Cross-Border Cooperation through Environmental Planning and Investment Institutional Strengthening Workshop Budva, Montenegro, 5 September 2007 Policies for reform of water sector utilities in SEE (Balkans)

Session Overview  Introduction to the water sector industry in the Southeast Europe (SEE)  Rationale for reform in the sector  Benchmarking & performance measurement indicators  Key Success Features and Alternatives for reform and transformation  Lessons Learned from Transformation Effort  Conclusions and recommendations

Definition of the Water Sector  Provision of services in: 1.Safe, drinking & continous water supply. Water supply system includes:  Raw water intakes, transmission pipes, drinking water treatment plants;  Water distribution networks, pumping plant, storage reservoirs, and related infratsructure 2.Environmentally accepted wastewater disposal. Wastewater systems includes:  Sewerage network, pumping plants, reservoirs and wastewater treatment plants (WWTPs)

Water Sector Strategic Context in SEE Organization & regulation of water sector  Organized mostly at municipal level: organization through municipal departments or municipal (public) enterprises is the most common form in the region, i.e. municipal WSS (water & sewerage) utilities.  Framework water legislation exists in all countries: the local government water regulation is the most common form, involving municipal authority setting tariffs (political influence)  Coverage of the population with water supply, sewerage and wastewater tretament is far from complete.

Water Sector Strategic Context in SEE Reasons for Poor Performance in Infrastructure:  Delivery of infrastructure services usually occurs without competition  Individuals & organizations responsible for managing & delivering services are not given incentives  Users are not involved in the process* * Source: World Bank, World Development Report 1994, Infrastructure for Development

Transition Indicators of WSS Sector in the CEE Countries – EBRD Perspective Category 1Category 2Category 3Category 4 Albania; Belarus; BiH; Kyrgyz Rep.; Tajikistan; Turkmenistan Armenia; Azarbaijan; Macedonia; Georgia; Kazakhstan; Moldova; Russia; Serbia; Montenegro; Slovak Rep.; Ukraine; Uzbekistan Bulgaria; Croatia; Latvia; Lithuania; Poland; Romania; Czech Rep.; Estonia; Hungary; Slovenia; Minimal Decentralization and Comercialisation Moderate Decentralization and Comercialisation Fairly large degree of Decentralization and Comercialisation Large degree of Decentralization and Comercialisation

The “vicious” cycle of WSS Utility Lack of Financing Poor Management Practices Service performance problems Poor operational efficiency Poor tarrif collection & cost recovery Low “bankability” of municipal utility and its investment projects Deteriorated climate for private sector participation Water services demand: Customer perception, affordability and political acceptability Core Issues

Core Issues of WSS Utilities  Operational Efficiency  Inefficient internal operations  Over-sized or poorly configured systems inherited from the past  Performance problems in service provision:  Low service coverage  High physical water losses and UFW  Unreliable and variable drinking water quality  Inadequate wastewater treatment capacity  Management Practices  Planning, communication, and control

The concept of “Bankable” WSS Utility  The concept incorporates considerations of the creditor’s confidence in both the: 1.Viability of the public utility or municipal government as a creditworthy institution, and 2.Viability of the utility’s investment project to be financed as a reliable source of future revenue flow  “Bankable” WSS utility is defined as one fully recovering:  its operating & maintenance (O&M) costs and taxes  Debt service  Meeting givernance and business performance norms Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

The concept of benchmarking ‘A systematic process of searching for best practices, innovative ideas, and highly effective operating procedures that lead to superior performance, and than adapting those practices, ideas, and procedures to improve the performance of one organization’ Metric benchmarking (Performance Indicators): What is wrong? Process benchmarking (Activities): Why is that wrong?

Performance Indicators in the water sector – metric benchmarking Quantitative comparative assessment of company performance over the time  Water resources indicators  Personnel indicators  Physical indicators  Operational indicators  Quality of Service indicators  Financial and economic indicators Purpose: Identify areas of under-performance

Process Benchmarking  Focused on individual processes (set of activities) within the organization. There are four key processes: 1.Production process 2.Distribution process 3.Sales process 4.General process  The purpose is to improve the performance by “learning from others”

The Transformation Process  The key question: How to end up the “vicious” cycle and successfully transition form the state of poor technical, financial and managerial performance to a “bankable” condition? Key initial factor: The degree of the utility’s autonomy from the municipal government

Key Features Contributing to the Success of the Transformation Process External Features Internal Features Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Key External Success Features  External Features  Effective and transparent legal/regulatory framework  Strong leadership and political will  Financial assistance from public sources  Fiscal discipline imposed in financial agreements  Coordinated technicall assistance from the international community Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Key Features Contributing to the Success of the Transformation Process  Internal Features  Public outreach/participation  Fair labor transition process  Installing a business culture within the organization  Improved understanding of the customer base  Accessing external expertise and experience through contracting Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Transformational Strategies Corporatization Performance Agreements Private Sector Participation Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Corporatization  The process of restructuring and reform the utility by applying the management practices and internal incentives that “mimic” those of private businesses:  Sound corporate governance  Driven by customer demand and  Focused on financial targets important to achieve operational efficiency and full cost recovery Establish clear commercial objectives Establish appropriate managerial authority and autonomy Implement effective performance monitoring Provide rewards and sanctions for performance Ensure competitive neutrality

Corporatization (cont.)  Corporatization is associated with:  Making rational investment choices where resources are limited by hard budget constraints  Employing cost recovery approaches to maximise user based revenues to the extent possible and within affordability constraints  Ensuring managerial independence while holding utility managers accountable for delivering an acceptable quality of service  Transparency and competition in the procurement of goods and services to ensure good value for money and avoid opaque practices and corruption

Performance-based Agreements  Performance-based agreements between water authorities and local utilities with explicit targets and clear incentives for service providers  Targets may include:  Unaccounted for water  Accounts receivable  Connection efficiency  Performance fee to the operating utility  Penalties may be involved against persistent failure to achieve certain targets

Private Sector Participation  Range of options of private sector involvement with the public sector under different conditions of risk and reward to both parties:  Service contracts  Management contracts  Lease contracts  Concessions  BOT contracts, and  Divestiture (Privatization through sale)

Menu of PSP Structuring Techniques “RISK” (Private Sector Investment Required) “REWARDS” (Returns to The Private Sector) High Low Construction Contract Service/ Management Contract Lease Concession Divestiture Low High

Characteristics of PSP Arrangements Type of contract DurationWhat the public sector receives What the contractor receives Nature of contractor performance Service contract1-3 yearsMinimized costs Improved quality Fee from the government Definitive, technical type of service Management contract 3-8 yearsIncreased efficiency Fee incentivesManage the operation Lease8-15 years Working capital Rent All revenues, fees or charges Manage, operate, repair, maintain Concession/ BOT years Investment capital Concession fee All revenues from consumers Manage, operate, repair, maintain, invest

Lessons Learned fromTransformation Efforts  Take advantage of events that raise public demand for transformation  Seek out and support champions for transformation  Conducive legal/regulatory framework is key  Incorporate public participation into assistance activities  Consider labor implications for transformation  Identify possibilities for mobilizing both public and private resources  Emphasize the application of sound business practices Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Conclusions  Poor performance of the water utilities in the Balkans (the vicious cycle)  Low bankability and lack of financing  WSS utility benchmarking as a management tool for assessment and improvement  Different strategies for transformation towards bankable conditions  Key success features for transformation and lessons learned