MARCH 2006 utility management - IWA Publishing...is published four times a year (March, June, September, December) by IWA Publishing. Statements made do not represent the views of

waterutilitymanagementI N T E R N A T I O N A L

MARCH 2006VOLUME 1 ■ ISSUE 1

ANALYSIS4 Prospects for European clarity on

procurement in public privatepartnershipsBy Peter Reina

5 The cultural challenge of NorthernIreland’s new customer service contractBy Lis Stedman

6 Funding shift to support EuropeancohesionBy Peter Reina

FEATURES7 CASE STUDY

Emulating success in Cambodia: lessons from Phnom PenhBy Eric van Zant

8 ENVIRONMENTAre utility attitudes to theenvironment shaped by corporate governance? Assessing the evidence from Australian utility reportsBy Adam Gray and Jennifer McKay

11 PERFORMANCE MEASUREMENTWhat gets measured gets done:applying a seven-step methodology in Columbus, GeorgiaBy Terrance Brueck and Billie G Turner

15 CUSTOMER DEBTDelivering on the debt dilemmaBy Lis Stedman

17 BRIEFINGA perspective on private participationBy Keith Hayward

20 VIEWPOINTLessons from Latin America: the potential of local privateoperatorsBy Alejo Molinari

23 INTERVIEWAguas de Portugal’s push towardsdirect service provisionBy Paul Garrett

Following an extensive consultation exercise,the European Commission is to launch

measures this year to clarify legal requirementsin creating certain public-private partnershiparrangements, including water and wastewaterconcessions.

New legislation is likely for concessions,whereby a private firm recovers investment costsby charging for its services. A cost benefitanalysis of such legislation will be made before adecision is made, according to European

Commissioner for Internal Market and ServicesCharlie McGreevy.

For service companies jointly owned by thepublic and private sectors, institutional PPPs,the Commission proposes issuing simplerguidance documents. The Commission’sclarification policy follows a 2004 discussionGreen Paper which drew 195 responses from various sectors, particularly in Germany,France, UK, Austria and Italy. (See Analysis, p4) ● Peter Reina

European Commission to clarify rules onpublic-private partnerships

The American Water Works Association and theWater Environment Federation have launched

the data collection period for their latestBenchmarking Performance Indicator Survey forwater and wastewater utilities.

The data collection period runs from 1 Marchto 31 May 2006. The survey is requestinghistorical and analytical data from each utility’sprevious fiscal year. Data collected from individ-ual utilities will remain confidential but willprovide aggregate information for benchmarking.Each participating utility will then receive its ownstatistical summary to compare to the aggregatedata, allowing them to measure their perfor-mance and efficiency in 22 key benchmarks.

Benchmarking is the process of identifying autility's strengths and areas for improvement bylooking at key operation and management areas,

and comparing them to established standards ofperformance in those areas. The BenchmarkingProgram is a joint effort of the two organisations.The 22 benchmarks are in five areas: organiza-tional development, business management,customer relations, water operations and waste-water operations. More than 200 utilities partici-pated in the 2004/2005 survey.

A comprehensive data analysis report thatmore fully interprets each benchmark indicator isavailable from AWWA (www.awwa.org/book-store). The full report, ‘BenchmarkingPerformance Indicators Survey and Analyses’,will be produced every three to four years andpresents summary analyses and interpretive textfor each performance indicator. ●

For more information visit www.awwa.org/science/benchmarking.

US benchmarking survey underway

The European parliament is due to vote soon onbudget proposals for the European Union

covering the seven years from next January. Thebudget will divert large grants financing for waterand other infrastructure to the EU’s 10 newestmember states within the Cohesion Fund, whichwill also be reformed.

Launched in 1994, the Cohesion Fundsupports, mainly, environmental and transportinfrastructure investments in the Union’s poorestcountries. Initially covering just three states, thefund will rise to over €60 billion for the period2007-2013.

As part of a broad revision of regional grants tothe neediest regions of the EU, the CohesionFund will in future be programme based. Thatwill relieve governments from seeking project byproject approval from the European Commission.

One of the biggest Cohesion Fund awardsmade last year went in December to a water and

wastewater project in Warsaw, Poland. TheCommission agreed to contribute €248 million to the €405 million project which is mainly aimed at cleaning up effluent emissions into theRiver Vistula.

The project is the third phase of the long termplan to improve Warsaw water supply and wastewater treatment. The project will improve thequality of drinking water, while in parallel reduc-ing the costs of surface water treatment andallowing a positive impact on the Baltic fisheryindustry. The project will allow the treatment ofwastewater from the central and northern leftbank part of the city, meaning the wastewatereffluent discharged from the Czajka wastewatertreatment plant will reach good quality standardsand achieve the standards and norms specifiedin European Union Directives. In addition it willprovide a long-term method of wastewater sludgemanagement. (See Analysis p6) ● Peter Reina

Decision expected on European support for infrastructure

2 • WATER UTILITY MANAGEMENT INTERNATIONAL • MARCH 2006

EDITORIAL

Editor / Associate PublisherKeith [email protected]

Publishing AssistantOisin [email protected]

Water Utility Management International is anew publication focusing on the needs andinterests of senior water utility managers.The aim of this publication is to providethose heading water and wastewaterutilities with an international referencepoint on the strategic issues affecting theirorganisations. Water Utility ManagementInternational will also be of value toconsultants and others followingdevelopments in this area.

Presented in a newsletter format, WaterUtility Management International willcontain news, interviews, and in-depthbriefings on topical issues. Other articleswill take an executive briefing approach orbe based on landmark case studies.Regular themes for articles will includefinancing, investment, regulation andpersonnel matters. There will also be acentral theme of achieving efficiency inwater utilities, encompassing topics suchas benchmarking, billing, tariffs, IT andservice standards.

For more information, visit:

www.iwapublishing.com/template.cfm?name=iwapwumi

PUBLISHING

PublisherMichael Dunn

Water Utility Management International is published four times a year (March,June, September, December) by IWAPublishing. Statements made do notrepresent the views of the InternationalWater Association or its Governing Board.

IWA PublishingAlliance House,12, Caxton Street,London SW1H 0QS, UKTel: +44 (0)20 7654 5500Fax: +44 (0)20 7654 5555Email: [email protected]: www.iwapublishing.com

SUBSCRIPTIONS

Water Utility Management International is available as either a print or an onlinesubscription.

2006 price (4 issues):£165 / €249 / $329(IWA members: £150 / €225 / $299)

ContactPortland Customer ServicesCommerce Way, ColchesterCO2 8HP, UKFax: +44 (0)1206 799331Email: [email protected]

Or visit: www.iwapublishing.com/template.cfm?name=iwapwumi

Design & printOriginal design: John BerbutoPrinted by Ashford Overload, UK

ISSN (print) 1747-7751ISSN (online) 1747-776X

© IWA Publishing 2006

waterutilitymanagementI N T E R N A T I O N A L

NEWS

Loans and tenders

NAMIBIA: EIB signs finance deal for infrastructureThe European Investment Bank has signed a €4M($4.9M) financing facility to go towards infrastructurein Namibia, including water and sanitation projects.The rationale is to mobilise local and internationalresources to provide debt funding primarily for municipal and other infrastructure projects.

INDIA: Italy agrees soft loan The Italian government is set to grant an €26M($31.7M) soft loan for water supply and waste management projects in 14 districts of West Bengal.Details for the project are not yet finalised. The processof selecting companies to be involved in the project isunderway, according to Agostino Pinna, Italy’s consulgeneral in Kolkata.

COSTA RICA: JBIC agrees loan for sewerageJapan Bank for International Cooperation (JBIC) hasagreed to lend $127M for a sewerage project to benefitCosta Rica's capital, San José, according to thecountry's foreign affairs ministry. The first tranche offunding is due to be handed out within a year, withworks scheduled to begin in 2008. The first phase, duefor completion in 2015, is set to cost $230M. A $220Msecond phase is scheduled for completion in 2025.

JORDAN: Government gives go-ahead to transfer projectJordan’s government has given the green light to thecountry’s Water Conveyance project, and is invitinginvestors and companies to bid for the BOT contract.On completion, the conveyor will supply the capital,Amman, and the southern governorates with over100Mm3 of water per year from the southern Disiaquifer. A main pumping station, three storage wellsand a 320km conveyance pipeline will be constructedduring the project. The conveyance project is one of sixplanned to counter the country’s water deficit.

GLOBAL: ADB announces increased water spendThe Asian Development Bank used the Fourth World

Water Forum as the opportunity to announceincreased investment in water. It introduced its WaterFinancing Program, which seeks to make water a coreinvestment area for the bank. Under the programme,ADB proposed to increase its water investments to wellover $2 billion annually for the period 2006-2010.

AZERBAIJAN: ADB announces boostThe Asian Development Bank has announced that itplans to increase its operations in Azerbaijan’s roadand water supply and sanitation sectors. An ADBcountry strategy programme sets aside some $179Min loans for the country in 2006, a considerableincrease in the forecast 2006 spend of $39M.

UKRAINE: EBRD funding for wastewater treatmentThe European Bank for Reconstruction andDevelopment is to provide a loan to the city of Harkiv,Ukraine, to finance priority capital investments for itsmunicipal wastewater utility. The project will contributeto decreasing polluting discharges into the SiverskiDonets River and the Azov Sea basin. The work will alsoinclude improvements to service standards andstrengthening of operational performance.

INDONESIA: ADB prepares sanitation projectThe ADB is preparing a project to improve sanitationand public health and reduce pollution in Indonesia’surban areas through a $1.2M technical assistancegrant from its Japan Special Fund. The grant will beused to prepare a project due for 2007 to set outsanitation strategies for five major cities and provideappraisals and investment plans for three of these.

ROMANIA: EBRD lends for wastewater upgradeThe European Bank for Reconstruction andDevelopment (EBRD) has made a €10M ($12M) ISPAloan to Romania to enable it to complete the upgradeand construction of the wastewater treatment works atGlina. Construction of the plant will begin this autumn,and it is scheduled to become operational in 2010.Total costs for the project are estimated at €253.3M($302M), in two stages over four years.

The US Government Accountability Office (GAO) hascriticised the Environmental Protection Agency for

not having in its database information from over 30% oflarge and medium-sized community water systems on theamount of lead in their supplies.

The EPA also does not have data on the status of theefforts to implement the lead rule for 70% of systems,apparently because states have failed to meet reportingrequirements.

The report from the GAO notes that ‘implementationexperiences to date have revealed weaknesses in theregulatory framework for the lead rule. For example,most states do not require their water systems to notifyhomeowners that volunteer for periodic lead monitoringof the test results.’

It adds that in addition, corrosion control can beimpaired by changes to other treatment processes andcontrols that might help avoid such problems may notbe adequate. The report also warns that becausetesting indicates that some so-called ‘lead-free’ prod-

ucts actually leach high levels of lead into drinkingwater, existing standards for plumbing materials maynot be sufficiently protective.

From the data available it appears few schools andchild care facilities have tested their water for lead. Thereport also notes that ‘no focal point exists at either thenational or state level to collect and analyse test results.Thus the pervasiveness of lead contamination in thedrinking water at schools and child care facilities – andthe need for more concerted action – is unclear.’

The GAO is recommending that it improve its data onkey aspects of lead rule implementation, strengthensome regulatory requirements and oversight, andassess the problem of lead in the drinking water atschools and child care facilities.

The EPA’s spokesman noted that the agency has issued comprehensive new guidance for protecting against lead in schools and is in the finalstages of issuing proposed changes to the federal rule. ● Lis Stedman

US EPA under fire for lead rule data gap

WATER UTILITY MANAGEMENT INTERNATIONAL • MARCH 2006 • 3

NEWS

Business

SPAIN: Acciona buys RWE water providerAcciona SA has released a statement saying it has bought RWE ThamesWater's Spanish water treatment provider, Pridesa, for €150M ($182M).The Spanish company said the deal strengthened its position in thedesalination sector, placing it in a good position for internationally-strategic water markets such as the US, the UK, Italy, Portugal, Turkey,Egypt and China. The deal is subject to anti-trust approval.

DUBAI: Authority invites bids for desal plantThe Dubai Electricity and Water Authority (DEWA) is inviting bids for anew power generation and water desalination plant worth an estimated$1.5 billion. The M Station will be DEWA's largest and is to be commissioned by 2010, according to local news sources. When complete, M Station will increase the country’s power supply by 2000MWand its desalination capacity by 105MGD.

UK: Thames signs asset database deal with OracleThames Water has signed an agreement with Oracle to consolidate 23asset databases into a single system. Engineers and managers will beable to access information about all assets across Thames Water’s supplyarea when the system goes live in spring 2007. Geographical informationsystems from ESRI will also allow Thames to analyse its water networkand provide engineers with details about each asset prior to repairs.

US: Macquarie Bank to buy AquarionYorkshire water and sewerage provider Kelda has announced that it hasreached a deal with Australian investment bank Macquarie to buy its USwater arm, Aquarion. Kelda said it does not expect any profit or loss onthe sale, which is expected to be worth around £375M ($651M). UK-based Kelda bought New England-based Aquarion in 1999 to gain afoothold in a market that was supposed to be ripe for consolidation, butthis move has never materialised.

THAILAND: Mitsui buys stake in Thai tap waterJapanese trading house Mitsui ha announced that it has reached

agreement to buy a 35% stake in the Thai Tap Water Supply company, for¥11 billion ($93.27M). The company has a 30-year agreement withThailand’s Provincial Waterworks Authority to supply drinking water to twoprovinces west of Bangkok.

COLOMBIA: Water share sale blockedColombian water company Aguas de Manizales has confirmed it will nottake over operation of Cartagena utility Acuacar from current operatorAguas de Barcelona (Agbar). Agbar’s purchase of its 45.9% stake in thecontract contained a suspension clause that stipulated any deal had to beapproved by the town’s mayor, who ruled out Aguas de Manizales.

CHINA: Suez outlines expansion plansSuez has told a press briefing that it intends to double its business ingreater China to nearly one billion euros ($1.2 billion) over the next twoyears as it expands its sewage and water treatment networks. Companyexecutive vice-president Yves-Thibault de Silguy said that the country’sneed for modern water distribution and waste facilities in major municipalities would be likely to mean a doubling of revenues by 2008from around €450M ($536M) at present.

PORTUGAL: Aqualia wins water supply tenderAqualia, a Spanish water services management company and FCCsubsidiary, has won a €1500M ($1790M) tender to manage the watersupply in Leziria del Tajo, Portugal, for the next 40 years. The area is acommunity of nine cities near the capital, Lisbon, with 200,000 inhabitants. The contract calls for €200M ($238M) in investment, with€53M ($63M) of the total being provided from public funds. The tenderwas won in consortium with Portuguese company Lena.

NORTHERN IRELAND: Glen Water wins Omega contractDepartment for Regional Development (DRD) Minister Shaun Woodwardhas announced that Glen Water is the successful winner of the Omegapublic-private partnership project in Northern Ireland. This design-build-finance-operate contract will involve capital investment of around £122M($212M) for upgrades to six existing wastewater treatment works,including a second incinerator for Belfast’s giant Duncrue Street works.

