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

JUNE 2007VOLUME 2 ■ ISSUE 2

ANALYSIS3 Calls for the private sector to meet

Canada’s cash needsBy Lis Stedman

4 US utilities get the guidance they need to improve managementBy Lis Stedman

5 The value of an international perspective when regulating waterBy Lis Stedman

FEATURES6 MARKET REFORMS

Russia’s road to water sector reformBy Lis Stedman

9 EFFICIENCYCooperation in the Dutch water sector: developments in North Holland By Lilian Bernhardi

11 FINANCEThe Philippine Water Revolving Fund:sustainable financing for watersupply and sanitationBy Daniel Moore

15 PROCUREMENTA question of cost: UK guidance oncost forecastingBy Steve Whalley

17 CUSTOMER SERVICESWhy water utility customers don’t pay their bills promptlyBy Josses Mugabi, Sam Kayaga andIan Smout

20 COMPETITIONWater and liberalisation of services: European scenariosBy Jeremy Allouche

22 GOVERNANCEInstitutional governance and regulation of water servicesBy Michael Rouse

Seven key US water and environmental organisations have issued a report outlining

recommended utility performance measures and encouraging the use of these tools and management qualities by utilities around the country.

The seven are the US EPA, the AmericanPublic Works Association, American WaterWorks Association, Association of MetropolitanWater Agencies, National Association of CleanWater Agencies, National Association of WaterCompanies and Water Environment Federation.The report from the Effective Utility ManagementSteering Committee makes a number of

observations about challenges and barriers as well as making various findings and recommendations.

The key elements are ten identified attributesof effectively-managed water sector utilities, plus five ‘keys’ to management success and aproposed toolbox and set of example measures.

Supporting strategy elements are also examined, asways of providing motivation to adopt the new practices.

The report makes a number of recommendations, including rolling out thestrategy as soon as possible and calls for ongoingcollaboration between the seven parent bodies.(See Analysis, p4) ●

US organisations set out utilitymanagement guidance

Northern Ireland Water, the new governmentcompany that replaced the Northern Ireland

Water Service at the beginning of April, hasannounced that a consortium led by environmen-tal engineering consultancy MWH has won acontract to implement an asset managementmodel to deliver the Northern Ireland AssetManagement Plan 3 (NIAMP3).

Although the old Northern Ireland WaterService was not subject to regulation by econom-ic regulator Ofwat, it did produce asset manage-ment plans that generally followed the guidancein Ofwat’s manual, hence this is the third of theprovince’s five-year asset management cycles.

The approach was, however, varied to allow forthe special status of the Water Service: forexample, NIAMP2 did not address issues ofprices or funding nor, obviously, informationrelating to shareholder-owned commercial

companies.The Department for Regional Development

commissioned an independent technical audit ofNIAMP2. This was carried out by consultancyHalcrow, which reported that NIAMP2 wassatisfactory for planning purposes, and that moredetailed work would be needed to verify theextent of future infrastructure investment. TheWater Service was urged to look into the opportu-nities for further capital cost efficiency savings.

The OneAM consortium, which has won thecontract to produce an improved model forNIAMP3, consists of MWH, multi-utility UnitedUtilities, management consultant EC Harris andIT consultancy ICS Consulting. OneAM will workwith the new GoCo on the 30-month project toimplement its asset management model, and willalso undertake its strategic investment planningfor the 2010 to 2015 period. ●

Anew report from independent researchorganisation the Fraser Institute says that

cash-short governments across Canada need to encourage private investment in their water and wastewater systems if the nation wants toprovide better protection for public health and the environment.

Although it is not known how many communi-ties across Canada have substandard water andwastewater systems, the problems are well-documented. Walkerton remains symbolic ofwhat can happen when there is treatment systemand monitoring failure, and significant amountsof wastewater on both coasts are dischargedwithout treatment.

There are several key problems: the age of thesystem, population growth exceeding capacity,poor management, ill-trained staff, lax regulation

and a lack of capital and operating funds. Elizabeth Brubaker, executive director of

Environment Probe and author of the report,said: ‘For many years, local governments haverefused to raise water prices to sustainablelevels, thereby starving their water systems ofmuch needed capital for upgrades. Clearly wecan’t count on the status quo to meet the chal-lenges facing our water systems. Governmentsneed to consider the benefits provided by privateinvestment and private expertise.’

She says that says the estimated cost formaintaining, refurbishing, and expandingCanada’s water and wastewater infrastructure in the coming decades could be as much as $90billion, an investment the public sector has been unable or unwilling to provide. (See Analysis, p3) ● Lis Stedman

Contract award for Northern Irish asset management

Canadian report calls for private sector investment

2 • WATER UTILITY MANAGEMENT INTERNATIONAL • JUNE 2007

EDITORIAL

Editor / Associate PublisherKeith [email protected]

Publishing AssistantOisin [email protected]

Water Utility Management Internationalfocuses on the needs and interests ofsenior water utility managers. The aim is toprovide those heading water andwastewater utilities with an internationalreference point on the strategic issuesaffecting their organisations. Water UtilityManagement International will also be ofvalue to consultants and others followingdevelopments in this area.

Presented in a newsletter format, WaterUtility Management International containsnews, interviews, and in-depth briefings ontopical issues. Other articles take anexecutive briefing approach or be based onlandmark case studies. Regular themes forarticles include financing, investment,regulation and personnel matters. There isalso be a central theme of achievingefficiency in water utilities, encompassingtopics such as benchmarking, billing,tariffs, IT and service standards.

For more information, visit:

www.iwaponline.com/wumi/default.htm

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

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2007 price (4 issues):£165 / €249 / $329(IWA members: £150 / €225 / $299)

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Or visit: www.iwaponline.com/wumi/default.htm

Design & printOriginal design: John BerbutoLayout: David ParryPrinted by Ashford Overload, UK

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

© IWA Publishing 2007

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

NEWS

News

EUROPE: Italy withdraws support for PPIAFItaly has withdrawn its support for the World Bank’sPublic-Private Infrastructure Advisory Facility – PPIAF– saying that the ‘negative consequences’ of thesystem need to be examined. PPIAF sponsors a rangeof water and sanitation infrastructure projects indeveloping countries through involving the privatesector. The European Commission and France,Germany, the Netherlands, Sweden and the UK stillcontribute funds to PPIAF.

SWEDEN: Award for Singapore’s PUBThis year’s Stockholm Industry Water Award has beenawarded to PUB, Singapore’s national water agency,for its holistic approach to water resources management in a challenging urban island environment. PUB’s holistic approach has resulted ina lower dependence on external water sources bydiversification of water sources, including water re-use, desalination, stormwater storage in new waterstorages and supply of very high quality recycled waterto industry with some internal reuse of this supply.

