promoting efficiency in water services
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Promoting efficiency in water services: a simple model João Carlos Silva 9.º Congresso Mundial da Água Lisboa, 21-26 de setembro de 2014TRANSCRIPT
PROMOTING EFFICIENCY IN WATER SERVICES: A SIMPLE MODEL Master thesis project in Finance (2010)
João Carlos Silva
9th IWA World Water Congress & Exhibition
Lisbon, September 2014
The issue in question 1
Results and conclusions 3
The proposed model 2
INDEX
The issue in question The proposed model Results and conclusions
Current framework
Water services in Portugal are
regulated by the application of a
model of cost of service (aka cost-
plus)
Capital base for the shareholders
remuneration
The regulation model focuses on
the net profit which means that the
financial operations are subject to
the regulator analysis
Shareholders remuneration is
guaranteed
Total costs, quantities and the
authorized rate of return are
estimated ex-ante; tariff is the model
output
Capital stock + legal reserve
(usually is used the operator RAB – regulated
asset base)
Absence of an incentive scheme for
cost reduction and efficiency
promotion
Due to these constraints it is not possible to transpose an incentive model from
another country or other different sector
Productivity gains
Definition:
• Extra remuneration that can be reached by the shareholders in addition to the
contractually established
• This amount is calculated every year and is divided in equal shares between consumers
(through tariff) and operators (surplus in dividends)
Current rule for productivity
gains calculation: comparison
between the budgeted unit cost
(ex-ante) and the effective one
(ex-post)
Problems:
• It is possible to obtain productivity
gains by just over-budgeting
• Operators can claim an efficiency
improvement without making a more
productive use of inputs
As requested by the Regulator, this rule was suspended in 2004 to prevent the distribution
of productivity gains calculated with 2003 figures. The aim of this procedure was to have
time to make a revision to this mechanism.
This procedure has been maintained since then.
The issue in question The proposed model Results and conclusions
Background
PROPOSAL RESULT
Two alternative proposals were presented to date by the Regulator in order to solve the
problem:
1) Different writing of the clause with
more accuracy that requiring the
demonstration of the productivity
gains calculation
2) Alternative model to promote
efficiency (MIE)
Combination in the same model of
shareholders remuneration and
productivity gains
Analytical model that introduces
risk – return on capital directly
linked with the operators
performance
Despite increasing the requirements,
it proved to be very difficult to make
this demonstration because there
were always different interpretations
between Regulator and operators
This model was not very welcomed
by the operators because the added
risk was disproportionate to the
potential gains
The shareholder remuneration would
no longer be assured and, in the
bottom line, could be cancelled due
to a bad performance
For these reasons the model was
abandoned
The issue in question The proposed model Results and conclusions
Model
Productivity Gains
Model (PGM)
Conversion
factors
INPUT OUTPUT
SUC
>
BMK
?
N
Costs
considered (C)
(current prices)
Standard
production (Q)
Standard unit
cost (SUC)
Y
Comparison with
the benchmark (BMK)
(constant prices)
Productivity
gains (PG)
No
productivity
gains
PG = (BMK – SUC) x Q (constant prices)
SUC = C / Q (current prices)
Conversion to
constant prices
In the end the result has to be
converted to current prices
BMK = Simple moving average of the best 3
observations in the last 5 years
BMKn =
( SUCt) - SUC Max1- SUC Max2n-5t=n-1
3
The issue in question The proposed model Results and conclusions
Operational expenditure (OPEX) considered
Amortizations and depreciation
Labour costs
Supplies and services
Cost of goods sold (COGS)
Taxes (except income tax (IRC))
Other operational costs
COSTS CONSIDERED
INCOME NOT CONSIDERED
Extraordinary income
Other operational income
Marginal activities with no expression or impact in
the operator core business
COSTS NOT CONSIDERED
Provisions
Financial costs
Extraordinary costs
The evolution of this kind of costs has a weak
correlation with the operators productivity
How to exclude these incomes from the model?
By deducting them to the costs considered.
The issue in question The proposed model Results and conclusions
Standard production
Operators
with one
activity
(Only water supply or
only wastewater
treatment)
No need for
standardization,
the production
comes directly
through the
measured flows
of the operator
(m3)
Water supply
Wastewater treatment
Total standard
production = Total volume of wastewater treatment
Total standard
production = Total volume of supplied water
The issue in question The proposed model Results and conclusions
Standard production
Operators
with both
activities
(Water supply and
wastewater treatment)
Water supply and wastewater treatment
Total standard
production = Activity
𝑖 x Conversion factor activity
𝑖
Opportunity cost
of wastewater
treatment
= Total income of wastewater treatment
Total volume of wastewater
= Wastewater tariff
Conversion factor ofwastewater treatment
in water supply
= Opportunity cost of wastewater treatment
Water supply tariff
=Wastewater treatment tariff
Water supply tariff
The issue in question The proposed model Results and conclusions
Volumes / quantities from different activities need to be standardized in order to be possible their
aggregation and consequently calculate the standard unit cost (SUC)
Productivity gains calculation
Why a benchmark for
each operator over a
global one?
• Geographical asymmetries;
• Investment asymmetries;
• Establishes an appropriate level of demand for
each operator.
How to divide the
calculated productivity
gains?
The same way as provided in rule of concession
contracts:
• 50% for shareholders (represents a higher dividend);
• 50% for consumers (through tariff reduction in the
following years).
How to calculate
productivity gains?
Each year, productivity gains are calculated by
multiplying the standard production and the
difference between the value of the reference unit
cost (RUC) and the standard unit cost (SUC).