In brief

NORTHERN IRELAND: Alliance wins first privatised water sector contractThe Xansa-led Crystal Alliance has won a seven-year, £70M ($122M)contract to run the Northern Ireland Water Service’s customer billingsystem. The organisation will be responsible for billing some 760,000domestic customers when the privatisation takes place. Under thecontract, the Crystal Alliance will establish a customer relations centre tohandle customer complaints and enquiries, which will be managed bysub-contractor Echo Managed Services. (See Analysis, p5)

US: AWWA and other water organisations announce mutual aid networkThe American Water Works Association (AWWA), together with other USwater agencies including WEF, NACWA and NAWC, has announced ajoint policy statement on mutual aid and assistance networks. Thestatement says that the ‘utilities helping utilities’ agreement will provideaid for ‘water or wastewater utilities that have sustained damages fromnatural or manmade events could obtain emergency assistance in theform of personnel, equipment, materials, and other associated servicesas necessary, from other water/wastewater utilities. The objective is toprovide rapid, short-term deployment of emergency services to restorethe critical operations of the affected water/wastewater utility.’

SCOTLAND: Alexander resigns over delivery plan disagreementProfessor Alan Alexander has resigned as chairman of Scottish Waterafter a disagreement with ministers in the Scottish Parliament over theorganisation’s delivery plan for the next four years. Ministers and theutility’s economic regulator had said the delivery plan fell short of theirrequirements ‘in a number of material respects’. Professor Alexanderbelieved the plan was fully compliant, the Executive noted, and in view ofthat had resigned.

Economic regulator Ofwat haspublished its interim report into

allegations about false reporting ofinformation by UK water utilitySevern Trent Water.

The report sets out the regulator’sinterim findings into certain allegationsmade by an employee of SevernTrent Water, and the actions Ofwatwill require the company to take.Ofwat’s concerns about the reliabilityof leakage data are not covered inthe report because this issue iscurrently being investigated by theSerious Fraud Office (SFO).

Ofwat’s investigation found thatSevern Trent Water had providedregulatory data that was eitherdeliberately miscalculated or poorlysupported. This led to price limitsbeing set for the water companythat were higher than necessary,which would have resulted incustomers paying £42 million moreby 2009-10. This is equivalent tobetween £2 and £3 each year on anaverage household customer’s bill.

Severn Trent Water has agreed toreduce its price limits to return the

£42 million to customers. The companyis returning £7 million of this in billscurrently being sent to customers.The remainder will be returned tocustomers over the next three yearsof the current price review period.

Ofwat regards the findings of itsinvestigation as sufficiently seriousto warrant a further reduction in thecompany’s price limits as a penalty.This can only be determined afterthe SFO investigation.

The Consumer Council for WaterMidlands welcomed the announce-ment. Sir James Perowne, chairmanof the Consumer Council for WaterMidlands, commented: ‘While weare disappointed that Severn TrentWater has been found deliberatelymiscalculating and misreportingdata to the regulator, our primaryconcern is that consumers be re-imbursed for any overcharging.We are encouraged that this willnow happen. However, we are stillseeking reassurance on behalf ofconsumers about the reliability ofwater company data supplied to theregulator.’ ●

UK water firm fined over bills


ANALYSIS

Austria’s European Courtdefeat over a municipal

contract following eruditelegal wrangling revealed thescale of uncertainty over theEuropean Union’s growingmarket for public privatepartnerships. Fearing lack ofclarity may impede privatefinancing of infrastructure,the European Commission isplanning new legislation inthe wake of an investigationlasting nearly two years.

The Austrian case,whilstinvolving a waste company,nevertheless shared characteristicswith potential municipal jointventure for water services. Itcentred on the creation of companyowned by the municipality ofMödling and a private firm toserve the community.The venturefell foul of laws that its architectsbelieved did not apply.

Four months after setting up afully-owned waste disposalcompany,Mödling municipalitysold 49% of its interest to privateoperator.The city and privatepartner agreed that each wouldappoint a managing director torun the waste company.

The transaction was completedin October 1999 and the company started operations thatDecember. In March 2001, after anew waste transfer centre wentinto operation, the companystarted serving other municipalities as well.

In late 2003, the Commissionchallenged the waste managementcontract at the European Court,claiming it should have beenopenly bid.The Austrian government countered that thewaste operator was an ‘in-house’operation under its control so felloutside European public procure-ment law.But the Commissionsuccessful argued that such anexclusion should apply only whenthe contracting authority hadunlimited control over the in-house operation.Even a minorityholding by a private investorwould require a contract award tocomply with EU law, it asserted.

The Commission calls theMödling type of arrangement aninstitutional public private

partnership (IPPP).Such contracts, along with morefamiliar concessions, are amongthe procurement approaches thatappear to be causing muchconfusion throughout the EU.And that worries EuropeanCommissioner for InternalMarket and Services CharlieMcGreevy.‘Improved publicprocurement practices andprocedures and more effective andtimely enforcement of existingrules are… going to have a majorrole to play… in terms of contributing to the resolution ofpublic sector financing problemsthat will inevitably become moreacute,’hopes McGreevy.

While broad principles ofequity and transparencyenshrined in the EU Treaty apply to the procurement ofconcessions and similar arrange-ments,no detailed laws of the sortcovering more conventionalcontracts apply.

‘Under Community law,’notesthe Commission,‘there is nospecific legal system governingthe many different possible formsof PPPs.’ It adds:‘In certain cases,they can be subject to the detailedprovisions of the Directives onpublic procurement.However,other cases and in particularcertain ‘concessions’ are not covered.’

As a result, aggrieved biddersappear to face ‘major difficulties…when disputing the legality ofallegedly discriminatory awarddecisions before national courtson the basis of general EC Treatyprinciples,’ notes McGreevy.

‘In the absence of Communityrules, some (states) have launchednational legislative procedures,’adds McGreevy.‘The fact that thishas simply added to the existingpatchwork quilt of applicablerules is not particularly helpful in

terms of developing a coherentframework in the context of anintegrated internal market in this area.’

Most respondents to a discussion Green Paper launchedby the Commission in May 2004to test the desire for more clarityin this area urged more legalcertainty on rules governing theaward of concessions.But theywere divided on whether newlegislation or simpler interpretativeguidance would be best.Companies, in particular, believedthat only EU-wide action couldcreate legal certainty whileavoiding diverse national laws,especially in central and eastern Europe.

The UK government’s responseto the Green Paper agreed thatuncertainly impeded the growthof PPP.But it warned againstrushing to further legislation.

‘The Commission will need toconsider whether the impact of

any proposals it might makewould reduce uncertainty,or havethe potential to increase it. It isalso important to ensure thatinflexibility does not become abarrier to the adoption of PPPswithin the European Union, andparticularly their adaptation tonational circumstances,’commented the British.

Similarly, the Irish Republic’sCentral PPP Unit advised:‘ACommunity legislative initiativeto regulate the procedures forawards of concessions does notappear to be desirable or neces-sary… there are no objectivegrounds for any action that maybe considered to cover all contractual PPPs, irrespective ofwhether these are designated ascontracts and concessions’.

Nevertheless, the Commissionbelieves new legislation may bethe best option.An interpretative

document would be quick butineffective, it believes.‘In manycases, a lack of precision in the lawcan hardly be overcome by meansof interpretation.’

On the advice against legislating,the Commission retorts:‘It isdifficult to see why spelling outthe rules applicable to the awardof concessions would per seunduly limit the flexibility ofcontracting authorities whenawarding service concessions.’Legislation would need to recognise the complicated natureof concessions ad the need fornegotiations, it adds.

Legislation would represent a‘qualitative leap in the protectionof bidders in most of the memberstates, as concessions… would fallwithin the scope of theCommunity Directives… whichprovide for more effective andadequate remedies than the basicprinciples of jurisdictionalprotection developed by theEuropean Court of Justice,’notesthe Commission.

Future legislation would cover both works and service,clearly distinguishing betweenconcessions and public procure-ment contracts. It would requireprospective contracts to beadvertised and would set objective, impartial selectionrules.Problems stemming fromthe long duration of concessionsand issues relating to projects forcross-border infrastructure mightalso be covered.

McGreevy says he will proposenew legislation ‘only when I amabsolutely certain that this will bethe best way to achieve our policyobjectives.We will thus look moreclosely into the costs and benefitsof such binding initiatives as wellas alternative measures to addressthe problems at state’.

The other source of procure-ment puzzlement, institution-alised PPPs,will get lightertreatment.

At present ‘it is too cosy anarrangement,’ believes McGreevy.Green Paper respondents ‘havesignalled… that public authoritiesare reluctant to enter into innova-tive PPPs involving the establish-ment of mixed capital companies,

Prospects for European clarity on procurement in public private partnershipsWith the European Commission due to launch measures on public private partnerships this year, arecent ruling by the European Court of Justice on an Austrian waste disposal company revealed theperils of mixing public and private interests in the procurement of municipal or government services,reports PETER REINA.

‘Improved public procurement practices andprocedures and more effective and timely enforcementof existing rules are going to have a major role to play.’

Charlie McGreevy, European Commissioner for Internal Market and Services


One of the most interestingand challenging

customer service contractsaround has just been let – theWater Service in NorthernIreland has signed a contractwith the Crystal Alliance, aconsortium led by Xansa andwhich also includes EchoManaged Services and AMT-Sybex.

The task of the consortium isto provide a billing and contacthandling service for the organisa-tion,which is an executive agencyof the Department for RegionalDevelopment in the province.

The seven-year,£70 million($122 million) contract will alsoeventually see the Allianceproviding technical services tosupport the Water Service’s fieldforce as it manages and maintainsthe water and wastewater infrastructure.

The billing centre,when it isimplemented in April 2007,willcreate 180 jobs locally.Protectingthe customers is a set of performance targets designed toensure that industry-leadingstandards of service are achieved.

The Water Service took legaladvice via a joint team from legalservices organisation DLA PiperRudnick Gray Cary and localBelfast law firm CarsonMcDowell.The deal was brokeredby Stewart James, a partner fromDLA Piper's Technology,Mediaand Communications group.

This move, radical for the WaterService,has been taken because ofthe decision to separate watercharges out from the NorthernIreland equivalent of Council Tax.Mr James notes:‘One of theconcerns is that it could look likean additional tax.The wholewater reform programme is quitecomplicated and includes

developing secondary legislationto establish the Water Service as aseparate company.’

As a government company,similar, for example, to OrdnanceSurvey, the Water Service will stillbe a public body but,with theloosening of government reins,will have a greater incentive topromote efficiency and to establish optimum ways to fulfil its

programmes.The new customerservices contract fits nicely withthe new approach.

In the end there may be anumber of different methods ofcontact,Mr James explains.‘Ifsomeone has a question they willhave a number to call, email,possibly a walk-in centre, and weare setting up a direct debitpayment system and a way ofpaying online.One of the innovations being brought in isthe introduction of new methodsby which the Agency can interactwith its customer base.’

Technical services companyXansa is the lead partner of theAlliance,providing front-endservices and, as the primarycontractor, it has the directrelationship with the WaterService.Echo will provide thebilling, contact handling and debtcollection side and AMT-Sybex, autility-focused consultancy andsystems integrator,will providethe mobile workforce solution.

The later workforce element ofthe contract will enable fieldworkers to act much moreeffectively by reducing the

amount of time they spend indepots collecting worksheets –their daily tasks will be sent tothem via PDAs (personal digitalassistants), laptops or mobiles overa secure communications network.

The contract sounds interesting,and will undoubtedly also bechallenging: there have beensimilar doubts, voiced in the press,about water privatisation as there

have been in Scotland.Thedistrust runs deep, and it remainsto be seen how the public viewthis new,private arm of theirpublic service and indeed thenotion of separating out theirwater bills as an identifiable item.There is also the added pressure of living next door to theRepublic of Ireland,whose wateris ostensibly free (albeit paid forwithin the rates), so the reaction is uncertain.

Mr James says:‘One of the

interesting factors is the creationeffectively of a new industrywithin the province.What will thereaction be? There is an elementof risk that had to be built into thecontract.One of the steps was toidentify the risk profile andprovide a workable solution tothat.’The detail of this is,predictably, confidential.

The initial £70 million ($122million) value of the contract will probably increase over itsduration,Mr James adds, as someof the additional requirementskick in.The contract is now in adevelopment and implementationphase.Although separate rates willappear on 1 April 2007,he saysthat there is a recognition that as anew service ‘you can’t just hitpeople, so they will come in on asliding scale over three years.’

Mr James notes:‘Another factorthat had to be built in was theneed to recognise that somesectors of the customer base havefinancial issues.Northern Irelandhas more customers at or near the poverty threshold than the rest of the UK.Because of thisthere are safeguards built into the system.’●

ANALYSIS

The cultural challenge of Northern Ireland’snew customer service contractAward of the new customer service contract for Northern Ireland coincides with a change in the waycustomers are charged. LIS STEDMAN looks at the challenge this represents.

‘Northern Ireland has more customers at or near thepoverty threshold than the rest of the UK. Because of this

there are safeguards built into the system.’Stewart James, DLA Piper

in order to avoid the risk of(being) non-compliant with EClaw later on,’he adds.

According to the Commission’sconsultation,public sectorrespondents, including govern-ments,would prefer a widerdefinition of ‘in-house’ to avoid

problems of the sort faced byMödling municipality.

But the Commission believesthere is no ‘compelling evidenceat present to suggest that thequality of public services could beimproved or prices be reduced, ifprivate undertakings - via IPPPs -

obtain public service missionswithout a preceding competitiveaward procedure’.

While IPPPs are still new tomost EU countries, according tothe Commission, interpretativeguidance, rather than new laws,would provide necessary clarity

‘without stifling innovation’. Inaddition, it says,‘quick response toperceived uncertainties appears tobe particularly important asregards IPPPs.’

Commission decisions on both concessions and IPPPs areexpected this year. ●

Northern Ireland’s Water ServiceThe Water Service provides water and sewerage services to over 730,000domestic, agricultural, commercial and business customers throughoutNorthern Ireland, with an annual budget before capital charges of £302million ($524 million) and fixed assets of £4.9 billion ($8.5 billion). Eachday it supplies 710 million litres of drinking water to customers.

Around 83% of households are served by the public sewerage system.The Water Service collects, treats and disposes of around 134Mm3 ofwastewater each year. In addition, it provides a desludging service forover 59,000 private septic tanks. The Water Service employs around1900 staff in total.

To protect public health, meet European standards on water qualityand respond to increasing demand sustained investment in water andsewerage infrastructure it is estimated that a £3 billion ($52. billion)spend will be required over the next 20 years. Over the next three yearsWater Service plans to spend £590 million ($1024 million) on the firsttranche of this expenditure.


ANALYSIS

In December's ill-temperednegotiations on the

European Union's next budget, controversially largefarming subsidies emerged asthe prime source of dissentand public interest.Morearcane discussions on regionalfunding involving similarlyvast sums went largely unreported, though theirpotential for European environmental infrastructurewill be profound.

The regional funds representmajor transfers of money fromricher to poorer nations aiming,eventually, to equalise economicsand social conditions throughoutthe Union.By adding ten relativelypoor states to the 15 more affluentincumbents, the 2004 Unionenlargement skewed the fundingfrom the Mediterranean andAtlantic fringes further east.