Business

MEXICO: Earth Tech jv wins wastewater DBFOAn Earth Tech joint venture has been awarded a$32.8 million contract to design, build, finance andoperate a wastewater treatment facility in Querétaro,Mexico. Earth Tech and jv partner Servicios de AguaTrident, a subsidiary of Mitsui, were awarded the 20-year contract by the Querétaro State WaterCommission.

MIDDLE EAST: UAE preferred bidder announcedBiwater and two Gulf-based partners, Kuwait'sMohammed Abdulmohsin Kharafi & Sons and AbuDhabi-based Al Qudra Holding, have been named aspreferred bidders for a $544.7 million contract tobuild wastewater treatment works in the UAE. Thepreferred bidder will take a 40% stake in a sewagecompany that will be set up, with the rest held by Abu Dhabi Water and Electricity Authority.

QATAR: Doha programme management awardUS-based engineering company CDM, in associationwith Kuwait-based KEO International Consultants, isto provide programme management services for thedesign, construction, and commissioning of a $1.35billion wastewater collection, treatment, and reuseproject for the Public Works Authority of the city ofDoha, Qatar.

CHINA: Veolia win in HaikouVeolia Water has just won its 23rd major contract inChina, for the complete management of the drinkingwater service and the operation of a wastewatertreatment plant in the leading economic city of Haikou,the capital of one of China’s top tourist destinations,on the Island of Hainan, South China. The 30-yearcontract was signed with the Haikou Water Group wholaunched an international tender for the acquisition of49% of the Haikou First Water Co. Ltd, which assuresthe total management of the drinking water service to800,000 inhabitants in the area.

Loans and tenders

AFRICA: Bank involvement in pan-African fundThe African Development Bank (AfDB) has teamedup with major African investors to generate up to aninitial $450 million to finance a pan-African infrastructure development fund, a private equity fund that will invest in infrastructure projects in theenergy, transport, ICT, water and sanitation sectors.

CAMEROON: World Bank provides credit for low-income infrastructure projectThe World Bank has provided an IDA credit of $80million to Cameroon to increase access by the urbanpopulation, particularly in low-income settlements, tobasic infrastructure and services, including watersupplies. The project will also support water sectorreforms, in particular implementation of public-privatepartnerships and rehabilitation of urban water facilities.

INDIA: ADB agrees loan for basic services in Jammuand KashmirThe ADB is providing $300 million to support aninvestment programme requested by the Indiangovernment to help improve the delivery of basicservices in the state of Jammu and Kashmir. Theprogramme will expand water supply, sanitation,waste management, urban transport, and othermunicipal works.

TATARSTAN: EBRD lends funds to reduce wastewaterdischarges to VolgaThe European Bank for Reconstruction andDevelopment has lent 350 million roubles ($13.5million) to reduce the discharge of untreated sewageinto the Volga River by Kazan, the capital of therepublic of Tatarstan, which is Russia’s seventhbiggest city with a population of 1.1 million. The 10-year loan to Kazan Vodokanal, the city’s wholly-ownedwater and wastewater management utility, will financethe rehabilitation of the city’s main wastewatertreatment plant.

Economic regulator Ofwat’s 2007 internationalcomparison of water and sewerage service report

has found that the UK companies generally comparewell with counterparts from across the world.

The regulator noted: ‘Where we can make comparisons of customer service the England andWales companies perform well at a cost to customersand a level of efficiency that appears comparable to elsewhere.

‘The statistics on water use and leakage in the recent drought in the south-east of England are also

interesting. Our consumption figures lie in the middle of the range of European comparators (where,unlike in England and Wales, universal metering is typical).

The report found that average leakage rates are alsoamong the typical range of performance seen inNorthern Europe. It notes: ‘We find that very lowleakage is generally explained by external factors andwhere England and Wales companies operate incomparable conditions they have similar low levels ofleakage.’ (See Analysis, p5) ●

UK regulator makes international performance comparison

WATER UTILITY MANAGEMENT INTERNATIONAL • JUNE 2007 • 3

ANALYSIS

Anew report from independentpublic policy research

organisation the Fraser Institute saysthat cash-short governments acrossCanada need to encourage privateinvestment in their water andwastewater systems if the nationwants to provide better protection forpublic health and the environment.

The country’s water and wastewater utilities face severechallenges, the report warns:although the full extent of theproblem is not known, Canada hassuffered a number of high profilewater pollution problems, notablythe Walkerton tragedy and the morerecent Kashechewan incident.

Most of Canada’s water andwastewater utilities are publiclyowned, operated, financed andregulated. However, there areserious issues: statistics show that47% of municipal wastewater inAtlantic Canada was dischargedwithout treatment, and on thePacific coast, almost 85% ofwastewater was discharged withonly primary treatment or, in somecases, just screening.

There are several key problems,the report finds: old systems at theend of their useful lives, systems toosmall to meet the needs of growingpopulations, poor management andill-trained staff, lax regulation and alack of capital and operating funds.

Elizabeth Brubaker, executivedirector of Environment Probe andauthor of the report, says theestimated cost for maintaining,refurbishing and expandingCanada’s water and wastewaterinfrastructure in the comingdecades could be as much as $90billion, which the public sector isunwilling or unable to provide.

By encouraging private investment, the reasoning goes,private capital would be injected,public funds would be freed forother purposes and financial riskswould be transferred from thepublic to the private sector, and thefunds would be likely to be usedmore efficiently.

The report notes: ‘Private firmscan bring to water utilities a greatdeal of expertise. Several largeinternational water companies havemore than a century of experience.They invest hundreds of millions ayear in research and development.They have thousands of specialisedemployees, whose skills can be

harnessed to solve local problems.’Although Canada’s experience

with privately-funded water infrastructure is limited, thoseprojects in existence have beendeemed a success includingMoncton in New Brunswick, whereUSF Canada built a filtration plantfor at least 25% less than the cityhad planned to spend.

Walkerton itself and the surrounding municipality recentlyconcluded a fixed-fee O&M serviceagreement with Veolia WaterCanada. The report adds: ‘Privateservice providers have numerousincentives to construct and operatesystems effectively and efficiently.Facility owners can build incentivesinto operating agreements, structuring contracts to reward

good performance and to penalisebad performance.

‘Competition for contracts andtheir renewal also motivates biddersand operators to perform well andto continually discover and imple-ment cost-effective alternatives.’

The report goes on to note thatprivate operators are ‘inherentlymore accountable than publicoperators’, saying government-runsystems are often ‘paralysed byconflicts of interest that preventeffective regulation.’

Distancing the operator from theregulator, the report argues,enables governments to focus onregulation. Private operators’ legalliability makes them accountable tothe public and enforceable contracts with specific performancecriteria make them accountable tomunicipalities. The market itselfprovides accountability, in that apoorly-performing company cannotincrease its shareholder returns ormarket share, and risks being putout of business.

