good practices in water & sanitation utility regulationsanitation... · good practices in water...

Good Practices in Water & Sanitation Utility Regulation

PRESENTATION OF STUDY INFORMATION

20 November 2005

Presenter

Presentation Notes

1. This study was commissioned by USAID to help USAID Missions and partners access good practices related to water utility regulation in developing countries. 2. The study is an attempt to learn from water regulators in developing countries that are doing an excellent job of transitioning toward financially viable water utilities. 3. The findings and suggestions included here are useful to both private and government operated water utilities.

© PA Knowledge Limited 2005. All rights reserved. - KR - PC - USAID Best Practice Reg. - Presentation2 - November 20 2005 - 2

Contents

1. Study Approach and Findings

2. Input from Expert Panel (Annex)

Presenter

Presentation Notes

The study included three components: 1. Examining how successful regulators in nine countries are dealing with critical regulatory challenges in developing countries; 2. Collecting useful documents on regulatory methods and procedures from our set of nine successful regulators; 3. Conducting a panel discussion on water regulation best practices with six leading experts in water regulation. The experts’ comments are included as an annex to this presentation and will be referred to throughout the presentation.


Objectives

1. Identify good practices in water regulation to deal with three conditions:

- Transitional situations

- Decentralized environments

- Public participation

2. Panel discussion objective is to:

- Review study results to date

- Obtain expert opinions and suggestions that

will be useful to USAID Missions.

Presenter

Presentation Notes

As indicated the study was commissioned to help our Missions and partners address common challenges associated with building regulatory capacity in the water sector. The three challenges are: 1. Transition to cost recovery – how does a good regulator provide a framework for a water utility to transition from poor performance to good performance, and from below cost recovery tariffs to cost recovery tariffs. 2. Regulating in decentralized environments – how do good regulators deal with a sector that has large numbers of water utilities owned and operated by local governments. 3. Public participation – how do successful regulators involve the public in the regulatory process.


Study Approach

• At a high level (project budget of $25,000) identify water regulators that are broadly involved in either transitional or decentralized environments.

• Select nine countries for study on the basis of (1) clear evidence of significant progress in water sector reform; (2) geographic representation, (3) alternative approaches to tariff setting and (4)recommendations from experts concerning good regulatory practices.

• Collect available documents about the regulatory methods and tools used by the regulators in the sample.

• Conduct phone interviews with the regulators to better understand their situation and approaches to regulation.

• Compile results of the above research in this presentation for expert review.

• Create final slide deck incorporating inputs from the panel. Country notes and reference documents that may be useful to USAID Missions available on CD.

Presenter

Presentation Notes

1. The study was limited in scope due to a small budget. Nevertheless, we believe the study has produced remarkable results that should be useful to both USAID missions and utility regulators. 2. The study included the work described in this slide. 3. We view the study as a initial step in developing a “toolkit” of regulatory best practices for water. We hope to be able to apply these tools in a number of countries where USAID is working to establish effective water regulatory agencies.


Country Regulators

Abu Dhabi - Regulation & Supervision Bureau *

Chile - Superintendent of Sanitation Services (SISS)

Colombia - Water Regulatory Commission (CRA)

Laos - Water Supply Authority of Lao P.D.R.

Lithuania - National Control Commission for Prices *

Mozambique - Water Regulatory Council (CRA)

Senegal - SONES - Contract Regulator and State holding Company

Ukraine - No central regulator

Zambia - National Water Supply and Sanitation Council (NWASCO)

* Multi-sector regulator

Presenter

Presentation Notes

1. The nine country regulators that were selected for review are shown on this slide. 2. The regulators were selected because they have clearly demonstrated effectiveness in applying good regulatory practices, and the water sectors in their respective countries have shown major improvement over time. 3. In addition, we tried to pick regulators representing the full range of commonly used regulatory methods, including incentive-based price caps; rate of return, benchmark, and lease-affermage regulation. 4. Our nine regulators are geographically diverse: 2 from South America, 3 from Africa, 2 from Europe & Eurasia, 1 from Asia and 1 from the Middle East. The study clearly indicates that effective regulation exists in developing countries worldwide; it is not concentrated in a single region.