Economic and social development,in the context of intensifying globalcompetition,underlies thepurpose of the regional funds.Butenvironmental infrastructure,particularly relating to water andwastewater, is seen as an essentialprerequisite of the 12-year oldCohesion Fund.That grant fundallows governments to makeheavy infrastructure investments,while containing budget deficitsin line with EU monetary policy.

EU infrastructure funding forcentral and eastern Europeancountries has been ‘incrediblysignificant’, says Richard Moult, adirector for water sector businessin the region at the UK-basedconsultancy Mott MacDonald.His firm’s growing business ineastern Europe is underpinnedlargely by EU grants to its clientorganisations, along with loansfrom the World Bank, theEuropean Investment Bank andothers,he adds.

Underlining the growingsignificance of the CohesionFund, the European Commissionthis December made its largestaward for 2005, and to the watersector.Worth €248 million, it willhelp fund a €405 million waterand wastewater project in thePolish capital,Warsaw.EU grantsamounting to nearly €3 billionhave been approved for 100 Polishinfrastructure investments in

2004-2006,with nearly half thefunding going on 71 environmental,mostly water-related projects.Cohesion Fund money is alsopartially financing a €250 millionHungarian wastewater plant atCsepel, due for completion in 2010.

Started in 1994, the CohesionFund finances up to 85% of majorenvironmental and transportinfrastructure project costs.Investments are generally dividedroughly equally between the twosectors, supporting projectscosting at least €10 million.

Countries with per capita grossnational products of up to 90% ofthe EU average qualify for theFund. Initially,only Greece,Portugal and Spain qualified forthe Fund, along with Ireland untilit became, in 2004, too affluent toqualify.That was also the yearwhen the Fund exploded in

significance as ten relatively poor,mainly former Communistnations, joined the EU.Cyprus,Czech Republic,Estonia,Hungary,Latvia,Lithuania,Malta,Poland,Slovakia and Slovenia allhave gaping infrastructure needs.

New EU members hadreceived grants for theCommission though the pre-accession ISPA facility.Butthe Cohesion Fund roughlytrebles money available to them,making a proportionally largerimpact than on the original fourrecipients.While the fundaccounted for under a fifth ofIreland's receipts from the EU in1994-1999, for example, the sharefor new members is over a third.

Whether the governments willbe able to spend newly availablefunding efficiently remains to beseen. Initially, grant recipientswere unable to absorb availablefunds, so that by the end of 2000 asum equivalent to 120% of theprevious year's total allocationremained unused.With measuresincluding limits on the freedomto make plan modifications, theCommission cut the correspond-ing under-spend by two thirds bythe end of 2003.Only a fraction

of the 2004 allocation was carriedover to last year.

While Poland and the othernew members anticipate substantial new infrastructure, theEU’s older states stand to lose out.Spain, for example,had warnedthat the inclusion of the newmembers would reduce thefunding eligibility level, excludingsix of its 12 regions,notes JoséIgnacio Torreblanca, a senioranalyst at the Elcano RoyalInstitute,Madrid.There were alsofears that Spain would no longerqualify for Cohesion Funding. Inthe end, the government securedaccess to until 2013, anticipatingreceipts of €3.25 billion plusother support,he adds.

For the period 2000-2006, theFund amounts to some €28billion (2004 prices).Over €19.7billion was allocated to Greece,Portugal and Spain, and to Ireland

up to 2004.The remaining €8.5billion was earmarked for the tennew members,with Polandgetting nearly half. Fund resourcesavailable in 2004 to Portugal,Spain and Greece amounted to€2.7 billion (1999 prices) and€2.9 billion for the ten new states.

For the next budget period, theEU will modify the structure ofregional funding, change the mainobjectives and spread moneymore widely.The CohesionFund’s eligibility criteria willremain,but the new regime willmove away from piecemealfunding to programme-basedsupport.However, environmentalprojects costing over €25 millionwill still need Commission approval.

Amid reforms planned to takeeffect this year is a redefinition ofregional funding aims.The threecurrent priority objectives aresupport for regions laggingbehind in development, for thoseundergoing economic and socialconversion, and for training andemployment promotion.Of thenew objectives, the one withgreatest bearing on the watersector is convergence, coveringinvestments to help poorerregions catch up.Convergence

covers 124 million people,or27.3% of the EU's population, in86 regions.

This convergence objectivesupports those regions,notnations,with per capita grossdomestic product (GDP) under75% of the average for theenlarged EU.While the EuropeanRegional Development Fund(ERDF) has a broader remit thanthe Cohesion Fund, it too supports basic infrastructure.However,because ERDF requiresprojects to be completed withintwo years, its scope for infrastructure is limited.

The Commission adopted theproposed new approach in early2004,proposing just over €336billion for all regional funding in2007-2013.The EuropeanParliament and nine of the then15 member governments broadlyapproved the plan.But at thebruising summit last December,under the UK presidency, the EUtotal budget was trimmed withregional funding falling to €307.6billion,or 0.37% of EU grossnational income for the period.

Now,around €252 billion isproposed for the ConvergenceObjective.Nearly 60% is aimed atthe poorest regions through theERDF.The Cohesion Fund isallocated just over €60 billion.And around €12 billion will betransition support for thosecountries no longer qualifying forfull convergence funding,whowould have done so if not for EUenlargement.

That the European Parliamentrejected the December EuropeanCouncil budget settlement was‘entirely expected’, according tothe UK government.‘It wasalways extremely unlikely that theParliament would accept the(Council of Ministers) budgetsettlement without any alteration.’

Final agreement by governments,the European Parliament and theCommission is expected this Aprilor May, forecasts Ana-Paula Laissy,the Commission's regional policyspokeswoman.After that thevarious regulations covering thenew fund must be agreed possiblythis June or July, allowing for allfinal arrangements to be madebefore the year's end,when thecurrent regime expires.●

Water and wastewater developments will be major beneficiaries of huge transfers of cash to theEuropean Union’s poorest countries as a new regime of regional funding takes root, reports PETER REINA.

Funding shift to support European cohesion

Whether the governments will be able to spend newlyavailable funding efficiently remains to be seen.


After a stunning, 12-year transformation of a leaky

post-colonial water supply system, the Phnom Penh WaterSupply Authority (PPWSA) is fastapproaching its goal to supply allurban and suburban areas in themillion-strong city. It is nowlooking toward new challenges,including the improvement ofsanitation and how to spread itsexpertise to areas of Cambodiaeven less well endowed withresources than the capital was inthe early 1990s.

Fortune favored the PPWSA as it setout to restore and expand the city’swar-torn and neglected services withlittle more than a will for change.Theinefficient and corruption-ridden bodyfaced a system little changed since1895, supplying just 20% of the city’sresidents and leaking cash as revenuesfrom inadequate tariffs, sapped furtherby illegal connections, fell far short ofcosts.Yet by 2005, it had plugged theholes: the system delivered affordableand clean drinking water to 100% ofPhnom Penh’s inner city and wasworking through suburban areas atabout 120km of piping a year, fundedby a sound balance sheet and backed bya solid tariff structure.

‘Our supply network now extends1300km from just 280km in 1994.Wecover 100% of the inner city area andabout 60% of Phnom Penh suburbanareas and some districts of otherprovinces bordering the city,’ says EkSonn Chan,general director of theauthority since 1993.

Practical steps are now being taken,he says, to apply hard-won experienceto other areas of the country, includingtalk of bringing other utilities temporarily under PPWSA authority.The PPWSA also recently provided anadvisory service to nearby Siem Reap.

Observers credit several factors forPhnom Penh’s success, some of whichmay be difficult to repeat.‘Number one was the agreement with thegovernment to make the PPWSA anautonomous body. It was one of ourloan covenants,’ says Xiaoyan Ye,

principal project specialist with theAsian Development Bank’s MekongDepartment.

In 1996,ADB loaned Cambodia $20million,part of a project totalling justunder $36 million, to help the capitalrestore water supply and drainage inPhnom Penh City.

Without this autonomy the effortwould have had to go through theministries and it could have takenanother five to ten years to pushthrough the necessary changes toimprove the city’s water supply.

A second important factor was thedecision to move quickly on a tariffincrease, closing a financing-gap for thecash-starved water utility and allowingit to provide the city’s poor with morereliable, cleaner and ultimately lessexpensive water than the many watervendors or resellers supplying the slum areas.

‘The tariff was a big issue in the earlyyears of our development,’ agrees MrEk Sonn Chan.Indeed,he says itremains an issue,although the authorityhas kept tariffs stable by concentratingon reducing non-revenue water.

Mr Ye echoes a common sentimentcrediting Ek Sonn Chan’s uncommonleadership for the PPWSA’s success.‘Itjust so happened that he was there atthe right time.’

According to ADB,when Mr EkSonn Chan joined as director in 1993only 20% of Phnom Penh residents hadaccess to PPWSA water.Only 0.7billion riels income was generated,wellshort of operating costs at 1.4 billionriels. Staff were under-qualified,underpaid and unmotivated. Illegalconnections in that year alone wereabout 300,most installed by PPWSAstaff at $1000 each.

Ek Sonn Chan recruited a youngand motivated staff (a big early challenge) and set up an open environment encouraging them toquestion management and to reporterrors and problems,going against thegrain of a Cambodian culture that shiesaway from open criticism under ahierarchical structure.

He gained public involvement

through reporting of leaks within thesystem.And when it came time to raisetariffs and legalise connections, he and staff negotiated closely withrepresentatives in poor communities.Planners had scheduled three increases,

CASE STUDY

Emulating success in Cambodia:lessons from Phnom PenhThe transformation that has taken place in theCambodian capital Phnom Penh provides an example ofhow a public developing country utility can reform itself.ERIC VAN ZANT spoke with its general director EK SONN CHAN,who is credited for this success, about how the utilitycould help raise standards throughout the country.

‘PPWSA, under inspired and disciplined leadership, is one ofthe better run utilities in the Asian region. Attention needs tobe given to expanding the service area and service coveragedensity without sacrificing the quality of service (24-hoursupply) or unnecessarily increasing the price of water. Thisexample shows that poor people can and will pay for goodwater service.’Author comment, ‘Asian water supplies – reaching the urbanpoor’, Arthur C McIntosh.

Production and distributionPopulation*: 981,805 (2001)Annual production 37,763,647 m3

Groundwater NilSurface Water 100%Annual consumption

Domestic 16,988,665 m3

Non-domestic 10,867,034 m3

Total 27,855,699 m3

Service connectionsDomestic** 64,035Nondomestic 10,910Total 74,945

Service indicatorsService coverage 84%24-hour water availability 100%Per capita consumption 104 l/c/dAverage tariff US$0.244/m3

Efficiency indicatorsNonrevenue water 26%Unit production cost US$0.082/m3

Working ratio 0.46Staff/1000 connections 5.4Revenue collection efficiency 99.6%

* The population in the service area is 532,130.

** The average number of persons per connection in 2001 was 7. The

increase in total connections in 2001 was 7,929.

Source: Asian water supplies – reaching the urban poor. Arthur C

McIntosh. 2003. ISBN: 971 561 380 2. Available at:

www.adb.org/Documents/Books/Asian_Water_Supplies/default.asp

Phnom Penh’s water supply

Are utility attitudes tothe environmentshaped by corporategovernance? Assessingthe evidence fromAustralian utility reportsLike much of the rest of the world, Australia is currentlyadapting its policies, legislation and resourcemanagement practices to achieve more environmentally-sustainable water usage. But does the extent to whichwater utilities implement appropriate measures dependupon their corporate governance? ADAM GRAY and JENNIFER

McKAY describe ongoing research of utility reports toassess this.

Australia’s Centre forComparative Water Policies

and Laws (CCWP&L) is currentlyundertaking research on behalf ofthe Cooperative Research Centrefor Irrigation Futures (CRC-IF)on whether a water supply business’ environmentally-sustainable development (ESD)agenda is impacted by the specifictypes of governance that they areformed under. In other words, isthe business structure of a waterutility likely to help or hinder autility’s pursuit of environmentallysustainable water managementpractices?

This feature looks at the current stateof the Australian water industry and thegovernance structures or types incurrent use, and then illustrates theESD priorities through analysis of thecontent of top management reports fromnearly two thirds of the water supplybusinesses (WSBs) in the country.

The Australian contextThe usual challenges faced in waterresource management are somewhatexacerbated in Australia by threefactors.Firstly, as is commonly noted,Australia is the driest populated continent in the world.Most of thecountry is arid or semi-arid.There

simply is not a lot of water available.Secondly,Australia’s economy is

currently – and has traditionally been – heavily geared towards primaryindustry.A significant percentage ofAustralia’s annual export is in water-consuming agricultural productssuch as beef,wool,wheat, and so on.

Thirdly,when Australia federated in1901,Section 100 of the constitutionvested all water resource managementpowers within the individual states andterritories.This has led to each stateand territory pursuing its ownparochial agenda in terms of waterlegislation and policies.This in turn has resulted in a highly-fragmentedwater industry.

In the early 1990s,with much of thecountry enduring severe droughtconditions, the federal governmentused the Council of AustralianGovernments (CoAG – a frameworkfor regular meetings between thefederal government and each state andterritorial government to examine andcoordinate on issues of national significance) to begin fostering anational approach to water resourcemanagement.Ultimately this led to theadoption of the National WaterInitiative (NWI) in 2004 (McKay,2005; for more information seewww.pmc.gov.au/nwi/index.cfm.

but after the second in 2001,PPWSAfound that its revenue already coveredsupply costs because of a highercollection ratio, the drop in illegalconnections,and reduction of unaccounted-for water,according toADB. Illegal connections are down toless than 20%.

The way forwardThroughout the Cambodianprovinces,urban water utilities arestarved of the experience PPWSA nowrepresents.Discussions are underway todetermine how to best proceed underwhat can only be described now as apolitical environment more complicat-ed than the one in the early 1990s.

Many observers say the best wayforward would be to temporarily bringother utilities under the PPWSA’sauthority,with clear plans for futureautonomy, such that its culture andsystems can be passed on.However, thisfaces resistance,not least from the bigdevelopment agencies,where theagenda still favors privatisation as thebest solution for the region.

Ek Sonn Chan has his own preferences:‘To my own thought, I prefer todirectly 100% control those waterworks – one by one for a certain time,probably three to five years – thenrelease them to be autonomous.’Doingso,he argued,would ‘actualise’PPWSAexperience without working in thelong-term against the government’sdecentralisation policy.‘I am quite surethis idea is realistic.’

Aside from advisory services to theSiem Reap Water Supply Authority,which was just renovated under grantaid of Japan, the PPWSA also shared itsexperience in a recent first meetingthat gathered water supply authoritiesfrom around the country.But he adds:‘I don’t think that’s going to help much.’

There are also discussions now,hesays, about creating a CambodianWater Work Association with PPWSAas its core,providing advisory servicesas well as contract services on specificissues, and contract management withPPWSA.

One way to proceed would be topick one or two provinces and do anexperiment – do the same thing as wasdone in Phnom Penh, says Mr Ye.Another would be to have provincialstaff come in to Phnom Penh fortraining,which at least could give themthe skills and dedication to take back to their provinces. Similarly,PPWSAstaff could be seconded to theprovinces temporarily.