Despite the advantages, partnering with a private firm willnot automatically solve a community’s water problems, thereport warns. Municipalities can getthe best results by entering intolong-term concessions that assign

to the contractor responsibility foroperation and capital investment,creating incentives to reduce long-term total costs and enhanceaccountability.

The report also suggests that the Federal government has asignificant role to play by encouraging private sector involvement in oversight ofCanada’s worst-run water facilities,those on First Nation reserves. Thereport notes: ‘The government issensitive to native communities’desires to determine for themselveshow best to solve their widespreadwater and wastewater problems.However, discretion in movingtowards locally-appropriatesolutions must not come at theexpense of health and safety.’

If health and safety are atimmediate risk, the Federal government should be prepared to intervene and appoint an expertoperator to provide safe water untilthe community can do so itself, thereport adds.

Across Canada, the federalgovernment can do much more, thereport suggests: educate decision-makers and the public about thebenefits of private involvement, andhelp develop models for theeffective economic regulation ofwater and wastewater services. Itcan also enforce existing health and environmental standards,prompting municipalities to seekassistance from those with greaterexpertise and ensuring that thoseproviding that expertise performsatisfactorily.

The report also suggests that theFederal government can ensure thesuccess of any privatisations that dooccur, by helping municipalities toavoid bungling the contractprocess. It can achieve this byensuring that these are drafted and implemented in ways thatprotect the long-term interests of municipalities, workers, consumersand investors, and by generallyhelping municipalities to navigatethe privatisation process. ●

A new report calls forgreater involvement ofthe private sector inCanada’s water sector.LIS STEDMAN reports.

Calls for the private sector to meet Canada’s cash needs

Government-run systems are often ‘paralysed by conflictsof interest that prevent effective regulation.’

The report, ‘Water and wastewater treatment in Canada: tapping into private-sector capital, expertise, and efficiences’, is available at www.fraserinstitute.ca.


ANALYSIS

Six national US water associations and the US EPA

have issued a report outliningrecommended utility performancemeasures and encouraging the useof these tools and managementqualities by utilities around the country.

The EPA and the AmericanPublic Works Association,American Water Works Association,Association of Metropolitan WaterAgencies, National Association ofClean Water Agencies, NationalAssociation of Water Companiesand Water Environment Federationhave produced the new document,entitled ‘Findings and recommen-dations for a water utility sectormanagement strategy’. Theseassociations, with about 80,000members, represent some of thelargest utilities in the country.

The report is the final output fromthe Effective Utility ManagementSteering Committee to its parentgroup, and is the result of a statement of intent created last May between the seven to‘formalise a collaborative effortamong the signatory organisationsin order to promote effective utility management’.

One general finding is that waterutilities across the US face commonchallenges such as rising costs,regulatory requirements, fundingcuts and ageing infrastructure, andthat they needed to focus attentionon these problem areas to deliverquality products and services andsustain community support.

The Committee also looked intothe barriers that can inhibitimproved utility management,where efforts should be targeted.One consistent theme was thedifficulty of generating and sustaining support for a governingbody and the community at largefor enhanced management efforts.Utility managers struggle to conveythe value of their services, thereport notes, and there is an ‘if itain’t broke why fix it’ mentality inmany organisations.

In that context, a number offindings and recommendationswere made, and ten attributes ofeffectively-managed water sectorutilities identified. The outcomes

are intended to help utilitiesmanage progress in daily operations, infrastructure andoverall performance through acommon management framework.

The ten attributes provide areference point for improvingperformance. They are: • product quality• customer satisfaction• employee and leadership

development• financial viability• operational optimisation• infrastructure stability• operational resilience• community sustainability• water resource adequacy• stakeholder understanding and

support

Complementing these, the SteeringCommittee also identified five ‘keysto management success’ asconsistently-used managementapproaches and systems that havebeen shown to engender utilitymanagement success. These willprovide a framework for using theattributes and example measures,also outlined. The keys are:• leadership (key throughout the

management improvement cycle)

• strategic business planning• organisational approaches, such

as participatory culture and change management processes

• measurement• a continual improvement

management framework

The Committee recommends thatthe sector adopt and utilise the tenattributes and that the collaboratingorganisations explicitly referencethe ‘keys’ in sector efforts topromote the Attributes and enableeffective management.

Measurement is seen as particularly critical. The Committeeidentified a set of high-level example water utility measures butdoes, however, note that these ‘arenot, however, equivalent to a utilitymeasurement programme: they arehigh-level, illustrative examples andare not presented with enoughinformation for “off the shelf” use.’

The Committee recommendedincluding a set of example measures, related to the Attributes,in the sector strategy. These couldbe based on or the same as those

that the Committee identified.Either way, it is seen as important that the measures are accompanied by a preamble that includes the sorts of caveatsand considerations identified inthe report.

It also asked for a set of examplemeasures to be circulated to abroader sector audience as soon aspossible, and for a longer-termeffort to be initiated to establish aprogramme to support a ‘cohesiveset of targeted, generally applica-ble, individual water sector utilitymeasures’. The idea is to provideutilities with a robust measuringsystem to gauge and improve theirinternal operational and managerialpractices and for communicatingwith external audiences.

Tools are also seen as vital andmany utilities would benefit from a‘helping hand’ to guide them touseful resources that address theirmanagement needs, particularly inthe context of the Attributes.Resources were identified as thestarting point for developing a‘resource toolbox’ and theCommittee considered options forits scope, structure and formatalthough it notes there is currentlyno funding or concrete plan for this.

It recommends that its parentbodies pursue this avenue, and thata toolbox, even in an interim form,be made available to a wideraudience as soon as possible. TheCommittee also urged that thetoolbox allow for resource cross-referencing and categorisation with,if possible, some sort of interactivefunctionality.

A set of supporting strategyelements was also explored. Theseare designed to create incentivesfor and reduce barriers to adoptingmanagement practices that would lead to Attribute-relatedimprovements. The other elementsof the approach focus on informingand enabling change, whereas the strategy elements focus onproviding extra motivation.

The Committee also recommends rolling out the sectorstrategy as soon as possible andproviding a brief, standalone primerfor water sector utility managers. Italso urges that its parent bodiescontinue to collaborate and asks fora continual improvement approachto implementation to be taken. ●

Leading water sectororganisations in the UShave provided utilitieswith guidance and toolsto help them improvetheir management. LIS STEDMAN summarisesthe key messages.

US utilities get the guidance they need to improve management

One consistent theme was the difficulty of generating andsustaining support for a governing body and the

community at large for enhanced management efforts.

To obtain the report, visit www.epa.gov/ogwdw/waterinfrastructure/.


ANALYSIS

Economic regulator Ofwat hasbenchmarked the water

companies of England and Waleswith enterprises from Scotland, the6-cities benchmarking group inScandinavia, the US, NorthernIreland, The Netherlands, Portugal,Canada and Australia, and includedinformation from other countrieswhere it was available, in an effortto expand comparative competitionbeyond its native shores.

