1. 1 Improving commercial efficiency in water utilities Review of business practices in private and public companies Commercial Practices Session May 8, Vienna, Austria

2. 2 Table of Contents Commercial Efficiency as a Concept3 Focus Areas Selection4-5 Idea Sources6 Area 1: Commercial Cycle and Customer Service7 – 10 Area 2: Financial Management11 Area 3: Business Planning12 – 13 Summary and Final Thoughts14 – 15 Contact Details16

3. The Basic Idea Commercial Efficiencies 3 An industry that loses up to 80% of its product before it is physically delivered to the end client can hardly be called or even expected to be commercially efficient… What can be done… Some definitions: Commercial: making or intended to make a profit Efficient: (1) achieving maximum productivity, (2) working in a well-organized and competent way

4. Focus Areas Commercial Efficiencies Everyone thinks that utility ops is a technical & engineering business. 4 Business PlanningFinancial management Commercial Cycle & Customer Service It is !!! This presentation, however, will focus on rather business & commercial areas… Common features: Can deliver results in less than 1 year Similar to same functions in other industries Not very CAPEX intensive Message: Even best performers in technical areas cannot afford to underestimate financial and commercial aspects of the job.

5. Focus Areas - Extended Commercial Efficiencies 5 Business Planning Financial management Commercial Cycle & Customer Service - Regulatory planning and tariff reviews - Group-level long-term plans - Investment programmes - Annual plans - Financial accounting - Management accounting - Budgeting and cost control - Treasury - CAPEX planning - Inventory management and procurement controls - Meter installation, testing and maintenance - Meter reading - Data entry and billing - Collection - Call centres and complaints handling - Interactive websites Rarely a utility (or any other) company can perform greatly if some of these non-technical functional areas of the business are neglected. Terminology is not that important, what matters is processes and integrated management approach.

6. Idea Sources Commercial Efficiencies Sofiyska voda 25-year Concession Part of Veolia (private) 1.3 million people served > 4 000 km of network > 80 million m3 billed/y 5 Dobrich Water Regional Bulgarian operator 100% state owned < 200 000 population served > 3 000 km of network < 8 million m3 billed/y Message: Private operators focus on commercial and financial measures by default, municipal and state-owned ones – when the owner requires, when the management believes in that or when the situation demands such approach. Commercial and financial management are integral business functions and priority of top management on daily basis. Liquidity, cost of capital and collection rates became a priority after a rapid analysis undertaken as a result of a crisis.

7. 1. Meter Installation and Testing Stages of the Commercial Cycle of a Water Utility Operator -Under-registration -Ageing -Blocking & manipulation -Under-registration -Ageing -Blocking & manipulation 2. Meter Reading 3. Data Entry and Billing 4. Collection Identified Issues among Water Operators -Access to meter -Real vs. fake reading -Illegal connections -Access to meter -Real vs. fake reading -Illegal connections -Quality of data -Estimation rules -Control mechanisms -Quality of data -Estimation rules -Control mechanisms -Willingness to pay -Tracking receivables -Control over clients -Willingness to pay -Tracking receivables -Control over clients -Demand profiling & higher class meters -AMR -Flow reducers -Demand profiling & higher class meters -AMR -Flow reducers Scope of Measures to Address the Issues -PDA-tracked real- time readings -Daily schedules -Pipe tracing -PDA-tracked real- time readings -Daily schedules -Pipe tracing -Implement estimation rules -Exception handling process -Implement estimation rules -Exception handling process -Aged debt report -Remotely-controlled stop valves -External collection -Aged debt report -Remotely-controlled stop valves -External collection FAILURE IN ONE STAGE = FAILED PROCESS Commercial Cycle Commercial Efficiencies 7

8. Commercial Cycle: Example Commercial Efficiencies 8 Issue 2: Meter under-registration: solvable Issue 1: Falling consumption: unsolvable A useful Approach: Demand Profiling

9. Customer Service: Utilize Your Website Commercial Efficiencies Personalized accounts: simple way to collect customer data 9 Visualized communication of interruptions of supply Cheap & effective way to get meter readings Develop brand identity Make the life of your call centre easier…

10. Customer Service: Example Commercial Efficiencies Visualize Interruptions of Supply 10

11. Financial Management: 3 useful concepts Commercial Efficiencies 1. WACC matters. Why: In similar companies, depending on debt structure it can vary between 3% and 9%... 11 3. One-step further: Activity based costing - 4 application areas 2. Budgeting is simple. 95% of the costs incurred can be summarized in 5-15 cost centres Leak Repair Sewer Unblocking Meter Installation House Connection

12. Various types of planning Commercial Efficiencies 1. The regulatory BP (usually 5-year)… 12 2. The master business plan for the shareholders… 4. The budget 5. The annual business plan (for the management) 3. The investment programme Message: Annual business plans are down-to-earth management tools with specific and measurable targets. Multi-year (long-term) business plans are common commercial practice and should be implemented given predictability of CAPEX and regulatory requirements.

13. The Annual BP - Practical Approach Commercial Efficiencies The Annual BO is … annual 13 Gives three targets to every director (at least three, at most five) If the ops director, the commercial director and the financial director achieve all their targets, and the company is not making a progress, the CEO knows nothing about the business! Avoid easy targets! The Annual Business Plan is the best communication tool for internal audiences! It is also the easiest way to fire people in a legally and morally compliant way…

14. Summary of Good Practices Commercial Efficiencies 1. High consumption users (>100 m3/m) & tackle their under- registration 2. Introduce aged-debt reporting 3. Create customer-registration option in your website 14 Commercial Processes 1. Analyze who is financing the company (WACC) 2. Simple cost centres & don’t forget profit centres 3. Introduction of ABC where it makes sense Financial Management 1. There are many plans, however for management and internal-communication purposes, one document has to be The Annual Plan. 2 Goals & objectives 3 People understand bonuses Business Planning and Organizational Issues Example Achievements 15% Collection improvement over 6 months 11% billed volume increase due to Class C block meters System of 15 cost centres introduced and productivity of emergency repair teams almost doubled. 2-year stabilization plan outlined within a 6-month project.

15. Final Thoughts Commercial Efficiencies 15 Commercial efficiency is not about ownership, it is about management. It would be exaggerated to say that commercial efficiency is more important than technical proficiency. Business-wise, however, they are of equal meaning to a utility operator. It does not happen overnight but a series of real measures can be implemented for something like 6 months. Results can be witnessed in less than 12 months. Usually that is far quicker to carry out as compared to CAPEX-intensive technical projects while contribution is of similar magnitude. Focus on where there is a combination of (1) real results, (2) visibility, (3) potential for replication.

16. Questions Commercial Efficiencies 16 Radoslav Russev Senior Advisor Water & Environment New Europe Corporate Advisory Ltd. 9 Narodno Sabranie Square BG-1000 Sofia tel.: +359 (2) 988-7390 Mob: + 359 886 442 758 web: http://www.necadvisory.com Question and Answers?