Country Comparisons (Extracted from Interview Notes and Background Documents)

Abu Dhabi - Regulates economic and quality activity for both electricity and water.

- Several private generators . Desalination companies.

- One State transmission company and two Discos.

- Total staff of 25; uses ROR techniques with an annual maximum revenue limit.

Chile - Regulates 13 regional water and sewer companies and about 50 smaller water only companies.

- Reform initiated in 1977 and included transition from a government run sector to the current private sector situation.

- Approximately 140 person staff; uses a competitive utility approach and ROR to tariff setting.

- Tariff subsidies to poor provided by government, not the utility.

Colombia - Has regulatory responsibility for over 1,300 water and sewer utilities.

- Most utilities are government owned and operated, but larger utilities use various PSP options.

- The water regulator (CRA) defines a standard tariff setting methodology

Presenter

Presentation Notes

1. This slide shows some of the key characteristics of the nine regulators. 2. Some only regulate a few water utilities ; others like Colombia regulate 1,300 water utilities. 3. Three regulate utilities with private sector operators; the others regulate government owned and operated water utilities. 4. The staff size of the regulatory agencies ranges from 5 to over 100, and income levels in the countries is also diverse. This indicated that effective regulation is not strongly associated with country income levels. 5. Five of the nine use cost plus regulatory methods to set tariffs. RPI-x or price cap tariff regulation is used by the two countries with the highest GDP/capita.


Other Country Information

1. The Abu Dhabi regulator monitors both economic and quality matters.

2. Chile has adopted a direct subsidy approach that limits the water companies responsibility for social welfare.

3. Colombia currently uses a uniform approach to regulation, cost recovery and tariff structure independent of utility size but is considering alternative approaches.

4. In Laos all but two of the 18 regulated water companies recover economic costs and one company is close to recovering depreciation based on current cost.

5. In Mozambique the regulator only regulates water companies that have some form of PSP.

6. Ukraine has no central regulator; each local government regulates its water company based on an Order from a central state committee.

Presenter

Presentation Notes

1.This slide shows some unique characteristics of the nine regulators. 2. The Abu Dhabi regulator is unique in that it regulates both price and water quality. All the other regulators in the sample regulate economic matters only. 3. Chile pioneered a unique approach to direct subsidies for poor customers. The approach transfers payment responsibility for these customers to the government, thus relieving the water utility from social obligations. Abu Dhabi also uses a direct transfer payment from the government to the utilities to “buy down” tariff rates. 4. Colombia’s CRA regulates 1,300 small water utilities and attempts to use a standard tariff method for all utilities regardless of size. We understand they are considering other approaches for smaller utilities now because of the difficulty of regulating so many utilities. 5. Mozambique only regulates utilities that use PSP. Ukraine does not have a central regulator. Ukraine’s State Committee for Communal Enterprises relies on uniform regulation that is supposed to be followed by each municipality.


Interview Questions

• Q1: How do you deal with revenue shortfalls during the transitional period?

• Q2: How do you set performance improvement targets during the early stages of transition?

• Q3: How do you regulate large numbers of autonomous utilities?

• Q4: What methods do you use to involve the public in the regulatory process?

Presenter

Presentation Notes

1. Each of the nine regulators was personally contacted and asked to discuss four questions. 2. Considerable time was spent to research the county situation prior to interviews. 3. Interviews lasted from 30 minutes to an hour. 4. Each question was designed to allow the study team to learn how the regulators deal with: - Transition issues - Decentralization - Public participation


Preliminary Findings

1. All regulators have put in place a form of economic cost recovery as a basis for regulation of the sector.

2. Most regulators allow transition arrangements that enable utilities to begin with recovery of O&M costs, but move predictably toward full economic cost recovery in lock step with progressive performance improvement.