The regulator notes that theunique scale and structure of thecompanies in England and Walesmade benchmarking difficult. Tomake comparisons easier, itconcentrated on enterprises that toan extent had a distinct corporateidentity and independence ratherthan being consolidated within localgovernment.

Ofwat looked at a number ofareas: customer bills; customerservice levels; water quality andenvironmental performance; waterdelivered, leakage and waterefficiency; unit costs and relativeefficiency; network activity andfinancial performance.

Meter penetration was found tobe a key difference, as in mostcountries apart from the UK it isnearly universal. Metering hasbenefits – it allows more accuratemeasurement of leakage andenables tariff structuring, but hasassociated operating costs.

On billing, the report finds thatEngland and Wales are ‘not out ofstep’ with other countries, with atrend for increasing prices beingrepeated across Europe, thoughgenerally at a slightly lower rate.

The report adds: ‘The two mainexceptions to this are in Germanywhere prices are rising more slowly, partly because large scaleinvestment has already taken place,and in Spain where prices are risingmuch more steeply.’

Many factors influence bills:lower costs in Sweden reflect thefact that companies are not allowedto make a profit from water, andconsumption levels are also lower.

Water in Italy is relatively cheapbecause of low levels of investmentin infrastructure compared withother European countries, and

ongoing water price subsidies. Higher prices in Berlin reflect

the high level of investment ininfrastructure to improve thenetwork and the need to meetdemanding quality standards.Water in the US is relatively cheapcompared to Europe, the reportadds. This may be because municipalities can access tax-exempt finance, youngernetworks and weaker environmental regulation thatreduces the incentive to invest.

On customer service, generallyOfwat notes: ‘Where it is available, itcan give comfort to both theregulator and the customer thatcompanies, in the absence of full competition, provide an appropriate service.’

Only Scotland provides a paralleldata comparison, though. For thismeasure, England and Wales werefound to significantly outperformtheir northern neighbour. Fewcompanies collect customer servicedata in the detail that is required inEngland and Wales – the US, forinstance, collects none.

On water quality, an increasingtrend to treat sewage to tertiary levelwas found, with some countriestreating all or most of their waste-water to this standard, includingAustralia. For compliance with theBathing Water Directive, Englandand Wales have one of the highestrates of compliance in the EU,behind only Greece and Spain.

On water delivered, leakage andwater efficiency, the differentdefinitions for water balancecomponents and the lack ofmetering in England and Waleswere found to make direct comparison difficult.

Water saving campaigns andinitiatives have helped Denmark,Australia, Germany and Helsinki tosignificantly reduce per capitawater consumption. Drought hasachieved a gradual reduction in usein Australia. Ofwat praises theinitiatives in England and Wales,and Waterwise information suggestsconsumption there is within the

middle range and lower thanFrance, Sweden and Norway inEurope, with the highest usecountries being the US, Canada,Australia and Japan.

On leakage Ofwat notes that‘robust information…can bedifficult to find outside England andWales’. The Netherlands andCopenhagen report very low levelsof leakage, whereas ScottishWater’s is considerably higher thanthe range found in England andWales.

Dutch companies’ low rates areexplained by several factorsincluding low operating pressuresdue to the flat terrain and a newerpost-war infrastructure. Australianleakage is similar to England andWales but US companies appear tohave higher levels, particularly inlarger systems.

For water service unit costs, on aper-property basis total costs arebroadly similar in Australia, TheNetherlands, England and Wales.Four members of the 6-city groupand one or two others report costs‘notably below’ and US companiesreport very high per-property costs.

Comparisons of volumetric unitcosts suggests the 6-cities group,Australian companies and many UScompanies provide water andsewerage services at a lower costthan England and Wales, whereascosts in The Netherlands arehigher. With costs adjusted toremove currency fluctuationeffects, England and Wales dobetter compared to Australia.

On network activity, England andWales compare to the 6-cities groupand have higher water main activityrates than Australia. England andWales companies have a lowerlong-term burst rate than Australiancompanies but a higher rate thanthe 6-cities group.

On financial performance,indicators appear broadly similaracross countries though individualcompanies vary significantly.Accounting practices and assumptions are likely to distort the comparison process. ●

Water sector regulationin England and Wales isbased on comparing theperformances of watercompanies. Theregulator also sets thisprocess in a widercontext by comparingthese performanceswith internationalpractice. LIS STEDMAN

reviews the findings ofthe latest comparison.

The value of an internationalperspective when regulating water

The report, ‘International comparison of water and sewerage service 2007report’, can be obtained at www.ofwat.gov.uk.

The Russian Federation is goingthrough a complex period of

upheaval as it moves into thecapitalist free market after rejecting the socialist economicmodel. Since the dawn of glasnostin the 1980s, the amount of reformhas been extraordinary – not leastthat relating to the Federation’swater and wastewater utilities, or Vodokanals.

A new report from IWA Publishingby Sergey Ivanov, Sergey Sivayev andElla Shalukhina looks in depth at thechanges in Russia’s water industry.Notably, the various models for changeadopted and the ways in which theauthorities have reacted to the pressurefor change have differed radically fromcity to city, area to area.

This is not surprising, as Russia is theworld’s biggest state, and one of themost diverse both geographically andsocially. Its land area is a massive17M.km2 and it borders countries as far apart geographically as Norway,Korea and China. With a population of143 million at the beginning of 2006,over 100 national and ethnic groupsand over 1100 cities, the scale of thetask of reform has been, and continues

to be, huge. The reforms began with

government moves to increase theattractiveness of the water and wastewater sector to investors. Keyambitions were the reconstruction ofageing infrastructure; increasingoperational efficiency, economic

soundness and customer service levels;ensuring that regulation and economicindependence worked in harmony; aswell as optimising assets.

There are a number of challengesthat the government has had to facealong the path to reform. Most importantly, the government sought tochange the patterns of ownership ofthe Vodokanals, But the obstacles areconsiderable: for instance, unreformedVodokanals do not work directly with their domestic customers, with

Russia’s road to water sector reformThe Russian Federation has set a course forimplementing major changes to its water sector, includinggreater involvement of the private sector. LIS STEDMAN

outlines developments as set out in a new report on theRussian water sector.

Utility management challenges

An OECD report on private involvement in the sector noted that ‘Unfortunately, themajority of Municipality administrations in Russia have had a shortage of qualifiedpersonnel for quite a long time. Participants in the review specified this as a problem. Asa result private sector engagement in the supply of public services is a political decisionin most cases, in which importance is placed on random and subjective factors.