The next big challenge is in sanitation. It was difficult to get peopleto pay for what they use, says Ek SonnChan. It is altogether another thing toget people to pay for their waste.●


CASE STUDY ENVIRONMENT


ENVIRONMENT

In August 2003,Australia’s deputyprime minister stated in the introductionto the NWI that ‘Australians use250,000 litres per year,which is about30% higher than the OECD average’(Anderson MP 29 August 2004).Hewent on to say that when it is finished:‘…the NWI will affect every singleAustralian household… Our livesdepend on a staggering amount ofwater, so it is crucially important toeach Australian who eats steak thatcosts 50,000 litres per kilo or drinksfruit juice that costs 780 litres per litreof juice.’

As mentioned above,many of the issues faced by Australia’s waterindustry today are a legacy of federation and Section 100 of theAustralian constitution.Section 100states that ‘the Commonwealth shallnot,by any law or regulation of trade orcommerce, abridge the right of a stateor of the residents therein to thereasonable use of the waters of riversfor conservation or irrigation.’

Section 100 was inserted becauseNew South Wales,Victoria and SouthAustralia feared that Commonwealthlaws under another section,51,mightaffect their common interest in waterfor irrigation. (Crawford 1991).Section100 arose out of the two-fold impor-tance of rivers for navigation andreservoirs for irrigation storage.Theobject of this section was to limit thesupremacy of navigation insofar as thiswould limit the reasonable use of waterby the states.

However,by enshrining state autono-my in water resource management,theclause has brought about little nationalcoordination or standardisation withinthe industry.This has led to very differ-ent policies and practices across thecountry.

The states’parochialism and autonomyin water legislation lasted until 1994,when the CoAG created national-levelpolicies and funded the states toimplement them by incentive payments defined under section 96 ofthe federal constitution. In addition,the national government has increasedit powers to directly intervene,withnew powers under the EnvironmentalProtection and BiodiversityConservation Protection Act 1999(CTH) which gives the Common-wealth power over environmentalmatters of national significance.

The Commonwealth also increasedthe power to regulate CorporationsLaw companies and state-ownedenterprises under the Corporationpower enshrined in section 52.(Moeller and McKay,2000).Finally, theAct’s external affairs powers can beused to implement treaties withenvironmental outcomes.

The CoAG reforms required institu-

tional separation of the old publicsector providers into water serviceproviders, pricing regulators andenvironmental managers.The reformsalso required full cost recovery from allwater sectors – that is, both rural andurban – with separation of waterproperty rights from land titles, and acomprehensive system of entitlementsreflecting volume, security and quality.

One overriding obligation of thereforms was to achieve sustainablemanagement processes. Some commentators observed that theCoAG water resources policy imposedtwo competing objectives: resourcesecurity for end users and publicinterest goals of environmental management.

The CoAG reforms were funded byfinancial incentives to the states ofAus$16 billion ($12 billion) (McKay,2002).The CoAG requirementsoutlined in the policy statements werepredicated on the view that separate bodieswould promote more transparency, reduceconflicts of interest and promoteaccountability.However, some commentators have speculated that theseparation has increased institutionalbarriers, reduced communication andincreased costs (Productivity Commission,2003).The micro-economic reformagenda commits all governments to:• universal application of

pro-competition laws• the creation of independent

regulators to regulate the pricing of services from state monopolies

• structural reform of government to facilitate competition and the review of any legislation that restricts competition.

Evaluating Australia’s fragmented industryWhen the CoAG reforms were adopted,the water sector in Australia was highlyfragmented with over 800 suppliers(Broughton 1999). It is still regarded ashighly-fragmented (ProductivityCommission 2003) and diverse,with in excess of 300 businesses.

Research carried out by the Centrefor Comparative Water Polices andLaws has identified approximately 333authorities or agencies that sell anddistribute water as of December 2005.(see Table 1)

When evaluating a WSBs governance type, the objective is toidentify what its legal structure is. Forexample,while a single individualmight own a corner store, it might also be owned by a family trust, acorporation,or any one of a number of possible scenarios.A similar variationin governance structure can be foundwithin Australian water supply businesses.

Once types have been confirmed,

patterns can be identified and trendsthat are associated with being formedunder a specific governance type canbe illustrated.The first task has been toidentify the WSBs in each state andterritory.This has meant identifyingand merging lists obtained fromvarious sources, including the localgovernments of each state,numerousstate and federal departments,irrigators’ councils and authorities,various water associations, and severaldozen state-owned and private bulkwater supply service providers.The next stage was to identify whichGovernance Typologies existed withinAustralia.This involved an examinationof Annual Reports, State and FederalLegislation, and a review of availablebenchmarking literature fromAustralia,Europe, and the UnitedNations.Through this process, 20 corporate governance types wereidentified within the Australian waterindustry (see box).

Each of these types is formed undera different legislative framework.Theyhave different requirements in anumber of areas, including publicreporting,obligations to shareholders,owners and stake holders, and so on.This process illustrated another keyfactor in the shaping of ESD priority,and that is whether the WSB hasmultiple missions or is largely a single-mission business.

Three main categories of missionbreadth have been determined.They are:• Multi mission: indicates that the

WSB has multiple areas of activity,such as water and roads and rubbish removal, etc.Generally these WSBs are local government authorities of one kind or another.

Corporate governance types identified within theAustralian water industry

• local government authorities• shire councils• town councils• city councils• island councils• aboriginal councils• joint local government organisations• local government-owned corporations• water boards• rural water boards,• rural drainage boards• government departments• government-owned corporations• statutory bodies• private entities• Corporations Law companies• revised corporations• irrigation trusts• customer councils• self-managed trusts


• Dual mission: indicates that the WSB has two areas of activity. In most instances within the Australian water sector, this mission breadth occurs within utilities that provide water and power services.

• Single mission: indicates that the WSB has just one area of activity.

For example, a local government in Queensland has a number of respon-sibilities and objectives ranging fromthe old cliche of ‘roads, rates, andrubbish’ to provision of childcare,supplementary health services, and soon.By contrast, a rural water authorityin Victoria has really only one business – water.

Assessing the content of management reportsThe next stage of the research was tosubmit the top management reports ofidentified WSBs to content analysis toidentify agenda priorities.Contentanalysis is a well known technique andhas been applied to the annual reportsof arts organisations in Australia(Rentshcler and Guersen,1999).Content analysis is a way of determin-ing management emphasis, priorities,or changes in corporate objectives.

The underlying assumption is that

senior management will express whatthey perceive to be positive,compelling and laudable in the reportsthat are written for their businesses’stakeholders and shareholders.As such,it is possible to determine what theirpriorities are in their management oftheir company.Content analysis iscarried out manually by measuring (incentimetres) the amount of spacededicated to specified subjects. Afterusing content analysis, the researchersare able to present an assessment of thedocument in terms of the percentageof document pertaining to a specifiedtopic.For example:‘1.3% of thisdocument concerned non-waterrelated infrastructure maintenance’.

A total of 62 distinct subjects weredefined,with these falling into 10 maincategories.These categories are usedwithin the research to provide ‘generalised’ snapshots of a WSBsattitudes and focus.The 10 categoriesused are:• water content (including ESD)• headings• acknowledgements and photos

of CEO• non-water• current drought• ESD

• staff• governance• customers• elections/profits• mission/vision

To carry out content analysis on theselected WSBs, annual reports wereobtained and the introductions,highlights,mayoral report,CEO’sreport and managing director’s reportsfrom within the annual reports wereexamined.The TMRs were printed onA4 paper which measures 21.0cm by29.7cm.This means that each page has

a total area of 623.7cm2.All graphics and text were measured to find the area of their ‘footprint’.Measurement wascarried out by hand with a transparentgrid overlay with each square being0.5cm by 0.5cm.

A tally of the total space for each ofthe 62 subjects was then kept as thedocument was assessed.After theassessment was completed, the total foreach category was determined.Thedata was entered into an Excel spreadsheet and percentages of TMRwere calculated.

ResultsAs the research is still in progress,it would be too soon to draw conclusions at this time.Nevertheless,the preliminary results are intriguing (see graphic).

As one would expect, it does appearthat WSBs with a single mission ordual missions are more likely to addressESD and water than multi-missionWSBs.There may also be a correlationbetween the level of fragmentation ofthe water industry within a given stateand the likelihood of ESD attentionand adherence to the NWI.

The research is progressing well. It isanticipated that with the data gatheredthe CCWP&L will be able to examinewhether issues of business size,customer base, customer type (rural,urban, irrigator, residential, and so on),staffing levels, region, type of owner-ship and even water source have anyimpact on a WSB’s tendency to adhereto ESD and the NWI.●

Table 1 - Australian water supply businesses and governance types.

State Population Area WSBs Governance types Mission breadthAustralian Capital Territory 314,171 2,358 1 1 Dual missionNew South Wales 6,532,459 800,628 145 16 Multiple missionNorthern Territory 197,590 1,335,742 1 1 Dual missionQueensland 3,627,816 1,723,936 133 16 Multiple missionSouth Australia 1,502,397 978,810 7 5 Single missionTasmania 470,272 64,519 14 5 Multiple & SingleVictoria 4,828,968 227,010 24 4 Single missionWestern Australia 1,909,751 2,526,786 8 6 Single missionAustralia 19,383,424 7,659,861 333 20

ENVIRONMENT

National Summary of Content Analysis

100%

80%

60%

40%

20%

0%

Tas Tas Tas Vic Q’Land Q’Land Q’Land NSW NSW NSW WAAve Multi Single Single Ave Multi Single Ave Multi Single Single

WSB WSB WSB WSB WSB WSB WSB WSB

Water Content (inc. ESD) Headings Ackowledgements, Photos & GraphicsNon Water Current Drought StaffGovernance Customers Electrical/FinancialMission/Vision

Key (top to bottom)Mission / VisionElectrical / FinancialCustomersGovernanceStaffCurrent droughtNon-waterAcknowledgements / photos / graphicsHeadingsWater content (including ESD)

‘It is not enough to do your best; you mustknow what to do and then do your best.’W Edwards Deming

What gets measured gets done, especially when we

know what to do.When humanbeings are involved,measuringperformance is a proven methodof improving outcomes.Mostforward-thinking utility managersrecognise the value of implement-ing a sound performance measurement programme.Thedifficult part is determining whatexactly to measure.

To provide some answers, a jointWater Environment ResearchFoundation/AWWA ResearchFoundation (WERF/AwwaRF)research project,‘Developing andimplementing a performance measurement system’,was conductedand published in 2005.Utilities acrossNorth America participated in theresearch, sharing their own experi-

ences with performance measurementsystems, and developing new frame-works that would serve as the standardfor water and wastewater utilities.Primary participants included the Cityof Phoenix Water Services (Arizona),Union Sanitary District (California),Seattle Public Utilities (Washington)and Central Contra Costa SanitaryDistrict (California).

The purpose of this research was toprovide methods and tools that wouldenable a water or wastewater utility todevelop and implement a provenperformance measurement systemapproach.The project included coreresearch,demonstration pilots, andapplication of the pilot results andlessons learned to the final published process.

The end result is a seven-stepmethodology,based on a BalancedScorecard (BSC) approach, to designand implement performance measuresat both the enterprise (utility-wide)level and the team level.The means to align and coordinate measuresthroughout the organisation weredefined for both levels, and recommendations were made forinvolvement, education,communication and commitment ofutility participants for successfulperformance measurement.

This feature explores how utilitiescan develop an effective performancemeasurement system. It also examinesthe case of a mid-sized US utility thathas implemented performance measurement as an integral part of itsstrategic planning.These lessonslearned, in both research and practicaluse, can be applied anywhere in theworld where utilities desire to improve performance.

Columbus Water WorksColumbus Water Works (CWW),170km south west of Atlanta,Georgia,

BibliographyAccountability Rating 2004, Institute of socialand ethical accountability,UK.

Anderson J,Hon MP,9 December 2004.Ahistoric week for water reform.

Anderson J,Hon MP,press release 29 August2004.National Water Initiative.

Australian National Committee on Irrigationand Drainage website http://www.ancid.org.au/

Broughton W ed,1999.A century of waterresources development in Australia 1900 to1999. Institute of Engineers,Sydney,Australia.

Centre for Comparative Water Policies andLaws websitehttp://business.unisa.edu.au/commerce/water-policylaw/

Cooperative Research Centre for IrrigationFutures websitehttp://www.irrigationfutures.org.au

Crawford, J (1991).The constitution and theenvironment.Sydney Law Review, vol 13,pp13–15.

McKay 2002.Encountering the southAustralian landscape; early European misconcep-tions and our present water problems.HawkeInstitute working paper 21.www.hawkecentre.unisa.edu.au/institute/

McKay,2004.Corporate governance modelsIn major Australian urban water businesses - atypology in the first decade after reform and issuesfor the future.Efficient2005, IWA,Chile.

McKay,2005. Irrigation water providers andenvironmentally sustainable outcomes - examplesfrom Australia.2005 OECD workshop.

McKay, JM (1994).Water planning in SA’,Australasian Journal of Natural Resources Lawand Policy, vol 1, no 2,1994,pp595–609.

Moeller and McKay,2000. Is there power inthe Australian Constitution to make laws forwater quality? Environment and Planning LawJournal,Vol 17,no 4 pp294-307.

National Water Initiative websitehttp://www.pmc.gov.au/nwi/index.cfm

Productivity Commission,2003.Rightsarrangements in Australia and overseas.Canberra

Rentshcler and Guersen,1999.Entrepreneurship as a market mechanism - thecase for art museums

SustainAbility 2003,May 2003.The globalreporters - sustainability reporting assessmentmethodology,www.sustainability.com

UNEP,2003.Tracking progress: implement-ing sustainable consumption policies.UNEP,2ndedition

Water Services Association of Australiawebsite http://www.wsaa.asn.au/


What gets measuredgets done: applying a seven-step methodology inColumbus, Georgia

PERFORMANCE MEASUREMENT

The Columbus Water Works is using a new seven-stepperformance measurement methodology to set andachieve strategic goals. TERRANCE BRUECK and BILLIE G TURNER

look at the approach and how it has been applied.

About the authors:Adam D Gray ([email protected])is research assistant and Jennifer [email protected] isProfessor of Business Law and director atthe Centre for Comparative Water Policyand Laws, School of Commerce,University of South Australia, Adelaide.See http://business.unisa.au/waterpolicylaw

Mission,Vision, Values

Strategies, GoalsObjectives

Strategic Planning Framework and Process

ALIGNMENT

OPER

ATIO

NAL

TEAM

-BAS

ED-ST

RATE

GIES

STRA

TEGI

C

Measures, Targets, TacticsActions, Timelines, Roles and

Responsibilities

Operational Plans and Budgets(projects, programs, “master plans”, initiatives)

Background data, information and analysis(surveys, focus groups, interviews, sub-team work)

Fig 1 The strategic framework


provides services to nearly 250,000people.This public utility has a historyof effectively planning for its futureneeds and the needs of its customers.

CWW has recently completed acomprehensive update of its strategicplan and facility master plans.Thisencompasses a number of areas including information technology,asset management,biosolids andsecurity improvements.CWW haspursued the ongoing challenge ofcommunications, tracking, linking andaligning business strategies and goalswith operational budgets and dailyactivities.