3. Progressive improvement targets appear to have a direct effect on reducing revenue shortfalls during the transition period.

4. Limiting the number of performance targets appears to result in clearer signals, sharper management attention, and more meaningful improvements.

5. Financial incentives must be significant, relative to baseline expectations, to be effective.

6. Regulators have difficulty finding tools to effectively regulate numerous small utilities.

Presenter

Presentation Notes

1. There were six major findings resulting from the study. 2. First, all nine of the regulators have stated in decrees or other key documents that their intention is to recover full economic costs of service. 3. Another important finding was concerning decentralization. No regulatory method has proven to be particularly effective in dealing with large numbers of decentralized utilities. Regulators facing this situation stated that they are having difficulty finding an approach that works. 4. Additional findings will be discussed in the following slides.


Q 1 – How do you deal with revenue shortfalls during the transition period?

PERFORMANCE:

IDEAL

STATE

PERFORMANCE:

INTERIM

TARGETS

INITIAL

PERFORMANCE

REVENUE SHORTFALL

$

YEARS

$Example:24 hr serviceWHO standards<20% UFW>95% Collections~5 Employees/1000

Example:< 24 hr servicePoor Water Quality>50% UFW<70% Collections~20 Employees/1000

Progressive Performance Targets Need to be Embedded in the Glide Path to Economic Cost Recovery

Presenter

Presentation Notes

1.This slide depicts the regulators challenge in many developing countries. 2. When most regulators are established, regulated utilities are performing very poorly in terms of key indicators, such as unaccounted for water, billing and collection efficiency. 3. Good regulators want the utilities to gradually increase their performance in response to incentives and penalties established by the regulatory framework. 4. One of our expert panelists commented that in many situations, cost recovery can be achieved just by bring performance on water theft, billing, and collection up to “best practice” levels. He also noted that achieving “best practice” levels requires some major changes in management and governance. 5. In most cases, the transition to “good” performance cannot occur immediately. Good regulators set intermediate performance targets that are achievable in the short run. 6. As performance targets are met, the revenue shortfall (cash flow deficit) will decrease, thus reducing government subsidies to the utility. 7. Experience shows that a series of interim performance targets, with the right incentives, will ultimately drive the utility toward good performance and cost recovery.


1. All of the regulators in the sample have a policy of achieving full cost recovery.

2. Most of the countries in the sample have a strategy of reducing cash transfers to water companies with the intent that efficiency gains and tariff increases will make-up for the declining subsidies.

3. In Abu Dhabi the subsidy is based on the difference between willingness to pay and total revenue requirements.

4. In other countries the interim approach is to recover O&M expenses and required debt service charges and forgo recovery of depreciation.

5. In most respects, Chile and Laos have already achieved full cost recovery but marked differences exist in service levels.


Presenter

Presentation Notes

1. All of the regulators in our study have a policy of achieving full economic cost recovery. 2. However, in the interim government cash transfers are usually needed to cover revenue shortfalls of individual utilities. 3. From a policy perspective the cash transfer can take various forms: a. In Abu Dhabi, the government determines the amount customers are willing to pay for water and they provide a direct financial transfer to subsidize the difference between revenue requirement and the allowed tariff level. b. In other countries the tariff is set with the intention of recovering O&M expenses and debt service payments. The government continues to provide capital grants for a large portion of capital requirements. 4. Regulators noted that service levels play an important part in determining O&M expenses. High service standards increase O&M expense. During the early years of transition, low service standards may be allowed. 5. For example, in Laos, service standards are basic but they fit what people can pay. Laos fully recovers O&M expenses and most capital expenditures. The utility is required to use free cash flow to finance expansion of the network to unserved areas.


6. In Senegal and Lithuania the transition period included significant capital investments to improve water and sewer services.