‘At the same time contractual relationships between municipal governments andprivate operators mainly appear to be agreements of intent rather than full contracts todelegate management. It is necessary to note that private initiative involvement on thebasis of management contracts that do not impose major responsibilities on the privatesector still provides a remarkable improvement within a short period (one to two years).The arrival of “private owners” leads to an improvement in performance (a reduction inthe incident rate and water losses) and the financial state of the Vodokanals.’


MARKET REFORMS

payments in many cases being collected by the local government’sMunicipal Services division, which actsas an intermediary. Under this system itis practically impossible to recoupunpaid debts, which has driven someVodokanals into bankruptcy.

Funds from water and wastewaterpayments also get diverted to othermunicipal causes and there is a complicated system of cross-subsidy,with industrial users paying more toensure domestic consumers pay less.Metering is rare, so there is no mecha-nism to encourage water efficiency.

Because the Vodokanals are municipal enterprises, they are alsooften influenced by political decisionsthat may run counter to water qualityobjectives. Another obstacle is personnel expertise – lacking a path toa senior managerial post, someVodokanals find staff have no incentiveto undertake training. These factors,combined with low tariffs (andincomes set just at break-even) as wellas somewhat oblique accountingmethods, have been a major disincentive to foreign private involvement.

The reform processAt a federal level, the aim has been toinitiate changes in the pattern ofownership to facilitate acceptance of effective corporate managementmethods in the municipal water andwastewater sector. Legislative andpolicy changes have set up a frame-work to attract private sector resourcesand overcome many of the commonproblems that the industry faces.

At Vodokanal level, this has meanttaking several paths: reforming thewater enterprises into legally-independent joint-stock companies,under the control of the municipaladministration; or getting in privatesector operators through a competitivebidding process to run the Vodokanals,with a contract setting out how toachieve a set of service level indices.

In terms of management, a formalrelationship has been establishedbetween the Vodokanal and the local administration, in which theadministration can set service levelobjectives, the enterprise is guaranteeda level of income in perpetuity and also, critically, autonomous management.

Parallel access to investment funds

At a federal level, the aim has been to initiate changes in the pattern of ownership tofacilitate acceptance of effective corporate

management methods in the municipal water and wastewater sector.


MARKET REFORMS

from government funds and the privatesector has also been ensured, to makeup for the years of under-investment.The municipal authorities have had toundertake numerous reforms to ensurethat it is possible to bring all of theseideals into reality.

In terms of the models that are beingused, there are four main groups: thosewhere the capital of the Vodokanalcomes entirely from the municipality;those where a controlling block (50%plus one share) of stock is held by themunicipality; those where the municipality holds between 25 and50% of the shares; and those where themunicipality has no shares.

Although there are no laws excluding the possibility, authorities atall levels have decided that title toinfrastructure assets should remain theproperty of the municipalities.

The principles applied are thatproperty used directly in operations,such as networks, facilities and processequipment will remain state property.Property for maintaining processequipment, buildings outside theboundary of the state assets andmovable assets can either stay in statehands or be transferred to the privatesector. And any property belonging tothe water supply and sewerage systemscan be transferred to the Vodokanal tomanage, under a lease or concession.Other forms of private sector engagement are possible, provided theycomply with federal laws.

There is an exhaustive list of whichtypes of asset belong in which group,and also definitions of consumers(system owners or housing associationsthat control or manage infrastructureassets), and sub-consumers (customers)as well as the Vodokanal’s rights andobligations, customer obligations andrights, tariff and payment systems,sampling regimes and a host of other regulation.

The taskThe scale of the task to be undertakenis considerable: statistics show that 23%of Russia’s water conduits (some30,000km) needs to be replaced, asdoes 38% of the mains network and33% of the main sewerage networks.Water losses are increasing at 5% peryear on average, a trend that if nothalted will see average losses exceeding30% by 2020. The amount of investment needed varies widelydepending on the district concerned,with the Southern and Volga areasrequiring most investment.

Private operatorsThe prescriptive nature of the framework has not deterred theformation of private operators. In 2003 and 2004 a number of private

New report on the Russian water sectorMunicipal water and wastewater services reform in the Russian FederationAuthors: Sergey Ivanov, Sergey Sivaev and Ella ShalukhinaIWA Publishing, July 2007. ISBN: 184339135X; 60ppPrice: £95.00 / $190.00 / €142.50IWA members price: £71.25 / $142.50 / €106.88

Russia is going through a complicated period of transforming its economy with a focus onthe expansion of private sector activity. This includes reforms in the field of municipalwater supply and wastewater disposal.

This report presents an analysis of the condition of the municipal water supply andwastewater systems in Russia in the early part of the 21st Century and tries to provideanswers to the eternal questions: what are the causes of problems faced and what needsto be done to solve them?

The objectives of the reform of Russia's Vodokanals are described, along with theregulatory framework governing the sector, including the way tariffs are regulated. Thecurrent condition of water and wastewater infrastructure is assessed. The most prominent examples of private sector involvement to date are examined. The reportconcludes with a short-range forecase of developments.

The report will be of interest to those wanting to understand the transformationprocesses taking place in Russia in the field of municipal water supply and wastewaterdisposal. It will also be of value to potential investors who are looking to take advantage of the favourable investment climate created recently in the country and who areconsidering possible long-term investment in the management, reconstruction anddevelopment of municipal water-related infrastructure.

This title belongs to the Water21 Market Briefing Series.For more information, visit www.iwapublishing.com

operators working in the public utilityservices market for water supply andwastewater disposal were founded inRussia. These are Rossijskiye kommunalnyje sistemy, Novogor-Prikamye, Evrazijskoye vodnoyepartnerstvo, and Rosvodokanal.

In 2005 Don-Yug and Don-Sever,companies with foreign capitalinvolvement (ABB,), joined the local operators. They implementreconstruction projects for theVodokanals in the Rostov region and the Stavropol territory.

In addition, several Vodokanals (for

instance in Syzran, in the Ulyanovskregion and in Krasnogosk in theMoscow region among other cities)were corporatised with private sectorparticipation.

It was estimated that by the end oflast year, private operators would beproviding water supply and sewerageservices in cities to 15 million people(over 10% of the country’s population).By 2010, it is predicted that 40 millionpeople – 30% of the population – willbe served by private operators.

To date, the private operators havemainly been involved in water andsewerage contracts for cities withpopulations of not less than 200,000although it is expected that they will

expand to smaller towns in the samearea as they become more secure.

The operatorsRossijskiye kommunalnyje sistemy(RKS) was one of the first projects inthe country set up to reconstructinfrastructure management systems. Itwas formed in 2003 and its main taskwas to raise large-scale investment inthe regional municipal economies.

RKS is mainly involved in short-term (11 month lease contracts in citieswith populations between 25,000 andone million, mainly combining infra-structure leases with a municipal orderfor repair and improvement. Contractterms provide the flow of funding. Theleases have evolved to something closeto a concession contract, whereby alabour contract migrates into a leasecontract when the operator makesimprovements from funds paid in long-term instalments by the municipal government.