Most utilities recognise the importance of strategic planning,butless undertake it in a comprehensivefashion.Of course, it is possible tomake incremental improvementswithout a strategic plan. In Columbus,however,utility leaders were determined to take full advantage ofopportunities for significant change.They embarked on a strategic journey,conducting a comprehensive,one-yearstrategic planning process that wascomplemented by in-depth planningin several focused areas.The processinvolved a cross-section of utilitypersonnel as well as outside expertise.

Columbus used the ‘scan,plan,do’approach to strategic planning that wasdeveloped in an AwwaRF project,‘Strategic planning and organisationaldevelopment for water utilities,’ inwhich CWW participated.Thestrategic framework for this approach(Figure 1) includes the process forstrategy development and addressesorganisational needs such as developing new skills, leadership,dealing with difficult issues, adapting touncertainty,handling emerging goals,and managing communications.

Successful PerformanceMeasurementMuch like the strategic planningprocess, it takes concentrated effort andorganisational leadership to design andimplement an effective performancemeasurement system.Do it well andthe process will enable the utility toachieve new levels of performance interms of efficiency,quality, and

effectiveness.The desire for change is driven by

multiple forces that impact upon theorganisation.External demands –competition, regulatory requirements,or customer expectations, for example– can be the primary motivator.Or the need for change can be driveninternally by the utility leadership’sdesire to improve performance.Eitherway,performance improvementrequires performance measurement.

A successful performance measurement system combines aholistic approach that is built aroundimproved business practices andeffective human/organisational strate-gies, in addition to performancemeasures for operational decision-making. It enables an organisation to establish a baseline for currentpractices, set targets for change anddrive improvement.

The concept of a continuousimprovement cycle emerged from thework of W Edwards Deming and wasfirst applied in Japan in the 1950s.Deming demonstrated that an understanding of the relationshipbetween measurement and process isfundamental to improvement.

The term ‘system’ is often used todenote the information technologythat automates data collection,datamanipulation, and the recording andpresenting of measurement results. Forperformance measurement to besuccessful, the system must also includeprocesses, procedures, communication,education, and supporting tools.All ofthe steps, from defining a utility’sstrategic plan to day-to-day use ofperformance measures, are part of the system.

As illustrated in Figure 2, the components of a performance measurement system are centred on thebusiness process and associated workpractices that deliver the product orservice to customers.

To make performance measurementmore clearly understood, a frameworkwas developed around a modified formof the Balanced Scorecard (BSC).TheBSC framework is based on the under-standing that an organisation’s continu-

ing success relies on more than justfinancial factors. Its balanced view alsoconsiders the customer, internalbusiness processes, and learning and growth.

With the framework in place, it isfundamentally important to select theright type of performance measures.Some measures record input on whatwas done (cost, effort,number of workorders,or other activity),while othermeasures indicate results (amount ofwastewater treated per dollar spent,percent of treated wastewater meetingeffluent quality standards).A goodmeasure should be easy to understandbut difficult to falsify.A scorecardshould be balanced on measures ofefficiency,quality, and effectiveness atboth the enterprise level and theprocess or initiative level.

Columbus asks its customersIn Columbus,one of the most important performance measures iscustomer satisfaction with utilityperformance.CWW uses a customersatisfaction index to measure changesin customer perception.A baselinescore was established via an initialsurvey of randomly-selected customers.The strategy team then usedthe baseline scores to identify bench-mark numbers with data collected viamonthly customer satisfaction surveys.

The utility has consistently enjoyedcustomer satisfaction scores nearing90%,but surveys alone do not revealwhere improvements can be made.Themost effective way to learn whatcustomers really think is to ask them.

Customer focus groups and stake-holder interviews were held to gatherindividual perspectives and opinions.The utility also acquired informationon customers’ perceived value ofproducts and services from residential,business, and regulatory perspectives.Each focus group meeting broughttogether similar customers and wasdesigned and facilitated to encourageinput and discussion.One-on-onestakeholder interviews were conductedwith various individuals recognised ashaving important community orbusiness influence or impact on theutility’s strategic direction.

Interviews were scheduled at thestakeholder’s convenience and weredesigned to promote candid input.Between the two approaches, theutility was able to obtain valid stake-holder perceptions and identify severalspecific strategic opportunities that thestakeholders regarded as important.

The value of both customer surveysand focus groups cannot be overstated.Each represents an excellent opportunity to learn about changingcustomer perceptions and buildstronger external relationships.


BusinessStrategy

Practices Scorecard

MeasuresBusinessProcess

Demands and Drivers

Useperformance data

1

2

3

4

5

6

7

Measureperformance

Implementmeasurement system

Establishperformance targets

Defineperformance measures

Prioritiseobjectives

Reviewmission and goals

Facilitation and energy needed to keep

the process moving

Fig 2 A successful performance

Fig 3 The seven-step process


Seven steps to successThe AwwaRF/WERF researchproject established a seven-step process(Figure 3) to serve as a guide todeveloping and implementing aperformance measurement system.These seven steps are set out below.

Step 1: Review strategic planThe first step in the process is to beginwith the utility’s vision and mission –assuming these exist. If not, the organisation should at least create aworking version of the vision andmission before proceeding.Thisensures that performance measuressupport accomplishment of theutility’s strategic direction.

As illustrated in Figure 4, the business strategies that support theoverall strategic direction can betracked using an enterprise scorecard of performance measures. In addition,each of a utility’s operational initiatives(these carry out the business strategies)can be measured by team-basedscorecards.Process-based scorecardsare linked to a business process frame-work that defines typical water/waste-water utility functions. Initiative-basedscorecards are linked to an organisation’s key or strategic initia-tives or programmes, typically throughthe strategic planning process.

A utility needs to select the bestapproach (that is, initiative-based,process-based,or a hybrid approach) torolling out the scorecards organisa-tion-wide. Individuals or organisationunits should identify and have respon-sibility for a set of measures that maycome from multiple scorecards.Thishandful of individual or organisationunit measures must be clearly relevantto their work, and be aligned with theachievement of goals and objectives.Step 2: Prioritise improvement needsStep 2 involves prioritising areas forimprovement and potential benefits(such as cost savings, improved qualityand better service) if the performancemeasurement system is to serve a validpurpose.These priorities are typicallydefined using a competitivenessassessment,benchmarking process,orreview programme such as theAWWA/WEF QualServe programme.This need for improvement provides themotivation to manage performance.

QualServe is a voluntary qualityimprovement programme that isfocused on continuous improvementand customer satisfaction. It is specificto water and wastewater utilities and isjointly sponsored by AWWA and WEF.QualServe provides tools to improveperformance for the purpose ofassessment and benchmarking.

Benchmarking allows the organisation to compare itself with

others for the purpose of effectingchange.The application of ‘best’ or‘leading’water and wastewater utilitypractices will improve performance.Using QualServe,utilities are able toidentify areas for improvement andaccess the resources to implementchanges best suited to the specific needsas dictated by their unique circum-stances.High-level indicators provide a‘global’ view,helping utilities comparethemselves to other utilities in morethan 20 areas of performance.

Quantifying the need for improve-ment is essential if the utility is going toselect good measures and establishsound targets.This step may also changethe goals and objectives defined in theprevious step. It may even challenge thevision and mission.

Step 3: Define performance measuresPerformance measures, linked directly

to priorities already established, alsoneed to be defined.A list of businessprocesses that contribute to the opera-tional initiatives should be developed.Aligning business processes withinitiatives will reveal performancetargets and measures that deserveconsideration.Specific measures shouldbe identified for each priority goal andobjective.The method and frequencyof taking measurements also needs tobe established and a responsible person or group assigned to gather and trackmeasurements.

A good measure:• drives performance improvements

(desired behaviours)• is actionable and relevant to

work activities• can be updated with regular

frequency (data collection is possible)• is clearly defined with targets (units,

how measured,baseline or history)• ties directly to goals and objectives• is strategy and initiative-based or

process-based (organisation or individual ownership follows)

Poor measures:• have little impact on work activities• are too complex to understand

• use data that is impossible to collect or more trouble than it’s worth

• are measured only because they are easy to measure

• are poorly defined and inconsistent• are ‘out of my control’or

not actionable

One of the most common mistakesmade in the selection of measures ischoosing too many. Just because youcan measure something doesn’t meanyou should. If a process or outcomeisn’t based on the organisation’simprovement priorities, then it shouldnot be measured for the scorecard (evenif it is being measured for other reasons,such as regulations).

Some measures may seem ‘forced’orlack relevance.Others measure theindividual more than the process. Somemeasures do not aggregate or roll upwell.Others are impractical and take

too long to measure.Start with a fewkey ‘good measures’.

Step 4: Establish improvement targetsTargets for improvement should beestablished based on the performancemeasures defined in step three.Targetsetting is sometimes obvious,particularly when goals and objectiveshave clearly desired outcomes.Targetsneed to be realistic and they need to fit with organisational goals.Theperformance assessment (completedin step two) will likely report the gapbetween current performance and anestablished standard or leading practice.Targets to close this gap should bespecific, achievable, and have a set time frame.

Without an existing baseline of data– either utility-specific or generalindustry data – setting targets can belike shooting in the dark.UsingQualServe performance indicatorsgives utilities valid statistical analysis ofperformance (by size, region, type ofutility and so on),which sets thecontext for utility-specific targets.Thisis the approach taken in Columbus,where QualServe was considered afamiliar, practical alternative.


Mission and Priorities

Support

Execute

Business Strategies

Balanced ScorecardGoals and Objectives

Balanced ScorecardMeasures and TargetsTactics and Operational Initiatives

Programs, Projects, Routine Operations

Fig 4 Scorecards canmeasure and relateperformance at theenterprise level as wellas at a team-basedlevel.

Step 5: Implement performance measurementImplementing the performancemeasurement system means establishing data collection, recording,manipulation of data, and presentationof measurement results via periodicreporting or an online dashboard.Newoperating procedures or additionaltraining might be required.Teammembers need to be selected andreporting methods/schedules established.Not all targets will be met,so processes for corrective action needto be set up.Team-based measures arethe best approach for actions to affect results.

Automated performance measure-ment is preferred because it places lessof a burden on employee time.The data that results must provide theinformation needed to adjust process-es. Ideally, the system should consoli-date and integrate data from a numberof sources – work management system(WMS),SCADA, financial informa-tion system (FIS), customer informa-tion system (CIS), and so on.

Step 6: Measure and adjustOnce the performance measurementsystem is in place, adjustments will be required. It’s inevitable.Are themeasures the right measures? Are theywell-defined for accuracy and futurerepetition? Are the targets realistic? Areprocesses in place to consistentlygather the information? User feedback

can provide the answers.It may be necessary to go back to

steps three and four and refine theinitial set of measures or targets.During the first measurement period,it will take more time and effort togather the data than in subsequentperiods.Group training and analysiscan be helpful here to ensure employ-ees understand the system, the need foraccurate data, and the ultimate goal ofperformance improvement.

Step 7: Use performance measurementStep seven puts the performancemeasurement system to work.Continuous improvement is an ongoing process that requires a long-term commitment. It is important toreview, refine, and/or revise measuresand targets at least once a year (Figure5) to ensure they remain relevant.

Simply giving the data to employeesis not enough.The next step is toprovide training that will help themmake the necessary process improve-ments.An ongoing education andcommunication programme is requiredthroughout the organisation whenevera performance measurement system isin use.

A word of caution:Do not skip anyof the seven steps.Completion of allseven is essential if the system is goingto yield true performance improve-ment.The seven-step process fordeveloping and implementing perfor-mance measurement systems wasrefined based on real-world experi-ences,using team-based implementa-tions with several scorecard rollout options. It is now a proven system that works.

From planning to practiceOnce its six major strategies had beenidentified,Columbus Water Worksformed six employee teams to implement one strategy apiece.Theutility management structure was alsoreorganized to provide support for andto facilitate implementation.Bylinking performance indicators to on-the-ground implementation tactics,each strategy team now has ‘owner-ship’of several key measures.

Implementation of each business

strategy is now underway.Strategygoals and objectives are directly linkedto performance measures.The utilityreports monthly on 27 measures thatshow company-wide performance,enabling every employee to see theresults of their own performance.Success is measurable and progress is tracked regularly.As the utilityenvironment changes, teams will adjusttheir tactics and the scan process willbe revisited annually to make changesin overall strategic direction.

In taking this path to plan for thefuture, the utility has charted a soundcourse.The key was using a flexible,dynamic,ongoing process.By including outside stakeholders in theplanning process, the utility gleanedvaluable perspective that ultimatelymade a significant impact on theorganisation’s future direction.

In identifying strategic measures andtargets to measure progress,CWW staffseized the opportunity to measure theutility’s performance against industry-wide data.Now CWW is utilisingsurvey results for several performanceindicators to modify measurementprocesses and help implement thestrategic plan.Key steps include:• setting the strategic direction• looking for appropriate indicators

to measure results• using the indicators to measure

progress and take appropriate action• improving performance

Of course,making the shift to a measurement-based culture doesn’thappen overnight. It takes time,enthusiasm, and commitment from thetop.Leadership needs to be visible andemployees have to be involved.Measures and results need to bereviewed frequently.Equally vital, is communication at multiple levelsemploying multiple methods. In theend,Columbus Water Works – or anyother utility employing performancemeasurement – will know exactly how far it has come and how far it stillhas to go.●

References:Terrance Brueck et al.Developing and imple-menting a performance measurement system.WERF/AwwaRF,2005.

Terrance Brueck et al.Strategic planning andorganisation design for water utilities.AwwaRF,2004.

Robert S Kaplan,David P Norton.Thebalanced scorecard.Harvard Business SchoolPress. 1996.

AWWA/WEF,QualServe program,www.qualserve.org

14 • WATER UTILITY MANAGEMENT INTERNATIONAL • DECEMBER 2005


About the authors:Terry Brueck is President of EMA, Inc., a North Americanmanagement consulting firm specialising in services forutilities and municipalities to improve productivity and max-imise long-term performance. He has over 25 years’ experi-ence working with utilities in the USA, Canada and the UnitedKingdom on strategic planning, organisation development,work process redesign, and information and control technolo-gy. He holds Bachelor and Master of Science Degrees, and is aRegistered Professional Engineer.

Billy G. Turner is President of Columbus Water Works, aninnovative public utility serving residents of Columbus,Georgia. The utility’s leadership and forward thinking enables itto provide among the most cost-effective water and wastewaterservice in the Southeastern USA.

Fig 5 Scorecards needto be reviewed on aregular basis to takeaction and ensure themeasures still makesense.

Financial Sustainability

Customer Process

No

No

No

Yes

Yes

Refine Scorecard

Measure and monitor performance

Are we meeting our target?

Goal and metric still appropriate?

Take steps to directly improve pergormance (Example: Re-assign staff for faster response times)


Debt is an important issue forthe water industry of England

and Wales.The Water Act of 1999made it illegal for water companiesto disconnect their customers andthe result has been soaring debtlevels. By 2003, the industry wasfacing an annual non-recoverabledebt of £164 million ($288 million) – equivalent to 700,000households not paying their billsout of the total of some 22 million.

The problem is that disconnectionwas a powerful tool, although it has tobe pointed out that the industry fullysupports the right to a continuoussupply of water.Unfortunately otheroptions such as pre-pay meters andflow reduction were also rejected bygovernment and the courts so, as debtspecialist TDX’s CEO Mark Onyettpoints out:‘Advisors are saying topeople that payment of their water billsshould be their lowest priority,becausethe industry can’t disconnect.’This is atruth the industry also acknowledges.