7. In Zambia the initial concept was to provide water companies with sufficient working capital at the date of reform; This was unsuccessful and debt swaps with the electric company and continued financial transfers were needed.

8. In Ukraine local governments (owners of water companies) are required to increase tariffs to achieve economic cost recovery; if they do not, the difference must come from local government sources.

9. In Senegal the private operator was able to obtain deficit financing from local sources to finance the transitional period revenue shortfall.

10. In Mozambique and Zambia (both low GDP/capita countries) donor funds also were used to finance a portion of operating expenses.


Presenter

Presentation Notes

1. The “transition period” is often linked with a capital rehabilitation program including enumerating customers, fixing leaks, and installing new systems. This occurred in Senegal and Lithuania. The rehabilitation program improves services and billing, lowers costs and collection levels. This quickly reduces the revenue shortfall. 2. Other approaches used to finance the revenue shortfall during transition included: a. In Zambia, the government provided a one time working capital infusion to the utility. But his was not sufficient in the long term because basic performance and pricing problems were not addressed. b. In Senegal, a portion of the revenue shortfall was “capitalized” through new debt. This “buys down” tariffs during transition, but increases debt burden later. This worked because the utility quickly improved its overall performance, and reached financial breakeven. c. Debt swaps and conversion of debt to equity were used. These approaches are successful if there is a corresponding program to fix the underlying management, governance, incentive and pricing problems of the sector.


Questions for the Panel on Transitional Strategies

1. Are there other documented examples of successful turn-around situations? What was the regulatory approach in these situations?

2. What factors should be considered in determining the optimal length of time to achieve full cost recovery?

3. What methods have been most effective in financing revenue shortfalls during transition:

1. Declining state subsidies

2. Forgo non-cash expenses (depreciation)

3. Deficit financing

4. Debt swaps

5. Recapitalization

6. Other

Presenter

Presentation Notes

1.We asked our expert panel for advice on how to deal with revenue shortfalls during the transition period and learned the following: a. It is important to fix governance issues before proceeding with any regulatory initiatives as part of a transition strategy. One expert noted that regulators need entities that will respond to good incentives and penalties. b. In many cases tariff increases are not needed to reduce revenue shortfalls. Improvements in key performance parameters - like increasing collection rates and reducing unaccounted for water – can reduce or eliminate shortfalls. c. Regulators may need to serve as advisors to utilities during the transition period. Several of our good regulators helped water utilities develop management skills and technical capacity to deal with collection losses and unaccounted for water and to help obtain capital financing. d. Subsidies needed during a transition period should be linked to performance.


Q2 - How do you set performance improvement targets during the early stages of transition?

Available Investment Political Will

& Willingness to PayOperator Skill

INTERIMBENCHMARKING INCENTIVES

REVENUEREQUIREMENTADJUSTMENT

INTERIMBENCHMARKING INCENTIVES


Available Investment Political Will

Customer Demand& Willingness to PayOperator Capacity

PROGRESSIVEPERFORMANCE

TARGETSINCENTIVES


Regulators Must Consider Several Factors When Designing Interim Performance Targets

Presenter

Presentation Notes

1. This slide summarizes the factors and pressures faced by regulators when setting improvement targets. 2. It’s a difficult job. If the targets are set too low, the water utility’s profit can be excessive. If the targets are to high it is a disincentive to the water utility and result in operating losses.


1. Most of the countries in the sample use some form of benchmarking to measure water company performance and set progressive performance targets.

2. Chile uses a competitive utility approach and sets performance targets based on multiple measures of a best-in-class utility.

3. All of the other countries in the sample use a phased approach that provides for improvements to be made in increments.

4. In Senegal and Mozambique, regulators focus on a few performance measures (collection % and UFW), which in turn, seems to focus management attention.