The RKS approach is to found a subsidiary in the regional administrative centre. The Vodokanalproperty is then transferred to themunicipality and liquidated, afterwhich the subsidiary takes over theinfrastructure assets in a short-termlease. After this, the subsidiary eitherundertakes services in its own right orcreates a new legal entity, a Vodokanal.

Evrazijskoye vodnoye partnerstvo(EVP) undertakes operation andmanagement functions and implementsstate-private partnership projects. Itaims, by 2008, to have long-termcontracts in seven to 10 cities serving

At present in Russia there is ‘practically nopossibility’ of getting bank credits for long-terminvestments in municipal infrastructure without

associated budget guarantees.


MARKET REFORMS

five million people with a turnover of$200 million per year.

The company was established in2004, and now manages the Omsk andRostov-on-Don Vodokanals.

In Omsk, EVP was awarded acontract for the long-term development of the water supply andwastewater disposal infrastructure. Withthe 25-year lease agreement came aninvestment agreement for funding forwater supply and sewerage assets valuedat $17.5 million over three years toApril 1, 2008. The long-term investment programme is wortharound $155 million, and to date morethan $3.9 million has been transferredfor upgrading and developing themunicipal water supply and sewerage systems.

In Rostov-on-Don, EVP has amanagement contract to run the waterand wastewater systems. The Vodokanalserves over one million residents andhas an annual turnover of $30 million.Work has been funded partly through a$10 million IBRD credit for develop-ment and repair of the water supplysystem, and a GEF grant to construct anutrient removal system for the city’swastewaters, with EVP also providingfunds from its own sources. Here, thecity administration owns the Vodokanalbut not the infrastructure assets, whichwere not included in the authorisedcapital of the joint-stock company andwere transferred in the Vodokanal lease.

Novogor-Prikamye (NP) is amanagement company subsidiary ofNovogor, which was established toimplement investment projects in thePerm region’s housing sector. In turn,Novogor is a subsidiary of Interros, oneof the largest private-investmentcompanies in Russia with assets worth$10 billion under its control. NP’sobjective is to provide high-qualitywater and wastewater services at areasonable price. The companyemployed Severn Trent WaterInternational to help with its aim ofaligning its performance with that ofEuropean city utilities with similarinfrastructures and population sizes.

The investment programme envisages joint management of theoperation, and there are plans to set upa technical council at NP involving theparticipation of the city administration,to work out the technical policy andorganisation for the city’s capitalinvestment committee. The cityapproves NP’s annual programme andmonitors it, and if issues arise eitherside can suggest modifications to theplanned projects. NP has to achieveefficiency measures within specifiedkey areas, and it has to comply with anextensive list of operational and societalrequirements.

Rosvodokanal (RV) was founded in

1949 and is a central repository ofinformation on the organisation ofwater supply and wastewater disposalsystems in Russia’s cities. In 2003, it wasreorganised and has become part of theAlfa-Group. It has successfullyreformed a number of municipalenterprises and undertakes assetmanagement for such enterprises,serving over two million people incities including Orenburg, Barnaul and Orsk.

One of its arms is Rosvodokanal-Consulting (RC), which has foreignpartners and provides engineering andconsultancy services. RV has beeninvolved in a number of successfullong-term lease agreement projectsthat have helped improve numerousaspects of municipal utility systems. Theprojects typically begin with signing an agreement and creating a new

company, followed by typical house-keeping tasks and development of abudget system for operational activitiesand a cost-optimisation programme.

These early projects have proved thatsignificant cost savings can be made bytransferring assets to private sectormanagement. Initial operational costreductions have been achieved byimproving management efficiency and motivation rather than large, long-term infrastructure investments.Management teams have also benefitedfrom the lessons learned from theirprivate sector partners.

However, it is acknowledged thatthere are still a number of factorsholding back progress. One is that atpresent in Russia there is ‘practically nopossibility’ of getting bank credits forlong-term investments in municipalinfrastructure without associatedbudget guarantees. Investors are stillreluctant to input significant amountsof their money into municipal infra-structure as the investment risks areseen as high, and do not increase thecapitalisation of the company as theinvestor does not own the assets.

Another problem lies in obtainingtrue market values for the infrastruc-ture assets as their costs can only beestimated and not related to any realestate market. The political risks are alsoextremely high, as tariffs are decided byrepresentatives on the regulatory body.Current legislation also foresees thepossibility at federal level of settingmaximum water and wastewater tariffs

whatever the real investment needs.And while things remain so uncertain,it is not possible to make reliable long-term forecasts and financial models.

Future plansThe plan to 2010 is for the keyVodokanals for Moscow and StPetersburg to be corporatised withtheir city administrations retaining thecontrolling shareholding. Vodokanals incities with populations of over 500,000will be reorganised into a model inwhich the investor has the controllingshareholding either on corporatisationor within a year of this, along the linesof the French model. Engineeringinfrastructure will be transferred to theoperator’s lease on condition of anassumed annual investment of 10 to 15% of the Vodokanal’sannual turnover.

In smaller cities, with populationsbetween 200,000 and half a million,the Vodokanals will be reorganisedmainly as joint-stock companies withthe municipalities retaining all of thecapital in their ownership, as in theGerman model. In some exceptionalcases these enterprises will be transferred on a short term (up to fiveyear) management contract to an investing company.

Vodokanals in cities with populations from 50,000 to 200,000will mainly be corporatised with themunicipality, leading city companiesand Vodokanal management all participating in the authorised capital.

Vodokanals in cities with populations up to 50,000 will becorporatised mainly by transferring all of their engineering infrastructureinto the ownership of a joint stockcompany, which is included in the authorised capital, and the simultaneous or subsequent transfer(sale) of shares to private investors as in England and Wales. In some rarecases the shares in such companies will remain the property of the municipality.

There is also a commitment tocreate a modern regulatory frameworkto regulate all areas of Vodokanalactivity. It is anticipated that five to sixnational management companies willbe active, each in its own geographicalarea. It is recognised that soon it islikely that private sector participationin Russia’s water and wastewatersectors will be seen as natural. Effectiveregulation is viewed as the remedy for any areas of service that leavecustomers dissatisfied. Clearly, althoughthere are many challenges ahead – notleast in changing municipal mindsetsand behaviours – Russia is gearing upfor a major change in the way it viewsand operates its water and wastewater enterprises. ●

Although there are many challenges ahead – notleast in changing municipal mindsets and

behaviours – Russia is gearing up for a majorchange in the way it views and operates its water

and wastewater enterprises.