It does,however, recognise that thegrowing level of debt is related toaffordability – the government’sdefinition of water poverty is whencharges account for more than 3% oftotal household income.Charges haverisen considerably since privatisation tohelp the industry meet the demands ofa number of stringent Europeandirectives.Whereas in some countrieswater charges are merged in with theoverall rates or subsidised from othertaxes, in England and Wales theydirectly reflect costs, both capital andoperational.

One of the main problems is thathousehold debt in Britain is the highestin Europe.According to the ChurchPoverty Action Group,one in fourpeople sometimes struggle to makerepayments on their debts.Recentfigures show that outstanding chargeshave increased by around 17% since1998/99, so debt represents a growing challenge.

The industry acknowledged thescale of the problem by staging a think-tank in May 2004,bringing together

the companies, regulators, governmentand consumer groups to explore theissues and circumstances surroundingnon-payment and identify possibleworkable solutions.

Applicants to Anglian Water’s TrustFund (see box) illustrate the scale of theproblem:8% have incomes of under£70 a week;12% have less than £160($280) a week and one or more children; average debt is £3000($5270) to £4000 ($7020); averagewater debt is £650 ($1140).Figuresfrom Severn Trent’s Trust Fund bearthese observations out as well asrevealing that two thirds of applicantsare totally dependent on benefits,manyare single households and over halfhave some form of mental illness.

Solutions, therefore, are not easy tofind.The water industry points out thatthere are ‘clear tensions between theneed to place a proper value on waterto ensure it is not wasted and the needto ensure it is affordable to all’.There ismuch discussion within the industryabout whether metering can provide asolution to the question of how toachieve effective demand managementwhile enabling affordable and equitableaccess to water.This may be possible,the industry feels, if it is teamed withintelligent tariff arrangements thatensure disadvantaged customers havesufficient water for their needs at anaffordable price.

Other issues such as communicationwere raised at the 2004 think-tank –economic regulator Ofwat pointed outthat improving communication withthose in debt was crucial as they wereoften very difficult customers to reach.This, the think tank noted, relates to acomplex psychological aspect of non-payment – the stigma of debt and thesocial isolation of the very poor.Customers in debt often view it astheir own fault and are reluctant toseek help, so they need sensitive,high-quality and probably face-to-face advice.

Research carried out byCreditScorer in 2003 suggested thatthe methods of debt recovery in thewater industry were comparable withefforts made by other industries andmeasure very favourably against theenergy sector. It segmented non-paying customers into three categories:‘why should I pay’ customers,who aredefiant or calculating debtors; poormoney managers,who divide intounaware and denying debtors; andstrugglers – distressed debtors andvulnerable people.The companiesrecognise their responsibilities for thelatter two groups. It is the first groupfor which it has long looked to government to provide concrete action to help prevent,manage andrecover debt.

In the meantime, companies arehaving to feel their own ways forwardin what is a politically and socially-sensitive maze.Thames Water’s actionsare illustrative of the efforts beingmade. Julian Tranter, collecting agencyrelationship manager for Thames, saysof the disconnection ban:‘At the time,I don’t think a lot of the water industryknew how to react.The industry as a whole has spent a lot of time developing new collection techniques– it has been a very hard road to go down.’

The companies are solely reliant onthe willingness of their customers topay and the company’s ability tocontact them and persuade them topay,he adds.‘The primary principle for

CUSTOMER DEBT

Delivering on the debt dilemma

Without the ability to impose punitive measures oncustomers who don’t pay their bills, water companies inEngland and Wales have been forced to take a fresh lookat their debt recovery strategies. LIS STEDMAN reports.

‘The industry as a whole has spent a lot of timedeveloping new collection techniques – it has

been a very hard road to go down.’Julian Tranter, Thames Water


us is about knowing our customers,who are the types of customers that arenot paying and their needs, issues andconcerns.We start by looking at theirpayment history. It’s about breaking upnon-payers into different areas so wecan make investment decisions.’

Thames begins with reminders andnotices warning of the consequences ofnon-payment.Next it tries to call non-payers before their bills are due if theyhave a history of non-payment, and tryto persuade and remind the mostforgetful.For genuine strugglers,Thames is willing to write off a certainamount of debt if they are sure theircustomer has tried to make payments –they have to demonstrate a willingnessto pay.Mr Tranter notes:‘People thatare struggling for genuine reasons havegot a variety of options.They can payweekly to help manage their budgets,for instance.’

For the ‘why should I pay’group,though, tougher action is needed.TDX,with its in-depth understandingof debt and debtors,was engaged in2004 to help Thames enhance itsstrategies and take the company a stepfurther.‘TDX has helped to shed a lighton the situation and has helped us toget money,’Mr Tranter says.‘They tryto maximise returns.They start with allof the data that Thames is able toprovide on the debt and scorecard it –they cluster the data into similar types,create a segmented strategy and tailortheir action to suit.’

TDX’s experts segmented thisuncollected debt,placing debt portfolios with the most appropriatedebt collection agency for each debtor,

a strategy that has resulted in a greaterreturn for Thames according to MarkHover, the company’s head of agencymanagement.

Before TDX came on board in 2004,Thames had attempted to collectoutstanding debt through its existingportfolio of debt collection agencies,with each receiving a random allocation of debt.This resulted in much of the debt remaining uncollected.

Thames had provided the agencieswith little information on the personalcircumstances of the debtors, so auniform method of debt collection wasused for each debt portfolio.Any debtnot collected was rolled through to thenext round of debt placement,whichwas costly and time-consuming.

TDX tailored the collection activity and segmented debt into eightdifferent bands according to whichcollection techniques were required.Individual bands were then matchedwith the agency best suited to collecting the debt.TDX was alsotasked with increasing the amount of debt collected first time around.The company also tracked and analysed any historical debt from the firstplacement and ensured that this was collected.

TDX group recoveries managementanalysis manager Elliot Jackson says:‘What TDX tries to do is tailor theprocess so that the right recoveryvehicle is chosen for the right debtor.’There are four steps to the process,henotes.First is a data-gathering exercise,in which TDX takes the informationThames has given it and augments it

with incremental data from thirdparties and across the industry.

Next is the segmentation process,in which debtors are clustered according to characteristics – increasing understanding of thecompany’s way of working and how it handles its customers allows thesegments to be closely tailored foroptimum success.

The third step is execution,MrJackson says.‘It is important that thesegments are matched to a specific,executable strategy.We have a networkof some 30 of the best collectionagencies that we reach into.’

The fourth step is monitoring – theprocess is watched very carefully.MrJackson adds:‘If it works out, that’sgreat, but there are still opportunitiesto do something more intelligent.What we learn is fed back to thebeginning of the cycle so we can makebetter,more powerful decisions. It is acontinuous “test and learn”process, sofor the client there is an ongoingvirtuous cycle of innovation andoptimisation.’

The results of the work have beensignificant: both new and old debtrecovery levels have increased, leadingto a 10% increase in debts recovered,with a forecast £1.25 million ($2.2million) additional debt recovered bythe end of 2006.

Mark Onyett says:‘We believe manycompanies can benefit from a moreconsidered and sympathetic approachto debt collection and we’re nowlooking at working with more utilitycompanies,motor financiers and othercreditors.Debt is becoming more andmore commonplace in the UK – thereis no longer an ‘average debtor’, andcreditors must react by adopting amore sophisticated approach to therecovery process.’

Mr Jackson adds that there are anumber of fronts on which TDX aimsto develop its offering.The grouprecently ran a water industry seminar‘so that the water companies could gettalking, and see the opportunities topull together and work centrally todrive improvement and share bestpractice,’he explains.TDX is also keento deploy sophisticated collectiontechniques developed in the debt-savvy financial services sector toimprove water industry debt collection success.

Consumer groups and the industryremain convinced that the only lastingsolution is for government to act, togive companies some alternative to thepayment incentives it has removed.Clear guidance and a regulatoryframework are what is needed, it isagreed.The problem appears to begetting the government to share this view. ●

Payment optionsThe new consumer body for the water companies of England and Wales, theConsumer Council for Water (CCWater), recently issued advice to customersworried about debt. It made a number of specific recommendations including:• Smaller households and those with high rateable values should consider

changing from rateable value to metering.• Metered customers should try water-saving measures including water butts,

showering instead of taking baths, washing the car with a sponge and bucket, not a hose, and installing a water-saving device in the toilet cistern.

• Apply for the vulnerable customer tariff if appropriate. This helps metered customers receiving particular benefits that either have a large family or a medical condition that requires extra water use.

Companies also offer flexible payment methods and can take deductions directlyfrom benefits. Some, like Anglian Water, have charitable or trust funding availablefor special cases, and this money can be used to help with other bills, as it isrecognised that the whole of a person’s debt needs to be tackled for repayment tobe sustainable.

The water industry has developed a number of measures to help domesticcustomers to pay their bills, including:• telephone helplines• flexible payment plans • charitable and hardship funds• advice on free water meters, where suitable• help in applying for direct payment through benefits (Water Direct scheme)• promotion of debt advice agencies.

CUSTOMER DEBT


Last year two water sectorcontracts in particular made

the headlines – those of Aguas delIllimani in the Bolivian capital LaPaz and neighbouring El Alto andof City Water in the Tanzaniancapital Dar es Salaam.‘In bothcases it seems to be a fairly grislycase of local politicians wantingsomething to hit, and there’snothing more fun than beating up,sometimes literally, executivesfrom a water company,’ commentsDr David Lloyd Owen.But thesewere of course exceptions to whatwas happening generally in themarket.

Lloyd Owen is well placed tocomment on developments in privatesector participation in water andwastewater services provision.He runsthe Envisager market analysis companyand edits the Pinsent Masons WaterYearbook.Speaking late last year at thelaunch of the latest edition,LloydOwen describes 2005 as ‘busy-ish’ interms of changes in the line-up ofcompanies participating in contracts.Six companies left the sector, includingBenpres,which Lloyd Owen describesas ‘rather a battered partner’of Suez inMaynilad Water in Manila. Italy’s state-owned ENI and ENEL were othernames to leave the sector.‘The longawaited rationalisation of the Italianwater sector finally took place,which isa very important goal in spurring on

the reform in that market and themobilisation of serious investment,’notes Lloyd Owen.Another significantloss is that of SAUR which, says LloydOwen,‘has been broken up and broken up again’.He continues:‘It was supposed to be sold off to privateequity,but in fact they retained theirItalian and African activities andBouyges have retained the Africanactivities and sold on the Italian activities.’

Alongside such losses,Lloyd Owensays he encountered some 11 companies around the world of whichhe was not previously aware, some ofwhich were ‘truly weird and trulywonderful’.There were also cases oflocal partners leaving concessions tobecome players in the sector in theirown right.‘These are extremelyimportant in my opinion because this isthe transformation of companies frombeing an alien foreign presence in aconcession to something with real localpresence, local shareholders, localmanagement, local accountability, andthis what we really are all about,’ saysLloyd Owen.He also notes an enthusiasm on the part of privateequity to buy into the sector.

The fortunes of the major globalplayers have also varied.Despite talk of pulling out of water,Lloyd Owennotes that Suez remains at the top,actually gaining in terms of the number of people served despite taking

a more cautious view in developing countries.Veolia,mean-while, is ‘certainly not taking a particularly cautious view aboutChina’, and in the more developedeconomies is ‘very,very busy’,he notes.Other major players include Aguas deBarcelona,SABESP in Brazil,UnitedUtilities and, for now at least,RWE.This said, the significance of smalleroperators is important.‘The grandprocess of consolidation has definitelyhas gone into reverse gear. It’s reallynow the portion of the market takenup by the smaller more local playerswhich is shifting and that is reallychanging the nature of the beast,’ saysLloyd Owen.

In terms of contracts,Lloyd Owenhighlights three key losses.Cascal’sconcession in Belize shifted into anoperation and maintenance contractwhich was ‘very much an agreed sale’carried out in a ‘phased and controlledfriendly process’.This contrasts withthe more hostile losses of Aguas delIllimani and City Water.Meanwhile,henotes that Suez is ‘looking for an exitroute’ in Aguas Argentinas.

At the same time there were verysignificant contract gains,with 40 newcontracts serving at least 25,000 peopleidentified,21 of the contracts being inChina.These new contracts includedeight major ones serving more than amillion people.‘As a result, 28.3million more people are being served

BRIEFING

A perspective on private participationContract awards for private sector involvement in water and wastewaterservices provision can make the headlines, but what is the wider pictureof how the market is developing? KEITH HAYWARD heard DR DAVID LLOYD OWEN

review developments.

Evolution of distribution of companies operating in the water sector

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06Number of countries 13 15 16 15 18 23 27

Number of companies 70 81 82 84 102 117 130- OECD countries 59 69 70 68 73 72 78- advanced developing countries 2 2 2 2 6 13 16- developing countries 9 10 10 14 23 32 36

Source: Pinsent Masons Water Yearbook 2005-2006 (p44)

BRIEFING

in this type of financing and manage-ment body.Again, two thirds of thoseare from China – the China marketreally is driving the world market atthe moment,’ says Lloyd Owen.He alsopoints out that the focus now is muchmore on sewage treatment contractsthan was the case before,which hasseen a gain of 24.7 million peopleserved.This means that,while 2005does not represent a peak year, it doesindicate a good level of activity.‘Itshows a rather more controlled climatethan we have experienced in recentyears,’ says Lloyd Owen.He recalls2004,‘a pretty traumatic year for theprivate sector’, during which unrest inwest Africa led to contract losses.Now,though,he notes ‘a degree of stability is emerging into the sector again,with a slightly more rational environment.’

Having tracked these developments,Lloyd Owen is able to update hisassessment of the current status ofprivate sector activity globally.Heestimates that around 393 millionpeople have actual contract awards.Another nine million have beenreached due to service extension and asimilar amount due to populationgrowth within the concession,although he says this is ‘almost certainlya quite spectacular underestimate’.Ontop of this are the traditional marketssuch as the US,UK,France and Italy,which account for another 150 million.Overall then he estimates that562 million people worldwide areserved by the private sector – about 9%of the world’s population and up from5-7% in 1998.

This suggests a steady move towardsgreater involvement by the privatesector,but there are of course differences to be observed.Globallythere are now some 130 companiesactive in the sector.There is ‘slightlysedate’progress in the OECD countries and ‘a good progress’ inintermediate countries,‘but it is thedeveloping countries where we arereally seeing the private sector nowstarting to engage with local issues andlocal projects,’ says Lloyd Owen.

There are also differences fromregion to region.There are verydifferent circumstances in North andLatin America – an economic climatecreated by ‘anti-environmental legislation’ in the former and ‘a fairlytoxic political atmosphere… wherewater is a proxy for other problems’ inthe latter – meaning that there arecautious forecasts for both. In centraland eastern Europe,‘the private sectorat the moment has a limited role andwill maintain a limited role in themedium term while the municipalitiesand governments get to grips with thereality of European grant funding.’Lloyd Owen predicts that,when the

countries do this,‘then they will take arather cooler look at how they aregoing to finance the upgrade theirwater services, especially withEuropean Union compliance in mind.’He also highlights the prospects ofIndia.‘South Asia is certainly a marketwhich is taking off because theCongress Party has taken a much moreprogressive attitude towards financingand cost recovery than we would haveexpected three years ago,’ says LloydOwen.‘Some of its coalition partnersdon’t share this outlook,but India ismost certainly becoming an interestingmarket,’ and here he highlights theChennai BOT contract.

