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Cross-Border Cooperation through Environmental Planning and
Investment
Institutional Strengthening WorkshopBudva, 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 SEEOrganization & 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 1 Category 2 Category 3 Category 4Albania; 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, and2. 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 TechniquesMenu of PSP Structuring Techniques
“RISK”(Private Sector Investment Required)
“REWARDS”(Returns toThe Private
Sector)
High
Low
ConstructionContract
Service/Management
Contract
Lease
ConcessionDivestiture
Low High
Characteristics of PSP Arrangements
Type of contract
Duration What the public sector
receives
What the contractor receives
Nature of contractor
performance
Service contract 1-3 years Minimized costs
Improved quality
Fee from the government
Definitive, technical type of service
Management contract
3-8 years Increased efficiency
Fee incentives Manage the operation
Lease 8-15 years Working capital
Rent
All revenues, fees or charges
Manage, operate, repair, maintain
Concession/
BOT
15-30 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