EFFICIENCY

Producing and supplying drink-ing water and collecting and

treating effluent constitute a watersupply chain made up of distinctactivities. In the Dutch watersupply chain, the water companiesproduce and supply drinkingwater, while the municipalitiescollect and dispose of effluent viathe sewer system and public waterboards treat effluent.

Central government policy in TheNetherlands is to increase the effectiveness and transparency of thewater supply chain in the publicinterest. The Dutch governmentconsiders a year-on-year improvementof between 1% and 2% is feasible forthe regions within and between thesectors over the coming ten years. Thistarget is based on regional experiences,current studies, benchmarking andmonitoring of water supply chain data(source: Toekomstagenda Milieu, adocument published by the Dutchgovernment in 2006 on the future of

environmental policy in theNetherlands). Central government hasnot imposed a structure or blueprintfor cooperation in the water supplychain. It has been left to the regionalactors to determine the details of their effectiveness and transparencyobjectives.

The European Union WaterFramework Directive also plays a role.The efforts necessary to improve waterquality as required by the Directive canbe made in large measure in the watersupply chain. A more effectiveapproach will therefore be beneficialfor the environment.

All stakeholders in the water supplychain recognise that significant efficiency gains are still achievable byimproving cooperation between theparties involved. Cooperating in thewater supply chain, organising operations differently and optimisingbusiness processes will not only reducecosts, but also result in an even higherstandard of service and a better product.

The Dutch drinking water sector hasalready improved its effectivenesssignificantly over the past few decades.Today’s challenge mainly concerns theeffluent treatment part of the chain.The sewerage system will requirereplacement investments totalling €10billion ($13.3 billion) over the next ten years, for example. Municipalauthorities have a duty of care forcollecting effluent, while the publicwater boards are responsible for furthertransporting and treating the effluent.By working together they can achievefinancial and/or environmental gainsfrom which the public and businesscommunity also stand to benefit.

Developments in North HollandprovinceNorth Holland province consists of 61municipalities (which are members of‘Vereniging van Noord-HollandseGemeenten’, the association of theprovince’s municipalities), three waterboards (‘Hoogheemraadschap HollandsNoorderkwartier’, ‘Hoogheemraadschapvan Rijnland’ and ‘HoogheemraadschapAmstel, Gooi en Vecht’) and twodrinking water companies (‘Waternet’,and ‘PWN waterleidingbedrijf Noord-Holland’).

North Holland province already hasmany good cooperative initiatives.Waternet is the first water cycle company in the Netherlands to combine water management dutieswith drinking water, sewerage andeffluent treatment operations (see box‘Waternet, a total water organisation’).The joint approach that the waterboards and municipalities adopted tocleaning up effluent discharges in ruralareas has served as a model for numerous similar initiatives elsewherein the Netherlands. And cooperation

Cooperation in the Dutch water sector:developments in North HollandGovernment and legislative pressures are increasing the impetus for cooperation in the Dutch water sector.LILIAN BERNHARDI describes activities in the province of North Holland to achieve such cooperation.

Investment requirements and the potentialgains from cooperation

There is a lot of money involved in the Dutch sewage system,with replacement values put at:• sewerage: around €60 billion ($80 billion)• transport and treatment of effluent: around €10 billion ($13.3

billion)

The extra burden from replacement is €6 billion ($8 billion) in 10years (2006-2015), a total of €14 billion ($18.7 billion) to 2027.

As well as this there are the large costs for the Dutch waterquality task of meeting EU Water Framework Directive require-ments plus the water quantity task of creating enough watercapacity. All this will lead to the burden of regular expenses.

Waternet, a total water organisation

A few years ago the city of Amsterdam and the ‘Amstel, Gooi en Vecht’ water boardembedded the operation of sewers and the treatment of sewage in a single departmentcalled ‘Dienst Waterbeheer en Riolering’, serving the entire Greater Amsterdam conurbation. Merging these operations in 1997 produced a saving of €15 million ($20million) per year.

On 1 January 2006, this department and the drinking water company were merged tocreate Waternet (a foundation under Dutch law). This is expected to yield additionalsavings of €15 million ($20 million) per year. Waternet is the first organisation in theNetherlands that accommodates the entire water cycle.

Waternet’s general business conduct is controlled at arm’s length by a three-manboard. In 2008, residents will start receiving a single water bill through the post. The billwill itemise four charged services: drinking water, sewerage, effluent treatment andmanagement of surface waters. It will give people a greater insight into their watercharges. Other benefits of such a construction include:• joint management of pipes• a service-enhancing single point of contact for customers• a joint fault repair service• sharing of knowledge with other parties.

Another beneficial feature is the Amsterdam Coordination System (which includes‘Cocuwo’, the body that coordinates the planning of public works in the city). Thiscoordinates the management of roads and sewers.


EFFICIENCY

between municipal authorities enablesjoint calls for tenders for the maintenance of sewerage systems (seebox ‘Cooperating successfully in Noordkop ’).

There are also examples of cooperation in the field of knowledgeexchange (see box ‘Joining forces inmanagement and maintenance’), andhow improvements relating to wastewater are being sought by introducing cooperation on a permanent basis (see box ‘Effluentcooperation in Rijnland district’).

A salient point is that cooperation isnot confined to the water supply chain.The parties are increasingly workingtogether on water volume and qualityissues, and on challenges arising from European and national policyobjectives (such as the EU WaterFramework Directive).

ConferenceTogether with its partners in the watersupply chain, North Holland provincewants to give an extra boost to bottom-up cooperation in the chain. Under thebanner of ‘Cooperate with each other’,on 15 November 2006 the provinceorganised a conference on cooperationin the North Holland water supply

chain in association with the partners. Managers and employees of

municipalities, water boards, drinkingwater companies, industry associationsand provincial authorities examinedoptions for harmonising in a better andsmarter way the separate efforts of thewater supply chain. The objective is toenhance quality of service, securegreater environmental gains and,ultimately, reduce costs for the public.

The conference showed that cooperation and harmonisation inmanaging and organising the effluentsupply chain can increase effectivenessand transparency and that the municipalities and water boards holdthe keys to success. The parties recognised the administrative necessityof cooperation. It was also acknowl-edged that cooperation could beintensified and expanded in the NorthHolland water supply chain. After all,there are even more opportunities forcooperating and there are many morepotential partners who can join in. Theconference provided a stepping stonetowards intensifying and expandingcooperation in North Holland.

Next stepsNorth Holland province wants to

actively stimulate and facilitate effortsto improve cooperation between water companies, water boards andmunicipalities. The provincial execu-tive gave the official go-ahead inMarch 2006 for the role the provincewill adopt in forming the water supplychain. The development under way inthe water supply chain is in line withcentral government’s view that it isnecessary to increase the effectivenessof the water supply chain. NorthHolland province drew up a plan ofaction after the water supply conference. The plan is based on twotracks, one establishing a voluntaryadministrative agreement, and thesecond designing a bottom-upapproach to cooperation.