China is of course a location whereprivate sector involvement is beingembraced. In the 1980s there was justMacau and a few small contracts,whilein the last five years there have beenover 70 contracts awarded, averagingaround a million people a contract.Thefocus now is on improving wastewatertreatment provision, says Lloyd Owen.The aim was for 30-35% of wastewaterto be treated by the end of last year andthe intention is that it will grow to 45-50% in five years’ time and to 65-80%in ten years’ time, requiring anythingup to $250 billion in capital spending.

Despite the apparently enormouspotential that the Chinese marketpresents,Lloyd Owen offers words ofcaution to those who believe they canmake money there.He draws attentionto the high level of commercial awareness that exists.‘You just don’t goin there making a quick buck.Whatyou do do is you go in there if you have

really got something that will really gettheir interest,’ he says.‘Because theyrecognise the need for quality, 65% ofengineering goods the Chinese buy for municipal water and wastewaterprojects are imported, so that shows it isa quality-led market.’Once this isrecognised, then there are indeedopportunities, and Lloyd Owen givestwo example areas.‘China will arguablyat some point become the world’slargest market for desalination becauseof the sheer need for water in coastalnorth east China, and the key driverthere is going to be water for industrialuse.’The other relates to the ThreeGorges dam project and the hugevolume of untreated wastewater that isbeing discharged into its catchment.‘700M tonnes of effluent are discharged there each year… Theyagreed to build 320 wastewater treat-ment plants for $5 billion which areneeded by 2010.My suspicion is thereis going to be an awful lot moreprofound engineering requiredaddressing those areas beyond that,’ hesays.

All of this shows that the privatesector continues to increase its involve-ment in the sector and that there arefurther opportunities, but Lloyd Owenalso raises some challenges for andchallenges to the private sector.

One of the challenges for the privatesector is what contribution it can maketo improving Africa’s fortunes.Thatthere is an overwhelming need forimprovements in water and wastewaterservices provision is clear, but LloydOwen adds his own voice.He notes


Contract awards for water-only, wastewater-only and combined contracts

Water Wastewater Combined Contracts1987 0 0 1 11988 1 0 0 11989 3 0 10 131990 1 1 0 21991 1 0 1 21992 1 1 1 31993 8 3 4 151994 5 3 6 141995 7 1 10 181996 12 2 5 191997 12 4 10 261998 12 5 8 251999 15 6 28 492000 26 16 16 582001 17 18 19 542002 11 10 8 292003 18 8 16 422004 22 13 14 492005 13 16 11 40Total 185 107 168 460



that 42% of people have to walk morethan 30 minutes to obtain water,on topof which poor water quality presentshealth risks.‘If you think of the timegetting back and forth, then you thinkof the sheer economic impact ofwomen not being able to work,children not being able to go to school,their lives are dominated by fetchingwater of profoundly dubious quality…The second largest cause of death inAfrica is bad water and it is the largestcause of child mortality… I always sayit is Africa’s AIDS.’He points out thatthe position in relation to the targetsfor access to improved water is merelybeing maintained for water,while thesituation for sanitation is worse,withthe continent falling behind the targets.

Some $20 billion a year is needed innew funding to address this, but it is notforthcoming.This is despite the eco-nomic gains that such investmentwould bring.‘There are two empiricalstudies which have been done on this.One compared the poorest countries inthe world.Those which had a reason-able quality of water and sanitationservices, in the last decade theireconomies have grown at 3.7% perannum.Those without decent access towater and sanitation have grown at0.1% - a 37 fold difference in econom-ic gain,’ says Lloyd Owen.Then there isevidence from assessing the economicbenefits of getting ill people back towork, letting women work and lettingchildren learn.‘For every pound youput into water and sanitation you get 6-11 back in Africa in economic growth.’But,he asks,where is the money? ‘It’snot coming.The West has I am afraidlet Africa down badly.’

Lloyd Owen therefore calls on thoseengaged with private sector participa-tion to contribute to addressing thissituation.‘I really do want to see somehard thinking about how privatefunding,management techniques, etc,are going to be mobilised to help Africaovercome this terrible obstacle.’

The other issue Lloyd Owen raises isboth a challenge to the private sectorand a challenge for it.The challenge tothe private sector comes in the form ofthe activity by those who are againstthe private sector and who have beenvery effective at communicating thefailings of private sector involvement inwater and wastewater services provi-sion.The challenge for the privatesector is therefore to better documentits successes.

Lloyd Owen has done his own bit inthis respect by preparing some casestudies.‘I had to do these for the UN,because the UN in their 2006 worldwater review wanted to look at anumber of water contracts around theworld which showed excellence inproviding private sector participation as

a tool for getting water to the poor.’One example is the Armenian capital

Yerevan,where the Italian utilityACEA began operating in 2000.Then,15% of water samples were unfit todrink, average water delivery was sixhours a day, and revenue collection was21%.Now Lloyd Owen says only 0.3%of samples fail, average delivery is 16hours and everyone pays their bills.‘Asa result it actually means that for thepoorest 30% of people in Yerevan whoin 1999 were paying on average 8.1%of their household income on water,that had fallen to 4% this year.’

This,he says, is a typical example ofwhat the private sector can deliver. Inthe case of Casablanca,Morocco,henotes that the Suez concession Lydecintroduced a strong system of cross-subsidy to ensure affordability andrecently sold equity on the localmarket,most of which went to localinvestors.He describes the work of theAyala / United Utilities joint ventureManila Water Company connecting 1.5million people over the last eight yearsas ‘one of the great unsung successes’.This has included reducing non-revenue water from 63% to 36% andproviding basic connections to 740,000

people in slum areas which, says LloydOwen,has resulted in a 36% drop ininfant mortality due to diarrhoea.

Other examples he cites are theachievements of Latin Aguas in its 30year Aguas de Salta concession,of theuniversal service provision achieved bythe Suez / New World Infrastructurejoint venture Macao Water SupplyCompany, and of RWE Thames Waterin East Jakarta, Indonesia.On the latter,Lloyd Owen notes:‘One of the thingsthey have done here is,when theystarted their concession in Jakarta,there was a heavy bias towards thewealthier people being served and thepoor people being unserved. It has notbeen a brilliant concession in terms ofeverything going smoothly,but there isnow no bias between connections andincome, so in that sense the principleof universal service is being adhered toand they are now doing variousprojects on ‘kampongs’,which areinformal settlements getting wateracross to the people.

The final example he gives isBolivia,where he compares whatAguas de Illimani was achieving in LaPaz / El Alto when it was ousted lastyear with the situation in

BRIEFING

Distribution of numbers served (millions) by contract awards

Water1985-99 1990-94 1995-99 2000-04

Europe 39.86 1.57 17.35 24.77Americas 0.00 20.73 50.19 22.64Asia 1.49 9.56 53.70 48.66Middle East / Africa 7.25 1.28 14.81 13.62Total 48.60 33.14 136.05 109.69

Wastewater1985-99 1990-94 1995-99 2000-04

Europe 55.03 3.54 18.41 23.27Americas 0.00 9.73 34.09 12.11Asia 0.00 0.30 3.48 30.98Middle East / Africa 1.50 0.00 1.96 5.69Total 56.53 13.57 57.94 72.05


Current and forecast extent of private sector participation

2005 2015Western Europe 179.1 45% 210 52%Central / Eastern Europe 24.5 7% 60 18%Middle East / Africa 30.6 3% 105 8%South Asia 3.3 0% 45 3%Central Asia 0 0% 5 15%South East Asia 146.7 7% 380 17%Oceania 4.6 18% 10 35%North America 79.3 19% 120 25%Latin America 94.5 17% 150 24%World total 562.6 9% 1085 15%



Cochabamba,which has been in publichands since the private operator wasousted in 2000. In Cochabamba,henotes that supply coverage is around69%, service provision around 15hours a day and the tariff $0.27/m3.This compares with coverage of 99%,provision of 24 hours a day and a tariffof $0.22/m3 in La Paz / El Alto.

For Lloyd Owen, such evidencecounters the criticisms levelled bythose who are against the privatesector.‘But then of course that’s theproblem, it’s not actually about servicedelivery, it’s not about getting water tothe poor, it’s not about reaching theMDGs, it is about ideology.’

Such documentation will not beenough on its own.For example, thereneed to be developments in relation tofinancing.‘We need new financingmechanisms,’ says Lloyd Owen.‘Climate change is going to fundamentally change the way wemanage water and wastewater and isgoing to be a vast cost driver.The othergreat challenge is going to be divertinglocal wealth towards local needs.Forexample, in India there is actually quitea large number of prosperous people,but due to the lack of suitable financialinstruments they send their money toEurope and America.What we needare water financing vehicles which arefully credit rated, liquid, and cangenerate business there.’

Lloyd Owen clearly feels the privatesector has a valuable contribution tomake. Indeed,he predicts that morethan one billion people will be servedby the private sector by 2015 (see box).However,he feels it is at risk of havingits efforts overshadowed by those whoare against private sector involvement.‘The private sector has got to engagein these debates. It is no good justdoing nice brochures,nice meetingsand nice dinners.They have to set theresearch agenda and bring water to the people.’ ●

The Pinsent Masons Water Yearbook 2005-2006, ISBN: 0-9551747-0-8, is availablefrom: www.bebc.co.uk.See also: www.envisager.biz

This feature intends to encouragedebate about exploring new

institutional arrangements for theprovision of water and sanitationservices in developing counties inorder to achieve universality,continuity and quality.

After a conceptual review of theexperience with some privatisationsthat have taken place since the early1990s,we explore some alternativesthat will enable a change of course andthe continuation of those aspects thathave proved positive.

As an introduction, let us remembersome characteristics of water andsanitation services.These services are,by nature, local monopolies.They arealso strictly local services, since thetransportation of water for potablepurposes is very costly in relation to therevenue it generates.The same is truefor the transportation of liquid waste.

These organisations are monopoliesbecause it is socially convenient to havea single grid for water and one forsanitation,serving the same community.However, it is fair to point out thatvertical fragmentation of the systems ispossible,by separating some processesin the value chain.Horizontal fragmentation is also possible, thoughexperience in this area is very recent.

Another important economiccharacteristic related to the ideas we

intend to analyse here, is the high costof infrastructure compared to therevenue for services provided,whenthat is collected.

It is also pertinent to stress the socialvalue of water and sanitation,which isrelatively high in relation to otherpublic services.Both services have aneffect on people's health, either directlyor through their effect on environmentalquality.A recent WHO report statesthat a monetary unit invested in waterand sanitation infrastructure representsa saving of three to 30 units of the samecurrency in costs related to public health.

These services, given their highsocietal value,have traditionally beenrendered by the state, generally represented by local or regionalauthorities.For various reasons, amongwhich is the inability of the state tofund the necessary investment toimprove those services and make themuniversal, a number of authorities havesought different ways to invite theparticipation of private capital since thebeginning of the 1990s.

Problems of the multinational private providersFor a number of reasons,which we willnot go into here, the main operatorswinning recent privatisations havebeen a handful of multinational corporations.These corporations,due

BRIEFING VIEWPOINT

Lessons fromLatin America: the potential oflocal privateoperatorsThe prospect of only limited input from multinationaloperators in meeting the water and wastewater servicesneeds of Latin America means the continent’s institutionalframeworks need to be re-thought. ALEJO MOLINARI looks atthe role local private operators can play.


to their experience, financial size andbusiness knowledge,were expected toprovide management capability,investment capital and technology toimprove services.

A little less than a decade after thebig rush of privatisations, these bigcorporations have revised their originalexpansive strategy to concentrate onnorthern countries, deserting contractsin peripheral countries to ensure theleast harm to their interests.

An analysis of the massive failure ofthese big corporations,which is hard tomake dispassionately today,will help us understand the best options forachieving the desired goals of universality and quality of service.

Let us start by saying that it is fairthat private companies seek the profitability necessary for the survivalof their business.Without that profitability, any business would beunsustainable.However, the pursuit ofprofitability as a single or main prioritycan also suffocate a good business.

In the case of water and sanitationservices, their capital-intensive naturemakes them a long term business,basically because of the differencebetween the high level of investmentneeded for infrastructure and therelatively low revenues that theoperation of these services generate,because of their strong social component.However, the permanentsearch for short term profitability,probably necessary because of the high risk of investing in countries with unstable economies,has led to a number of problems.Companiesare permanently renegotiating theircontracts, applying pressure for rateincreases and,when this has not beenpossible, indirectly adjusting revenuesby failing to meet their investmentobligations.

This sense of high-risk exposure mayhave led investors to become extremelycautious in committing their owncapital for investment, turning insteadto debt as the main source of finance.This policy enabled stockholders toquickly recover the minimum capitalprovided in the early stages of thecontract, but leaving operating companies with high gearing. In this way, the expectation that big corporations would supply investmentcapital has been frustrated.They onlyprovided plain debt capability and thenonly partially, because the main debthas been provided via multilateralcredit agencies.This has not made themany different to the previous statemanagements.

But unlike previous state managements, the improved management capability allowed arelative move forward in terms ofinvestment levels.However, this

investment was made by hiring companies owned by the corporation’sown stockholders or their venturepartners.Contracts were allocatedmainly by a private bidding process, atprices that were generally favourable inrelation to the probable market value,thus increasing the investment cost but improving the consolidated profitability of their head offices.

However, the technology providedhas been no better than the corporation-owned technology,because the suppliers have been mainlycontrolled companies,which have littleincentive to introduce technologicalimprovements as their captive customers are the companies of theirown group.This means that the attempt to incorporate cutting-edgetechnology via privatisations has also failed.

This systematic purchasing andhiring from corporate companies hasalso had a negative effect on localmarkets, because when purchases from previous suppliers have beendiscontinued they have gone out ofbusiness, producing a downwardpressure on investment and an increasein unemployment. In other words, agreat amount of the money yielded bycustomer payments, destined forinvestment and debt repayment,hasgone instead to corporate hubs, via thecorporation’s contractors and suppliers.

In terms of the privatised companies’contribution to management capability, it is necessary to point outthat services have improved remarkablyin quality, compared with the previousstate management, though they havenot reached the levels demanded in thecontracts.Nevertheless, years after thisearly improvement, service quality is now stagnant and has deteriorated in some cases as a result of high debt burdens and the missing investment capability.

We cannot deny the possibleinfluence of the difficulties imposed bythe macroeconomic instability in someof the countries that privatised theirservices.However, the expatriates from the large corporations,whocontributed greatly to the improvedmanagement skills at the beginning of the privatisations,have slowlydecreased in number as time goes byand have been satisfactorily replaced bylocal personnel,who have similartraining but cost less.Management,therefore, apart from in the higherranks, is now in the hands of properlytrained local personnel.

Finally, let us examine the failure to reach the target of universal service,which happened because of theinability of big corporations to provideservices to the poor.This inability has been acknowledged by the

top managers in some of those corporations.

The poor are not profitable,becausetheir ability to contribute is below thecost of service provision.This means itis necessary to explore low-costalternative technologies and associatedparticipation plans to enable access atminimum cost.