5. In other countries the regulator has focused on multiple performance measures.


Presenter

Presentation Notes

1. Almost all regulators in the sample use some form of benchmarking. Some use benchmarking data for analysis and information sharing; others use this data to set performance targets. 2. Performance targets are set by several different methods: a. Using best-in-class utilities to set targets, or b. Evaluating baseline performance on key performance indicators for a single utility, and setting targets based on reasonable incremental improvements – the performance “glide-path.” 3. Chile started its regulatory approach with well run utilities. Chile developed a “competitive utility” approach, in which standards are set by better performing utilities. Most other regulators in our sample are using the “glide-path” or projected incremental improvement approach. 4. There is debate about how many performance measures should be used. In Senegal and Mozambique, only two key performance measures were set: collection rate and unaccounted for water. The regulators thought it was best to have the private sector manager focus on actions that lead – in the aggregate – to improving collections and reducing UAW. This gives managers ample freedom to chose the actions that will in the end lead to better performance. 5. It seems that fewer performance measures are better than large numbers of measures.


6. In Senegal the private operator has a significant financial incentive to improve UFW and has invested needed time and money to address the problem.

7. In Mozambique, the UFW incentive was not perceived to be significant and results have not been as dramatic.

8. In some countries, incentives to meet or exceed performance targets result in additional compensation to the water companies and/or private operators.

9. In other countries, indirect incentives are related to job retention and seem to have little or no effect on performance.


Presenter

Presentation Notes

1. Good regulators seem to link performance targets to incentives. 2. Incentives can be either positive or negative. For example: a. A positive incentive is one that rewards utility management and staff with additional compensation if they meet or exceed targets. b. A negative incentive is one that avoids staff cuts as long as performance targets are met. c. Our survey indicates that positive incentives seem to work better, particularly when they are financial incentives. 3. For example, in Senegal the private operator had a significant financial incentive to reduce UAW. The incentive is in the form of a fixed fee that they can keep for each cubic meter of water that they bill and collect. The more water they deliver, bill, and collect to registered customers, the more they earn. In this case, performance improved quickly. In Mozambique and Zambia, the incentive to reduce UAW was not very strong, and so performance improvements were slower and smaller.


Questions for the Panel on Performance Setting

1. Are there other documented examples of regulators using interim progressive performance targets during transitional situations?

2. Can you describe the analytical and other factors used by the regulators to set performance targets during the transition process?

3. Is it better to focus on a few performance measures or multiple performance measures?

4. How significant do the incentives need to be in order to motivate the utility to achieve interim performance measures?

5. What kinds of incentives exist for progressive performance improvement work for public sector utility employees?

Presenter

Presentation Notes

1. We also asked our expert panel for comments on how to set performance targets during the transition. Responses included: 2. Make sure there is management in the utility that is empowered to make changes before setting performance targets and incentive programs. 3. If management arrangements allow changes to be made, the experts said that a first transitional objective is to achieve O&M breakeven. 4. The experts said that if a PSP contract is used, it is best to include in the contract a clear statement of how performance targets and incentives will be adjusted over time. 5. Experts noted that the regulator can function as a technical auditor to verify the actual performance of the utility compared to performance targets.


Q3 – How do you regulate large numbers of autonomous utilities?

Regulator Activities:Tariff ReviewMonitoringStandard SettingEnforcementComplaint Monitoring

ECONOMIC REGULATOR

FEW UTILITIES

INCENTIVESINCENTIVESNUMEROUS

UTILITIES

Administrative Capacity Needs Have to be Considered When Regulating Numerous Small Utilities

Presenter

Presentation Notes

1. Water regulators face widely differing situations in terms of the number of utilities regulated, and the authority that a regulator has to actually set utility rates. 2. Some, like Colombia’s CRA, regulate numerous small utilities, but have strong powers to set tariff rates. Others, such as the Ukraine regulator, have large numbers of utilities to regulate, but have no legal power to set rates. They simply specify the methodology that should be used. 3. Other regulators set price controls for just a few utilities. For example, Abu Dhabi sets rates for only four utilities. 4. When there are large numbers of utilities to regulate, and where the regulator has limited powers to directly set rates, regulators struggle with how to set effective price controls.


