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A Discussion of Regulatory Issues in the Water and Sanitation Sector Katharina Gassner, PhD World Bank Group IWA Bucharest, June 17, 2014.

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Presentation on theme: "A Discussion of Regulatory Issues in the Water and Sanitation Sector Katharina Gassner, PhD World Bank Group IWA Bucharest, June 17, 2014."— Presentation transcript:

1 A Discussion of Regulatory Issues in the Water and Sanitation Sector Katharina Gassner, PhD World Bank Group IWA Bucharest, June 17, 2014

2 Outline  Regulation in the International Context  Country Specific Options for Establishing a Regulatory Framework  The Role of the Private Sector  Regulating State-Owned Enterprises  Benchmarking

3 3 Economic Regulation in Infrastructure Why is it Needed?  Infrastructure markets are imperfect and long term contracts are incomplete.  Regulation is different from Policies. It is a technical function that helps balance the interests of users and of operators.  It is meant to issue/enforce decisions/recommendations using technical tools and consistent with boundaries set by pre-existing policies/laws/contracts.  Regulation does not replace policies.  Regulation provides a level playing field to all stakeholders in the sector.  autonomous third party  equal treatment of all operators, private and public  effective regulation provides a transparent, predictable operating environment (important for investment!)  Economic Regulation focus on Ex-ante Interventions, not on Ex-Post actions. This is the difference with Competition Laws.

4 The Rise of Regulatory Agencies outside the OECD (by sector) Sources: ITU (ICT); authors’ database (electricity and WSS) Note: WSS is incomplete.

5 Regulation as ONE of the tools for Government

6 Establishing a Regulatory Framework: No One-size-fits-all

7 Regulatory Functions Need to be Matched to Sector Objectives ProblemPossible regulatory core functions The utility is efficient, but average tariffs are above cost  Limit tariffs to no more than costs The utility is efficient, but average tariffs are below cost  Provide a neutral and authoritative view on reasonable cost recovery tariffs, providing legitimacy for tariff increases The utility is inefficient. Average tariffs are below actual costs, but above efficient costs  Support effective governance and incentive structures to provide pressures for efficiency  Allow tariffs to rise to cover actual costs (in short term these costs may be above efficient levels, but in longer term these costs should decrease to efficient levels) The utility is inefficient. Average tariffs are below efficient cost  Support effective governance and incentive structures to provide pressures for efficiency  Allow tariffs to rise to cover actual costs Tariffs are at cost, but some customers cannot afford service  Allow cross-subsidies between consumer categories

8 Option 1: Standard Independent Regulatory Model

9 Option 2: Regulating Private Providers by Contract Example: Bucharest Water and Wastewater Concession

10 199019952000 Liberal- democratic Government elected The Example of the Bucharest Water Concession Associate EU membership End of Communist dictatorship 19962007 Full EU membership RGABICABApa Nova November: Veolia takes over 19981997 March: Concess- ion signed 2001 May 2001 and Oct. 2002: Staff strikes 20022006 Apa Nova sells 10% of shares to employees 2008 Comprehensive agreement and contract amendment 2003 Water quality Customer satisfaction Staff per 1,000 connections Non-revenue water (l/km/d) Typical Household Bill (real)

11 The Results of the Apa Nova Water Concession ♦ Was the Bucharest water and wastewater concession a success, as measured by: –Access? Increased from 90 to 92 percent and expanding in the unmapped areas –Quality of service? Improved and approaching Western European standard –Tariff? Remained below average and far below Western European level –Operating efficiency? Increased thanks to higher labor productivity and energy efficiency –Fiscal impact? Saved US$349 million –Private investment mobilized? EUR200 million (US$250) since the start of the concession ♦ What are the lessons for future water PPPs? –A committed public authority –A committed and expert advisory team –A well-prepared, high quality, and transparent transaction process –An unusually thoughtful and innovative contract design –A well-negotiated plan for the staffing reduction –Well-designed and implemented contract monitoring and dispute resolution arrangements.

12 The Connection Between Utility Performance and Private Sector Participation Global evidence on a sample of suggests private sector participation has a strong positive effect on performance: number of residential water connections up by 12 % electricity sold per worker up by 32% residential coverage in sanitation services up by 19% bill-collection rate in the electricity sector up by 45% distribution losses in electricity down by 11% hours of daily water service up by 41% These effects—differences in averages between the pre-PSP and the post-PSP period—occur over five years or more and are over and above the change for similar SOEs. Source: Does Private Sector Participation Improve Performance in Electricity and Water Distribution? Katharina Gassner. Alexander Popov. Nataliya Pushak. PPIAF 2009

13 An Important Role for Private Investment Flows – but they are vulnerable to crises…. Private investment commitments to PPP projects in developing countries, by sector, 1990–2009 13 Source: World Bank and PPIAF, PPI Project Database *Adjusted by the US Consumer Price Index Mexico and Argentina Expansion TequilaCr isis Asian Crisis Brazil Crisis Market Liquidity Global Crisis ?