In parallel, it is necessary to implement local community participation, to guarantee that servicesare sustained in the long run.All this is possible only if the local culture is correctly understood and a considerable ability to achieve consensus can be developed within the communities.

Some of the most significant failuresof big international corporationmanagement have been made in this area, as witnessed by the socialrejection manifested in communitymeetings of those in need.Cases suchas Cochabamba and La Paz, in Bolivia,or Tucumán and some municipalitiesof Greater Buenos Aires, in Argentina,provide a very clear picture of this.

Lessons for the futureWe can now outline some conclusions,pointing out that the three reasons forprivatisation – management capability,capital provision and technologysupply – have reached a ceiling and we cannot expect, in the future, anycontributions from the big corporations in these areas.This is even more the case, as we said,because they have shifted their strategyto concentrate on other markets.

It is evident that the solutionsadopted in the past have reduced theircapability and they have not reachedthe expected goals of continuity,universality and quality. If our societyseeks to achieve the same goals,wemust find different institutionalschemes that enable us to achieve themat a lower cost and over the shortestpossible term.Let us consider some options.

In some cases,where services havereturned to state management,becausethe big corporations have desertedthem, the results in terms of continuity,quality and universality are not veryencouraging.This does not mean thatstate management should in itself becondemned.There are many cases ofremarkably good state management,but they generally occur in specificinstitutional and cultural environments.

But there is management capabilitywithin the private operators of small-scale water and sanitation services,which encourages us to think thiscould be a feasible alternative. It is clearthat local private experience in thistype of service has so far been verylimited.However, companies in the

VIEWPOINT


private sector undoubtedly have goodmanagement capabilities.And it shouldnot take long for this capability toadapt to these services and providesome advantages over the big international corporations.This isparticularly the case if we rememberthat today’s middle ranks in privatisedcompanies are formed from localpersonnel who are highly skilled intheir own specialties.

It is evident that contracts will haveto be redesigned, creating adequateconditions for checking that thismanagement goal is being achieved.Investment is among the fundamentalissues that need to be reviewed.Theinvestment needs are so great inrelation to the revenues for this type ofservice that we cannot expect them tobe supplied solely by the private sector.A decade of operation by the biggestinternational corporations,whichspecialise in this type of business,hasnot been able to solve this problem.

Acceptable charging levels relate to user affordability,particularly that of the poorest,which hinders reimbursement of necessary investmentwithin periods that are compatiblewith the risks arising from unstableeconomies.Nevertheless,we couldalways design new levels of customercharges that allow us to invest part ofthe yield,dealing with cases of extremepoverty through an adequate system ofsocial charging.This contribution ofthe customer charge to investment canbe used as seed or counterpart capitalto attract funds from other sources,such as the state and/or multilateralcredit agencies.This way,we coulddevelop infrastructure in accordancewith community expectations on timing.

A local private operator wouldcontribute their managementcapability,better interpretation of local culture and commitment to hiscommunity.To a great extent, localcompany managers have mainly beenborn and educated in their owncountries and, if they have not emigrated, it is because they prefer to live and evolve in their naturalenvironment.That is to say,not only will they remain linked to thisenvironment,but they will also raise

their children in local schools andcolleges.Therefore they will want to beseen as a part of their community andwill be less keen to emigrate.

Their knowledge of local culturewill enable them to adapt more easilyto the demands of an unstable macro-economy,while their commitment tothe local community will lead them todevelop not only future managers butalso local suppliers, thus generating jobsthat are now exported, to the benefit ofthe economies of other regions.

On the other hand, the absence ofany ‘captive’ in-house technologywould open the possibility of developing new technologies, betteradapted to the economy and serviceconditions, and suitable for countrieswith fewer resources.As an example,small-diameter sewage systems have aproven good performance in a numberof urban areas.

This would not invalidate the needand convenience of looking to theinternational technology market forthose parts of the system that requiresuch input.But even this type ofpurchase would not be tainted by arequirement to buy in-house andobsolete technology at a high price.

Finally, the ability of such managersto better understand their local communities should make them moreacceptable,when trying to implementany participative institutional arrangement for the expansion andmanagement of services, in contrastwith the deep social rejection experienced today by the foreignagents of big corporations.

Because of these factors, it wouldseem convenient to encourage the localprivate sector to participate in managing public water and sanitationservices, gradually substituting them forthe multinational corporations which,due to circumstances or their owndecisions, seem to be withdrawingfrom emerging markets.●

ReferencesSjölander Holland,Ann-Christin (1995).TheWater Business:Corporations versus People.ZedBooks,London.

SIWI (1995).Securing Sanitation:Thecompelling case to address the crisis.Stockholm.

SIWI (1995).Making water a part ofeconomic development:The economic benefits ofimproved water management and services.Stockholm.

Tayler,Kevin and Parkinson, Jonathan(1993).Effective strategic planning for urbansanitation services:Fundamentals of goodpractice.GHK,London.

WASH (1994).Listening to those workingwith communities in Africa,Asia and LatinAmerica.WSSCC,Geneva.

WEHAB working group (2002).Aframework for action on water and sanitation:World Summit on Sustainable Development,Johannesburg.

Urquhart,Penny and Moore,Deborah(2004).Global water scoping process: is there acase for a multi-stakeholder review of privatesector participation in water and sanitation?Water Aid,GTZ,RWE,ASSEMAE,Consumer International,Public ServicesInternational,Environmental MonitoringGroup.

Swiss Tropical Institute (2004).Evaluation ofthe cost and benefits of water and sanitationimprovements at the global level.WHO.

Sirtaine,Sophie et al. (1995).How profitableare infrastructure concessions in Latin America?Empirical evidence and regulatory implications.WBG.

Estache,Antonio and Pingo,María Elena(2004).Are returns to private infrastructure indeveloping countries consistent with risks sincethe Asian crisis? WB policy research workingpaper 3373.

Nellis, John et al (2004).Privatisation inLatin America:The rapid rise, recent fall, andcontinuing puzzle of a contentious economicpolicy.Center for Global Development,Washington DC.

Slattery,Kathleen (2003).What went wrong?Lessons from Cochabamba,Manila,BuenosAires and Atlanta. Insitute for Public-PrivatePartnership (IP3), Inc.Washington DC.

Lamote,David Nicolas (2004).CountryReport,France.AQUALIBRIUM.

Kessides, Ioannis N (2004).Reforminginfrastructure:Privatisation, regulation andcompetition.WB,Oxford University Press.Washington DC.

Mehta,Lyla (2000).Problems of publicnessand access rights: perspectives from the waterdomain.

Winpenny, James (2003).Financing water forall.World Water Council,Global WaterPartnership.

Hall,David (2003).Financing water for theworld – an alternative to guaranteed profits.PSIRU,University of Greenwich.

World Council for Sustainable Development(2002).Water for the poor.Earth Print:Stevenage,UK.

Sansom,Kevin et al. (2004).Serving allurban consumers.A marketing approach to waterservices in low and middle-income countries.WEDC,Loughborough University,UK.

Rees, Judith A (1998).Regulation andprivate participation in the water and sanitationsector.GWP,Stockholm.

Suez, (2003).2004-2005 action plan.Paris.

VIEWPOINT

About the author:Alejo Molinari ([email protected]) is a civil engineer and MBA. He has takencourses in public services economic regulation (CEER-UADE, 1996 and 2003) andstrategy and regulation of public services (PURC, University of Florida, US, 1997). Hewas manager of assets management between 1994 and 1999 and since 2000 has beenmanager of services quality at ETOSS, the regulatory body of Buenos Aires city’s waterand wastewater services. He collaborates with the World Bank, IWA, AFERAS andADERASA in matters of benchmarking. He is a professor of water and wastewatertechnical regulation at various colleges and he has organised and lectured at variousseminaries and workshops.


Creation of Aguas de Portugal in 1993 brought substantialconsolidation of the Portuguese water sector, but muchresponsibility for the direct service to customers remainswith municipalities. PAUL GARRETT spoke with the company’schairman PEDRO SERRA about the moves to increase directprovision of services.

Aguas dePortugal’spushtowardsdirectserviceprovision

All over the world the waterindustry is consolidating – or

trying to. From a fragmentedgeography usually based aroundmunicipalities, economies of scaleare increasingly being sought bybringing together water andwastewater activities into biggerumbrella organisations.This hashappened in Portugal – almost.

Aguas de Portugal (AdP) was createdin 1993 as the Portuguese state vehiclefor operating and developing the waterand urban solid waste network there

and to implement a concession strategybased on multi-municipal ownership.AdP is in effect the holding companyof a group comprising 65 operatingcompanies,of which 57 are direct andmajority owned, covering water supplysystems,wastewater treatment systems,treatment and disposal of urban solidwaste and other sanitation systems.Thelargest subsidiary by far is the waterutility EPAL (Empresa Portuguesa dasÁguas Livres),which has served thecapital Lisbon since 1868.Apart fromthis,AdP’s core business is in providing

wholesale services to municipalities. Itdoes however have some retail activityserving customers directly, covering 29municipalities with water distributionand wastewater collection and serving apopulation of around one million(around ten percent of the Portuguesepopulation).

Pedro Cunha Serra is the chairman of the board of AdP.A civilengineering graduate specialising inwater resource planning,he worked fora civil engineering consultancy until1989, specialising in water projects in

INTERVIEW

‘Regulatory benchmarking has shown that we are not as efficient as we could be.’


To square the circle may requirelegislative change.Serra would likeAdP to extend its responsibilities intothe retail part of the value chain – butto do this in partnership with themunicipalities and the smaller number ofprivate companies which also operate inthe retail space.

Southern Portugal shares,withsouthern Spain, a low rainfall whichattracts tourism but also presentsresource issues familiar around theMediterranean.‘We have had a droughtfor the last two years and do share theresource issues that Spain has, althoughPortugal does not have the demands forwater from agriculture that exist inSpain’ says Serra.‘We have also beenable to harness assets that alreadyexisted – hydroelectric dams – toenhance our water resources aroundthe country. In addition we have builtnew dams and reservoirs over the lastdecade – there is one more project tocomplete, at Odelouca, in Algarve.’

Serra says that negotiations withPortugese power companies to secureuse of the water at their hydro-plantshave been important in order toestablish concessions for surface wateruse.AdP has also worked closely withthe Portuguese Institute of Water andthe Department of Agriculture.

Portugal shares five key rivers withSpain, the most important of which isthe Douro. In some parts of the world,rivers which rise in one country andflow through another have beensources of contention. In fact, the two countries of the Iberian Peninsula havehad agreements relating to shared useof their rivers dating back to the 1860s.‘The European Water FrameworkDirective is also going to be helpful inour joint management of these rivers,’says Serra, adding that shared river

basins actually comprise 64 percent ofPortuguese territory.

As well as resources, bathing watershave been a challenge in this maritimecountry.Like many countries,wastewater treatment was until recentlya low priority,but today, spurred on by legislation such as the EuropeanBathing Water Directive and the UrbanWaste Water Treatment Directive,Portugal can boast 98 percent compliance for its designated bathing beaches.

‘We have invested €466 million incoastal wastewater collection andtreatment systems over the last tenyears,’ says Serra. Sensitive coastal areasreceive secondary treatment in thesummer months, and primary inwinter,with long sea outfalls.

Portugal’s water industry is ahead ofmany in that it has universal metering,and has had for many years.Water istherefore billed volumetrically andseparately from municipal taxes.

Serra says that there are no plans tochange AdP’s status as a publicly-owned company.But he does foreseean expansion from being essentially awholesale operation into retail, in partnership with the municipalities.Healso sees a greater role for outsourcing.

‘Regulatory benchmarking hasshown that we are not as efficient as wecould be,’he says.‘We have thereforebegun outsourcing activities such asmaintenance contracts and operationof plants to private sector contractors.

‘So the near future will see moreoutsourcing and a move into retail. Iam certainly not comfortable with thepresent situation.’

It seems then that Aguas dePortugal’saim,of achieving full control of thecomplete water cycle, is on the verge ofbeing realised.●

Portugal and in Africa.He was thenappointed chairman of the PortugueseInstitute of Water (the national waterauthority of Portugal), and after a spellas Portuguese water regulator andanother period working on waterresources in Mozambique, took overthe helm of AdP in May 2005.

The AdP over which Serra presidesis an organisation that has made rapidprogress over the last 15 years,particularly in the two key areas ofwater resources and wastewatertreatment.When the company wascreated,wastewater treatment waslargely ‘missing’,he says.‘The lastdecade has seen a substantial investment in wastewater infrastructure, including the keysouthern coastal tourist region of theAlgarve.Previously,municipalities hadnot invested in wastewater plants andnetworks – they were understandably reluctant to raise local taxes.’

But AdP’s investment in wastewaterhas not completely solved the problem.This is because, crucially, it does not‘own’ the whole water cycle.‘The municipalities are responsible for waterand wastewater retail,’ says Serra.‘Andas their investment has not matchedAdP’s, some of our infrastructure is notworking to its installed capacity.’

The exception is Lisbon’s EPAL,which undertakes wholesale and retail activities.

Pedro SerraPedro Cunha Serra has been, since May 2005, the chairman of the board of Aguas dePortugal (AdP), which is responsible for the design, construction, operation andmanagement of water supply and wastewater and solid waste collection and treatmentsystems in Portugal.

Born in Lisbon in 1946 he is a civil engineering graduate specialising in hydraulicand water resource planning and management. From 1969 to 1989 he worked in theprivate sector for Coba, a Portuguese engineering consultancy, where he was involved in the design of dams, irrigation, watersupply and other water sector projects in Portugal and overseas – Algeria, Angola,Mozambique, Guinea-Bissau and Greece. In 1990 he became an independent consultant.

In 1999 he was invited by the Lisbon government to chair INAG (the PortugueseInstitute of Water), the country’s national water authority. In this capacity he wasresponsible for negotiating the Portuguese-Spanish Convention for Shares River Basinsand the European Water Framework Directive.

After a spell with Portugal’s National Road Administration he was involved from 2002in the implementation of the Water Framework Directive in several river basins inPortugal, as well as acting as a water consultant for the government of Mozambique. Amember of the National Water Council from 1994 to 2002, he is a member of thePortugese Academy of Engineering, has written several books on water regulation andhas taught water law at the University of Coimbra in Portugal.

AdP’s overseas operationsAdP has subsidiaries and investments ina number of overseas territories, namelythose where the spoken language,culture or presence of Portuguesecommunities stand for competitiveadvantages. The group’s portfolio ofinternational investments is built aroundthree countries – Brazil, Cape Verde andMozambique – with each operationhaving its own characteristic structure:AdP acting as a concessionaire in Braziland Cape Verde, as a concessionmanager in Mozambique, and as aservice provider in Angola and EastTimor. The international sector has beenresponsible for supplying water to 2.5million inhabitants of Brazil, Cape Verdeand Mozambique, with investmentsaround €12 million in 2005.

The International Division (UNI) is oneof the group’s six operating divisions. Theothers are Water Production andWastewater Treatment (UNA-PD), WaterDistribution and Collection (UNA-DR),Urban Solid Waste (UNR), OtherBusinesses (UNON), and SharedServices (UNSP). The Water Productionand Wastewater Treatment unit is AdP’slargest business division, accounting foralmost 60 percent of the group’s revenues.

INTERVIEW