The issue in question The proposed model Results and conclusions
Productivity gains calculation
Item Units 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Operational costs Current prices 16.940,4 € 17.448,6 € 17.972,1 € 18.511,3 € 19.066,6 € 22.119,8 € 24.677,9 € 29.767,0 € 27.908,8 € 30.587,0 € 29.986,4 €
Amortizations Current prices 19.644,4 € 20.233,7 € 20.840,8 € 21.466,0 € 22.110,0 € 22.809,2 € 24.101,8 € 22.604,5 € 25.310,7 € 27.733,1 € 29.119,8 €
Operational incomes not considered Current prices -302,7 € -311,7 € -321,1 € -330,7 € -340,6 € -370,7 € -396,6 € -587,5 € -982,8 € -2.597,7 € -2.727,6 €
Total costs considered Current prices 36.282,2 € 37.370,6 € 38.491,8 € 39.646,5 € 40.835,9 € 44.558,4 € 48.383,1 € 51.784,0 € 52.236,6 € 55.722,4 € 56.378,5 €
Water supply 000 m3 padron 40.227 41.434 42.677 43.957 45.276 47.994 49.469 50.629 52.382 52.758 54.446
Total incomes Current prices 18.949,7 € 19.707,7 € 20.496,0 € 21.315,9 € 22.168,5 € 23.169,5 € 22.043,4 € 20.788,2 € 22.799,4 € 23.432,3 € 24.603,9 €
Volumes supplied 000 m3 40.227 41.434 42.677 43.957 45.276 47.994 49.469 50.629 52.382 52.758 54.446
Unit income €/ m3 0,4711 € 0,4756 € 0,4803 € 0,4849 € 0,4896 € 0,4828 € 0,4456 € 0,4106 € 0,4353 € 0,4441 € 0,4519 €
Conversion factor m3/ m3 std 1 1 1 1 1 1 1 1 1 1 1
Total standard production 000 m3 std 40.227 41.434 42.677 43.957 45.276 47.994 49.469 50.629 52.382 52.758 54.446
Standard unit cost Current prices 0,9019 € 0,9019 € 0,9019 € 0,9019 € 0,9019 € 0,9284 € 0,9780 € 1,0228 € 0,9972 € 1,0562 € 1,0355 €
(€/ m3) Prices of year 2000 0,9476 € 0,9272 € 0,9019 € 0,8639 € 0,8331 € 0,8302 € 0,8532 € 0,8739 € 0,8272 € 0,8556 € 0,8168 €
Benchmark
Best 3 of last 5 years Prices of year 2000 0,8663 € 0,8424 € 0,8388 € 0,8388 € 0,8302 € 0,8369 €
Productivity gains
Best 3 of last 5 years Prices of year 2000 0,0362 € -0,0108 € -0,0351 € 0,0116 € -0,0254 € 0,0201 €
Current prices 0,0404 € -0,0124 € -0,0411 € 0,0140 € -0,0314 € 0,0255 €
Total of productivity gains Prices of year 2000 1.735,5 € 0,0 € 0,0 € 606,8 € 0,0 € 1.093,3 €
Current prices 1.940,9 € 0,0 € 0,0 € 731,5 € 0,0 € 1.386,1 €
(Values expressed in '000 Euros, except where indicated) TOTAL 4.058,5 €
Years
The issue in question The proposed model Results and conclusions
Productivity gains calculation
The issue in question The proposed model Results and conclusions
Results
000 € %
Operator 3 3.284,3 15,49% 116.186,6 2,83%
Operator 12 0,0 0,00% 269.586,1 0,00%
Sub-total Water operators 3.284,3 15,49%
Operator 9 6.233,7 29,39% 74.719,0 8,34%
Operator 23 2.400,9 11,32% 159.126,2 1,51%
Operator 2 0,0 0,00% 138.201,3 0,00%
Operator 6 0,0 0,00% 30.306,4 0,00%
Operator 31 0,0 0,00% 32.240,0 0,00%
Sub-total Wastewater operators 8.634,6 40,71%
Operator 18 2.579,6 12,16% 17.268,2 14,94%
Operator 22 2.883,4 13,60% 29.084,3 9,91%
Operator 25 3.147,8 14,84% 70.545,3 4,46%
Operator 27 678,0 3,20% 230.246,1 0,29%
Operator 1 0,0 0,00% 79.755,7 0,00%
Operator 7 0,0 0,00% 58.919,0 0,00%
Operator 8 0,0 0,00% 28.223,9 0,00%
Operator 13 0,0 0,00% 60.166,4 0,00%
Operator 14 0,0 0,00% 75.977,5 0,00%
Operator 19 0,0 0,00% 19.138,4 0,00%
Sub-total Water and Wastewater operators 9.288,8 43,80%
Grand Total 21.207,7 100,00%
Operator
Productivity gains
2003-08
(A)
Total costs
considered
2003-08 ('000 €)
(B)
PG share in
total costs
(A) / (B)
The issue in question The proposed model Results and conclusions
Conclusions
Main characteristics of Productivity Gains Model (MGP):
• More demanding – operators are stimulated to reduce their unit cost of production in order
to reach the benchmark and achieve productivity gains
• It can increase shareholders remuneration – productivity gains are a surplus in the
dividends without interfering in its calculation
• Productivity gains are shared between shareholders and consumers
• Incentive for continuous improvement, which is a motivation to elaborate more realistic
budgets
• Simple rules, using few variables and calculations easy to understand
The issue in question The proposed model Results and conclusions
Thank you for your attention!
João Carlos Silva [email protected]