Cross-Border Cooperation through Environmental Planning and

Investment

Institutional Strengthening WorkshopBudva, Montenegro, 5 September 2007

Policies for reform of water sector utilities in SEE (Balkans)

Session Overview

Introduction to the water sector industry in the Southeast Europe (SEE)

Rationale for reform in the sector Benchmarking & performance measurement

indicators Key Success Features and Alternatives for

reform and transformation Lessons Learned from Transformation Effort Conclusions and recommendations

Definition of the Water Sector

Provision of services in: 1. Safe, drinking & continous water supply. Water

supply system includes: Raw water intakes, transmission pipes, drinking

water treatment plants; Water distribution networks, pumping plant, storage

reservoirs, and related infratsructure

2. Environmentally accepted wastewater disposal. Wastewater systems includes: Sewerage network, pumping plants, reservoirs and

wastewater treatment plants (WWTPs)

Water Sector Strategic Context in SEEOrganization & regulation of water sector

Organized mostly at municipal level: organization through municipal departments or municipal (public) enterprises is the most common form in the region, i.e. municipal WSS (water & sewerage) utilities.

Framework water legislation exists in all countries: the local government water regulation is the most common form, involving municipal authority setting tariffs (political influence)

Coverage of the population with water supply, sewerage and wastewater tretament is far from complete.

Water Sector Strategic Context in SEE

Reasons for Poor Performance in Infrastructure:

Delivery of infrastructure services usually occurs without competition

Individuals & organizations responsible for managing & delivering services are not given incentives

Users are not involved in the process*

* Source: World Bank, World Development Report 1994, Infrastructure for Development

Transition Indicators of WSS Sector in the CEE Countries – EBRD Perspective

Category 1 Category 2 Category 3 Category 4Albania; Belarus; BiH; Kyrgyz Rep.;

Tajikistan; Turkmenistan

Armenia; Azarbaijan; Macedonia;

Georgia; Kazakhstan;

Moldova; Russia; Serbia;

Montenegro; Slovak Rep.;

Ukraine; Uzbekistan

Bulgaria; Croatia; Latvia; Lithuania; Poland; Romania;

Czech Rep.; Estonia; Hungary;

Slovenia;

Minimal Decentralization

and Comercialisation

Moderate Decentralization

and Comercialisation

Fairly large degree of

Decentralization and

Comercialisation

Large degree of Decentralization

and Comercialisation

The “vicious” cycle of WSS Utility

Lack of Financing

Poor Management Practices

Service performance

problems

Poor operational efficiency

Poor tarrif collection & cost

recovery

Low “bankability” of municipal utility and its

investment projects

Deteriorated climate for

private sector participation

Water services demand:

Customer perception, affordability and

political acceptability

Core Issues

Core Issues of WSS Utilities

Operational Efficiency Inefficient internal operations Over-sized or poorly configured systems inherited

from the past

Performance problems in service provision: Low service coverage High physical water losses and UFW Unreliable and variable drinking water quality Inadequate wastewater treatment capacity

Management Practices Planning, communication, and control

The concept of “Bankable” WSS Utility

The concept incorporates considerations of the creditor’s confidence in both the:1. Viability of the public utility or municipal government

as a creditworthy institution, and2. Viability of the utility’s investment project to be

financed as a reliable source of future revenue flow “Bankable” WSS utility is defined as one fully

recovering: its operating & maintenance (O&M) costs and taxes Debt service Meeting givernance and business performance

norms Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

The concept of benchmarking

‘A systematic process of searching for best practices, innovative ideas, and highly effective

operating procedures that lead to superior performance, and than adapting those

practices, ideas, and procedures to improve the performance of one organization’

Metric benchmarking (Performance Indicators): What is wrong?

Process benchmarking (Activities):

Why is that wrong?

Performance Indicators in the water sector – metric benchmarking

Quantitative comparative assessment of company performance over the time

Water resources indicators Personnel indicators Physical indicators Operational indicators Quality of Service indicators Financial and economic indicators

Purpose: Identify areas of under-performance

Process Benchmarking

Focused on individual processes (set of activities) within the organization. There are four key processes:1. Production process

2. Distribution process

3. Sales process

4. General process

The purpose is to improve the performance by “learning from others”

The Transformation Process

The key question:

How to end up the “vicious” cycle and successfully transition form the state of poor technical, financial and managerial performance to a “bankable” condition?

Key initial factor: The degree of the utility’s autonomy from the municipal government

Key Features Contributing to the Success of the Transformation Process

External Features Internal Features

Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Key External Success Features

External Features Effective and transparent legal/regulatory

framework Strong leadership and political will Financial assistance from public sources Fiscal discipline imposed in financial agreements Coordinated technicall assistance from the

international community

Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Key Features Contributing to the Success of the Transformation Process

Internal Features Public outreach/participation Fair labor transition process Installing a business culture within the organization Improved understanding of the customer base Accessing external expertise and experience

through contracting

Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Transformational Strategies

Corporatization

Performance Agreements

Private Sector Participation

Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Corporatization The process of restructuring and reform the

utility by applying the management practices and internal incentives that “mimic” those of private businesses: Sound corporate governance Driven by customer demand and Focused on financial targets important to achieve

operational efficiency and full cost recovery

Establish clear commercial objectives

Establish appropriate managerial

authority and autonomy

Implement effective

performance monitoring Provide

rewards and sanctions for performance

Ensure competitive neutrality

Corporatization (cont.) Corporatization is associated with:

Making rational investment choices where resources are limited by hard budget constraints

Employing cost recovery approaches to maximise user based revenues to the extent possible and within affordability constraints

Ensuring managerial independence while holding utility managers accountable for delivering an acceptable quality of service

Transparency and competition in the procurement of goods and services to ensure good value for money and avoid opaque practices and corruption

Performance-based Agreements

Performance-based agreements between water authorities and local utilities with explicit targets and clear incentives for service providers

Targets may include: Unaccounted for water Accounts receivable Connection efficiency

Performance fee to the operating utility Penalties may be involved against persistent

failure to achieve certain targets

Private Sector Participation

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

Menu of PSP Structuring TechniquesMenu of PSP Structuring Techniques

“RISK”(Private Sector Investment Required)

“REWARDS”(Returns toThe Private

Sector)

High

Low

ConstructionContract

Service/Management

Contract

Lease

ConcessionDivestiture

Low High

Characteristics of PSP Arrangements

Type of contract

Duration What the public sector

receives

What the contractor receives

Nature of contractor

performance

Service contract 1-3 years Minimized costs

Improved quality

Fee from the government

Definitive, technical type of service

Management contract

3-8 years Increased efficiency

Fee incentives Manage the operation

Lease 8-15 years Working capital

Rent

All revenues, fees or charges

Manage, operate, repair, maintain

Concession/

BOT

15-30 years

Investment capital

Concession fee

All revenues from consumers

Manage, operate, repair, maintain, invest

Lessons Learned fromTransformation Efforts

Take advantage of events that raise public demand for transformation

Seek out and support champions for transformation Conducive legal/regulatory framework is key Incorporate public participation into assistance activities Consider labor implications for transformation Identify possibilities for mobilizing both public and private

resources Emphasize the application of sound business practices

Taken from USAID Publication: Case Studies of Bankable Water and Sewerage Utilities

Conclusions

Poor performance of the water utilities in the Balkans (the vicious cycle)

Low bankability and lack of financing

WSS utility benchmarking as a management tool for assessment and improvement

Different strategies for transformation towards bankable conditions

Key success features for transformation and lessons learned