17 18 18 17 Collection ratio (%) 85 83 78 88 93 95 95.4 contract, the Labor productivity (staff 7.9 7.2 7.1 7.2 6.4 5.0 4.5 performance per 1,000 connections) of ONEA remained Source: ONEA. Note: Connection coverage is the share of the urban population with access to water through a household connection. Improved coverage is the share of the urban population with access to water through a household connection or a standpipe. good operator also coached ONEA staff in updating productivity, were passed on to customers through the customer cadastre and identifying illegal a gradual decrease in average tariffs in real terms customers, put in place new working practices to of about 8 percent. The total cost of the service improve meter reading, established a meter repair contract proved reasonable: 3.9 million over five workshop, and advised on improving customer years. The cost for management services of the service. It also helped reorganize work practices to private consortium was just 2.6 million, equiva- increase labor productivity (which improved to 5 lent to less than 3 percent of average yearly reve- staff per thousand connections by 2006). nues during the contract. The performance-based service contract was supported by an investment program of about 200 The gains apparently sustainable million financed by a pool of donors (including the European Investment Bank, Agence Française In 2008, two years after the end of the service de Développement, KfW, and the African Devel- contract, the performance of ONEA remained opment Bank). The increase in water production good, suggesting that the efficiency gains achieved capacity in Ouagadougou made it possible to start with the international operator are sustainable. expanding the distribution network in the capital. The bill collection ratio was still above 95 percent, The total length of the network almost doubled and the level of nonrevenue water was only 17 between 2001 and 2006, from 2,460 kilometers percent. And further gains had been made in to 4,740. The number of household connections labor productivity. The government confirmed also almost doubled--increasing by an average its commitment to transparency and account- of about 12 percent a year to reach more than ability by starting to rely on external independent 125,000 by 2006--and some 280 additional consultants for monitoring ONEA's performance standpipes were installed in poor neighborhoods. under its contrat plan. Continued support from Overall, more than 600,000 people gained access donors allowed ONEA to continue expanding the to piped water over five years, and water rationing network and to scale up the subsidized connection was almost ended in Ouagadougou during the dry program, providing access to another 600,000 season. Thanks to improvements in the customer people in just two years. Piped water coverage in cadastre and meter reading, nonrevenue water urban areas stood at 73 percent by 2008. remained broadly stable as a percentage of total water distributed despite the increase in average Lessons learned pressure resulting from the new production facility--and even declined when calculated as The success of the urban water reform in Burkina losses per connection per day. Faso stems largely from a combination of compe- tent public management at ONEA, sustained The financial situation of ONEA improved mark- commitment from the government, strong finan- edly. Revenues increased by 50 percent. Effi- cial support from donors, and an innovative part- ciency gains, especially in bill collection and labor nership with the private sector. All partners played 4 their roles and worked together. The case high- tent and dedicated professionals--rather than lights some important lessons. relying on the usual political patronage prac- tices. ONEA staff receive a higher average · Public water utilities can perform well, even in a salary than typical civil servants, and over poor country like Burkina Faso. The recipe time a solid work ethic developed in the utility, for success is neither complex nor original. making it a respected company to which The government refrained from interfering employees are proud to belong. In addition, in ONEA's operations, kept its management ONEA management proved confident enough accountable, and ensured that tariffs were high to be open to testing an innovative approach enough to recover costs. The utility's manage- for private sector involvement, and proved ment focused on efficiency and adopted sound responsive in acting on the advice provided by commercial practices--much as a private oper- the expatriates. ator would have done. This shows that what matters for successful reform is not whether the · Urban water reform needs to be supported by signifi- operator is public or private, but whether the cant investments. Water distribution is infrastruc- government has the capacity and willingness to ture intensive. Even with a competent operator put in place the critical conditions and incen- in place, significant improvements in efficiency, tives for the service provider to deliver. service quality, and financial performance can rarely be achieved without major investments in · The private sector can contribute more effectively when rehabilitation and expansion. This was the case its intervention is tailored to local conditions, expec- in Burkina Faso, where both the major expan- tations are realistic, and the public sector partner sion of production capacity in Ouagadougou is equally committed. The performance-based and associated investment in network expan- contract was well designed, with realistic contrac- sion were needed. Establishing credibility with tual targets and an incentive bonus based on a donors was essential: they were ready to support simple and objective criterion. The requirement the large investment required and finance an for the operator to send experienced operational innovative contractual approach because of the staff was well specified, and independent audi- positive results ONEA had already achieved in tors were recruited to monitor progress toward its first decade of corporatization. contractual targets. The contract was custom- designed to suit the specific objectives of the Note government, resulting in an innovative approach 1. ONEA is also responsible for providing sanitation services, a role that includes operating a small sewerage network in Ouagadougou that did not simply replicate a contract tried and handling septic tanks for on-site sanitation. elsewhere. Finally, the managerial prerogatives of ONEA staff were respected, as the expatriate References staff were not in direct management positions. Baietti, Aldo, Meike van Ginneken, and William Kingdom. 2006. All this contributed to a strong sense of owner- "Characteristics of Well-Performing Public Water Utilities." Water ship by ONEA staff. Supply and Sanitation Working Note 9, World Bank, Washington, DC. · The quality of human resources is key. One essen- Fall, Matar, Philippe Marin, Alain Locussol, and Richard Verspyck. 2009. "Reforming Urban Water Utilities in Western and Central tial reason that ONEA has been so successful Africa: Experiences with Public-Private Partnerships." Vol. 2, "Case is that the government of Burkina Faso consis- Studies." Water Sector Board Discussion Paper Series, World Bank, tently made good choices in appointing compe- Washington, DC. GRIDLINES Gridlines share emerging knowledge on public-private partnership and give an over- view of a wide selection of projects from various regions of the world. Past notes can be found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involve- ment in infrastructure. 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