14 … and difficult in WSS Source: PPIAF PPI database

15 The Role of Regulation in the Case of State Owned Enterprises Objective: improve the accountability for water and sanitation sector performance The institutional framework needs to: ♦ take into account conflicts between roles (ownership vs rule making) ♦ impose on service operators a set of rules and contractual relationships that: –establishes accountability through absolute clarity of roles and objectives; –specifies rights and obligations consistent with those roles –provides necessary incentives and sanctions to encourage efficiency (hard budget constraint); –ensures that incentives are aligned with wider social interests; –sets out clear principles and processes to be applied when circumstances change or disputes arise.

16 Benefits of benchmarking in regulation Strong incentives are provided to operators to be efficient and innovative, mitigating the costs of operation and the capital expenses; An on-going pressure is put on the water utilities to improve the quality of service; Main advantages of benchmarking use A fairer recovery of costs and of the capital investments is assured; An increase of transparency and sharing of information, minimising its asymmetry between different stakeholders (specially between regulator and operators). Compulsory or voluntary Economic and/or quality of service aims Publicised or just for operators Benchmarking

17 8th September 2008 WSS regulation in England and Wales (E&W) is pointed out, in the literature, as one of the successful examples of YC application Determination of the Overall Performance Assessment, measured through a compilation of several performance indicators Quality of service YC (Sunshine regulation) Office of Water Services (OFWAT) RegressionDEA Determine the efficient costs that are the basis for the X factors calculation (in the price cap formula) Case studies – Benchmarking to set prices (1/2)

18 18 Chile WWS regulation in Chile (SISS) Based on benchmarking in which a (efficient) model company is set for each operator; There is no comparison with real operators but with a hypothetical operator; … efficient operator is imposed to enable the regulator to determine the base costs for the setting of tariffs and it can further include the expected productivity earnings (X factor) in the price cap formula Colombia La Comisión de Regulación de Água Potable y Saneamiento Basico (CRA) Economic regulation of the water sector Definition of methods and tariff formulas It uses benchmarking (DEA technique) to compute the efficient administrative costs and the efficient OPEX; Based on a system of price cap defined for a period of five years which also includes a prices floor (minimum limit of 50 %). Regulatory Process Case studies – Benchmarking to set prices (2/2)

19 Case studies – Benchmarking to improve quality (1/2) 19 The regulator (now Essential Services Commission – ESC) applies sunshine regulation here since 1994. the quality of service supervision … increases the transparency and accountability of the WWS. Victoria, Australia Responsible for… the quality of the supplying (e.g. water quality and compliance with the norms); the service reliability (e.g. interruptions, non-revenue water and blockages); the services availability (e.g. prices, special customers and lack of payment); the customer service (e.g. call centres, claims and customers’ satisfaction). the economic regulation The WSS performance improvement can be seen, i.e., in the evolution of the indicator water interruptions

20 Case studies Benchmarking to improve quality (2/2) 20 ERSAR - Sunshine regulation model 16 PIs computed and published annually;Reference values for each PI;Explanatory factors (for each PI);Operators are categorized with three balls (green, yellow and red). Portugal Set of PIsNumber Protection of user interests5 Operator sustainability7 Environmental sustainability4

21 Conclusion (1/2)  Working towards more effective economic regulation in infrastructure is key, because regulation influences the performance of the sector, in the short (productive efficiency) and long term (investment and expansion of services).  Not everything is regulation: sector policy matters, and weaknesses there (in rules and institutions) have a major impact on results on the ground.  Improving internal governance is an equally important pillar of reform, i.e.:  for PPPs: Contracts design  for SOEs: internal systems of incentives and governance which affect their own drivers of performance and sensitivity to economic regulation.

22 Conclusion (2/2)  The benefits of using yardstick competition are well visible in the cases analyzed, including in the case of sunshine regulation (takes longer, but often best option).  Ultimately, what matters for successful regulation is  technical soundness of decisions, coupled with common sense that recognizes the political/social dimension of these services;  legitimacy, autonomy & accountability of the regulatory institutions;  transparency, predictability & credibility of the rules & processes in place.  A last word: good communication can strengthen a regulator, increase its effectiveness and improve its autonomy.

23 23 THANK YOU Dr. Katharina Gassner

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