1. This question only applies to Colombia, Laos, Lithuania, Mozambique and Ukraine.

2. In Colombia there is a wide variation in the degree to which municipalities comply with regulatory requirements. One province arranged for multiple small systems to be managed by a few private companies.

3. In Laos the regulator only regulates water companies that operate in urban centers but promotes community approaches in rural areas.

4. In Mozambique the regulator only regulates water companies that have some PSP. The regulator is considering publishing tariff guidelines for smaller communities to use.

5. In Ukraine there is no central regulator but all local governments are required to comply with national tariff guidelines; if the tariffs do not cover costs the local government must provide a subsidy.

Q3 – How do you regulate large numbers of autonomous utilities?

Presenter

Presentation Notes

1. Our study showed that regulating large numbers of utilities is very difficult. 2. Five of the regulators in our sample (Colombia, Laos, Lithuania, Mozambique and Ukraine) regulate “large” numbers of utilities. The others regulate just a few utilities. 3. Colombia has had excellent success in improving the water sector in large cities. However, the regulator said they are having difficulty setting prices and incentives for 1,300 small utilities. 4. There were three approaches to regulating a large number of small utilities: a. Don’t set prices or targets. Rely on community based utilities to regulate themselves, typically with help from local NGOs. b. Develop guidelines and standards at a central government level and require municipalities to follow the regulations for their water utilities. c. Simplify the regulatory rules and procedures used for larger utilities and apply these to small utilities. This is a common approach used in the US as well.


Questions for Panel Regarding Numerous Small Utilities

1. What are your thoughts on the approaches used by the countries in our sample to regulate numerous small utilities?

1. Indirect regulation with guidelines2. Do not regulate – promote community based

organizations3. Promote consolidation4. Elimination of state subsidies

2. Do you think it would be wise to empower the economic regulator with the ability to issue grants and low interest loans as incentive tools?

3. Are there other approaches to regulating numerous small utilities in a country that should be considered?

Presenter

Presentation Notes

1. Our expert panel gave suggestions on how to deal with the problems associated with regulating a large number of small utilities. 2. Experts stressed that regulators should recognize their limitations and not try to set prices if they don’t have the time or resources. 3. Experts say it is important to regulate in a way that is consistent with the political and social culture of the country. If citizens look to local officials for solutions, it may not be wise to regulate from a central government agency. 4. Indirect regulation can work if it is coupled with annual reporting to the public that “names and shames” poor performers. Annual reporting including comparisons to other utilities can motivate citizens to demand change through the political process. 5. The experts cautioned against trying to force small utilities to consolidate. Their view is that it is best to allow consolidation to occur naturally based on mutual benefits determined by individual utilities. However, regulators can provide incentives to encourage consolidation.


Q 4 – What methods do you use to involve the public in the regulatory process?

• All the regulators share some type of information with the public. This ranges from posting rights and responsibilities on a website (Abu Dhabi) to publishing service standards in public buildings (Senegal), to utility data in annual reports (Laos).

• Some regulators seek feedback in the form of satisfaction or affordability surveys. Mozambique and Chile have formed partnerships with municipalities to obtain feedback. Laos uses participatory field studies.

• Zambia supports involving water watch groups in setting and monitoring service standards.

• Chile and Colombia involve consumer groups in tariff setting through public hearings. Zambia and Mozambique are working towards this. Progress depends on the development of credible associations and linkages to academic institutions as the ability to analyze cost of service and other financial data is critical.

• There are some instances, as in Marinilla, Colombia, of community involvement in developing management contracts and negotiating for services.

• In Senegal and Mozambique, urban standpipes are managed by community members with oversight from the operator; in Laos, rural communities are involved in choosing technical options. Community managed systems serve most of rural Colombia. These are legally empowered to set tariffs, but lack institutional support.


Other methods for gaining public trust

Laos was exemplary in terms of action to gain public trust in the regulatory process. The regulator demonstrated:

Transparency: Making information public about utility performance, tariff methodologies, performance targets and strategies for achieving them.

Emphasis on efficiency: Indicators for lost water, labor utilization and financial management were developed, along with strategies and incentives for improvement. Tariff increases were not viewed as a substitute for improvement in these areas.

Residential customers are not penalized for the non-payment of government agencies: The 2005-7 tariff review notes that “poor revenue collection performance is generally attributable to non-payment by government agencies. We do not believe that tariffs should be increased to compensate for non-payment by this sector and no adjustments have therefore been made.”

Affordability is taken seriously, even where data is limited.

Presenter

Presentation Notes

There are several frameworks for public participation that can be adapted for use in water regulation. These frameworks would be useful in helping regulators to think systematically about a range of methods that could be employed. These include: The International Association of Public Participation’s “spectrum”, which ranges from “inform” (providing information) to “consult” (obtaining public feedback) to “empowerment” (placing decision-making in public control). Each point on the spectrum implies varying levels of influence that the public may have, ranging from none to full. This tool is available at http://www.iap2.org/associations/4748/files/spectrum.pdf The Electricity Governance Toolkit offers indicators of public access to information, decision-making processes and accountability in electricity regulatory bodies. Many of these are relevant to water regulators as well. The toolkit may be downloaded at http://electricity governance.wri.org. The toolkit is a joint project of World Resources Institute, Prayas-Pune (India) and the National Institute for Public Finance and Policy (NIPFP- India). The DFID sponsored Institute for Development Studies study on “Bringing citizen voice and client focus into service delivery.” The study focuses on public service delivery and identifies 14 types of mechanisms for “citizen voice.” These can be downloaded at: http://www.ids.ac.uk/ids/govern/citizenvoice/annexcs.html


Providing Information Consult/ Surveys

Complaint Handling

Involvement/ Collaboration

Community Management

Rights/ Legislation

Service Standards

Annual Reports

Customer Contracts

Complaint Mediation

Monitoring Service Standards

Public Hearing /Tariffs

Developing management contracts

Abu Dhabi x x x x

Chile x x x x x x

Colombia x x x x x

Laos x x x x x x

Lithuania x x x

Moz’bique x x x x x

Senegal x x x x

Ukraine x x x x

Zambia x x x x x x x x

Multiple levels of Public Participation

Q 4 – What methods do you use to involve the public in the regulatory process?

Presenter

Presentation Notes

Two of the expert panelists mentioned the potential for “capture” of the regulator by consumers and their representatives. There are safeguards that reduce the risk of regulatory capture by consumers: Legal authority of the regulator to decide. Public input cannot impose a pricing decision on the regulator. Public concerns should be considered and responded to, but the regulator has the duty and authority to balance interests. Training for regulators on balancing multiple interests may be useful. Transparency. Consumer groups, like any participants in the regulatory process, need access to both the tariff methodology and utility data to make a sound argument, and to understand final decisions. Capacity Building: NGOs may need to partner with academic or research institutes in order to analyze data. Regulators can also provide training in advance of public hearings. Accountability. The regulator needs to provide a thorough explanation of decisions, including response to input from stakeholders.


Next Steps

Compile a data base on CD of reference material collected as part of the study including:

• Charter/mission statements of regulators• Case studies and reference documents• Tariff policies and guideline documents used by regulators• Accounting guidelines published by regulators.

• Developing training materials• Technical assistance to regulators in the design of transitional

plans• Regulatory networking, especially regionally

Consider follow-up activities including:


Input from Expert Panel


Expert Panel Members

• Eric Groom World Bank Washington (Chair)

• Antonio Estache World Bank Washington

• Simon Gordon-Walker WRc Plc. London

• Greg Houston NERA Sydney

• Alain Locussol World Bank Washington

• Tim Irwin World Bank Washington

Presenter

Presentation Notes

We organized an expert review of our findings. The review panel included six people with extensive experience in utility regulation and water sector reform. Eric Groom is a lead water regulation specialist at the World Bank. Antonio Estache is well known for his innovative research on infrastructure development, utility regulation, and private sector participation. Simon Gordon-Walker has managed the International Benchmarking Network for water utilities. This is a joint DFID and World Bank facility. Greg Houston specializes in regulatory methods for water utilities in Australia. He served as the advisor on the Manila water concession for several renegotiations and rate rebasings. Alain Locussol has been instrumental in designing a number of successful affermage projects in Africa and Asia on behalf of the World Bank. Tim Irwin recently led the redesign of the World Bank’s Water Toolkit, and is a senior technical specialist at the Bank on utility and infrastructure issues.


Q1: How do you deal with revenue shortfalls during the transitional period?

1. It is often important to fix corporate governance problems before good regulation is effective. The regulator’s role during transition may need to be a partnership (e.g., involved in governance and management issues) rather than the traditional long-run role of economic regulation in developed countries.

2. There is no major revenue gap in many situations IF the utility is properly governed and managed.

3. A well-run utility with good corporate governance typically has low UAW, enumerates all customers, bills most water delivered, and collects most bills.

4. By promoting fundamental things like increasing collection and stopping losses (theft, leakage, etc.), regulators can improve the quality and reliability of service, strengthen management capacity and close cash-flow gaps in the early periods.

5. During transition, regulators can function in an advisory role to help water utilities: (a) prepare business plans, (b) improve business processes, including metering, billing, and collections, (c) determine asset condition, (d) develop information and reporting systems, and (e) obtain financing.

6. Whatever regulators do during this period, subsidies should be linked to utility performance.


Q2: How do you set performance improvement targets during the early stages of transition?

1. A common transitional goal is to require operating income to match operating costs (operational breakeven).

2. First, assure there is governance and management in place that demands accountability, and provides rewards based on merit.

3. Establish a mechanism for resetting progressive performance targets that are built into PSP contracts.

4. If allowed under civil service rules (or perhaps with changes) regulators can function as technical auditors to authorize bonuses based on results.

5. Allow sufficient autonomy to hire, fire, reward, and penalize employees.

6. Tariff and subsidy design can be powerful incentives for improved performance by directing financial rewards to specific outcomes that affect performance targets, monitoring, and reward/penalty systems.


Q3: How do you regulate large numbers of autonomous utilities?

1. Do not micro-manage – one option is to act as an arbitrator where local disputes arise.

2. Recognize limitations -- do not try to set prices if you don’t have the resources.

3. Make regulation consistent with the political and social culture of the country. Do not try to regulate centrally if citizens look to local officials for solutions.

4. Indirect regulation using guidelines can work if coupled with benchmarking and public annual reporting that “names and shames” poor performers.

5. Allow peer pressure from reporting to force change. Rely on citizen’s demand for improved service to force political action.

6. Do not force consolidation. Let it occur from the bottom-up.

7. Promote community based organizations in small communities. For the smallest villages, consider using NGO’s in a management role.

8. Consider establishing regional regulators.


Q4: What methods do you use to involve the public in the regulatory process?

1. The regulator can play a valuable role in conducting willingness to pay surveys, especially in transition. This is a key input to the business plan.

2. Regulators should develop a relationship with customers through town hall meetings and other events that provide an opportunity to interact with customers.

3. Regulators can ensure transparency by, for example, publishing public- private participation contracts on the Internet, and encouraging public input in the design of PSP.

4. Regulators should insist that consumer and NGO participants provide a high degree of scientific evidence to support recommendations, for example, in the form of customer surveys, benchmarking data, or realistic financial assessments.