Draw up a voluntary administrativeagreementAll partners will help draft and willsign a voluntary agreement (in theform of a letter of intent) that willdefine goals, an approach and a timeframe for further cooperation. After all,the agreement of all parties is essentialto ensure effective cooperation. Thevoluntary agreement will includeprovisions to the effect that the initiators will stimulate and initiatecooperation in the water supply chainin 2007 to 2009. Together, the initiatorswill formulate effectiveness targets, asrequested by central government. Thespearhead will be the effluent chain,particularly sewerage. A precondition isthat the present duty of care mustremain unchanged. Continuation ofthe agreed arrangements will beevaluated in early 2008.

Design bottom-up cooperationTogether with the water boards andVNHG (Association of Municipalitiesin North Holland), the province willlead the initiative to bring partiestogether wherever this will producesignificant added value in the watersupply chain, locally or regionally. Thegoal is to improve and intensify cooperation in North Holland. Thiswill benefit both the public and the environment.

ConclusionsCentral government policy in theNetherlands is to make workingpractices in the water supply chain10% to 20% more effective over thecoming ten years. There is wide-ranging cooperation in North Hollandprovince between parties in the watersupply chain. To fulfil the objectives ofcentral government policy, however, itis necessary to expand and intensify thecooperation.

The conference on cooperation inthe North Holland water supply chainrecognised that more opportunities

Joining forces on management and maintenance

Since early 2004, the municipality of Heerhugowaard and the Hollands Noorderkwartierwater board have been cooperating in managing and maintaining sewerage facilities andreturn pumping stations. The cooperation came about because of the specialisedknowledge necessary to run a large and complex sewerage system. The municipalitypossesses only some of this knowledge. The missing know-how (about pumps andprocess control) is available at the water board.

Patience is a key success factor. Other important building blocks for cooperation arewillingness, capability, trust and clearly-defined arrangements. It is the people in theorganisation who cooperate, not the organisations themselves. This calls for a differentmindset and different work skills. The conclusion that may be drawn a few years downthe road is that this cooperation has proved a success and can act as a model for otherparts of the country.

Cooperating successfully in Noordkop

Over the past few years the Hollands Noorderkwartier water board has establishedcooperation with nine municipalities in Noordkop, an area in the north of North Hollandprovince. Fruitful optimisation studies have been completed and a project has beenlaunched to build individual effluent treatment plants in outlying areas. The water boardis responsible for their construction, management and maintenance.

These initiatives triggered fine-tuning of investments and collective operation betweenthe municipalities and water board, not only about the care for the sewerage system butalso the rest of the water chain.

Cooperation has been taking place in Noordkop for five years. This focuses on suchmatters as the joint outsourcing of operational work, the studying and reporting ofdisconnections, the joint establishment of monitoring systems, and the harmonisation ofpolicy with a view to joint action. This approach has produced benefits: external costsand hours worked at the participating organisations are now divided according topredefined arrangements. A steering committee made up of representatives of all tenparties issues work instructions to two working groups that address maintenance,management and the maintenance of knowledge. Dealing substantively with other watertasks has created sufficient challenge and perspective for continuing the cooperation.


exist for cooperation and that there arestill numerous potential partners whocan join in. The same conferenceagreed that the province would initiate follow-up steps to flesh outcooperation in North Holland. Theprovincial government wants tostimulate and facilitate the process bybringing parties together and givingthem an incentive for closer harmonisation.

At the administrative level, theparties will sign a voluntary agreementto give new governmental momentumto cooperation in the North Hollandwater supply chain. This will be donein the interests of delivering betterservice, securing greater environmentalgains and, ultimately, reducing costs forthe public.

Each partner in the water supplychain has its own qualities that can beused perfectly well beyond the bordersof their own organisation. The aim andchallenge for the future is to combinethe essential qualities of water board,drinking water company and municipalities and to make use of these qualities. This is also what centralgovernment expects. ●

EFFICIENCY

Effluent cooperation inRijnland district

Rijnland water board is pursuingcooperation in the effluent system onthe grounds that this approach presentsthe best opportunities for improvingquality with municipalities and forreducing costs. The starting point is thatthe effect of cooperation will beoptimum if all municipalities worktogether on the scale of the collectioncatchment areas for sewage treatmentplants. The cooperation needs to bepermanent, not incidental. Permanent cooperation is the only wayfor the effluent chain to absorb theconsequences of changing legislationand climate change at the lowestpossible cost.

Rijnland wants to set up permanentcooperation through a step-by-stepapproach. The first step is an exploratorystudy. The findings will be laid down inan initial effluent agreement along withagreed arrangements for the jointfollow-up steps. All catchment areas willbe contacted in the coming yearsthrough an approach that consists ofstand-alone programmes.

About the author:Ir Lilian Bernhardi is water policy advisorwith the Province of North Holland, TheNetherlands.Email: [email protected].

FINANCE

The Philippine Government isreshaping its financing model

for water supply and sanitation.From the traditional publicresources, including official development (i.e., donor) assistance (ODA), it is opening new avenues for commercial bankparticipation and ultimately thebroader domestic capital market.One such approach is thePhilippine Water Revolving Fund(PWRF), a new lendingprogramme designed to leverageprivate funds using ODA andgovernment resources.

The PWRF is a work in progress, an initiative of the Philippine government’s Department of Finance,with technical and financial supportfrom the United States Agency forInternational Development (USAID)and the Japan Bank for InternationalCooperation (JBIC). While the fund is

still being established, the ongoingefforts to address policy and institutional barriers to private sectorparticipation in the water financingsector are notable, as are the emergingtrends in private bank interest in waterand sanitation infrastructure financing.This article describes and discusses therelevance of these efforts.

Background on the Philippine waterand finance sectorsWater utility ownership structure, coverageand service levelsThe ownership structure of waterservice providers in the Philippines ishighly fragmented. There are morethan 1500 utilities, 90% of which haveservice connections of less than 5,000.These utilities consists of: two privateconcessionaires operating in MetroManila, roughly 500 water districts(government-owned and controlledcorporations), about 1000 local gov-

The Philippine government has committed to achievingthe Millennium Development Goal targets of cutting byhalf the population without access to safe water andsanitation by 2015. However, the investment required tomeet this target far exceeds what the government canprovide from public resources. This means thatmobilising private financial resources is imperative.Alongside this, the government has issued a newfinancing policy requiring, among other changes, thatcreditworthy water service providers move fromconcessional to market-based lending.

DANIEL MOORE describes the Philippine Water RevolvingFund, an innovative funding mechanism being set up touse limited public resources to leverage private financing,to ensure that financing is on terms and conditionsaffordable to local users and acceptable to privatefinancial institutions, and to establish a fund withrevolving capacity.

The Philippine WaterRevolving Fund:sustainable financingfor water supply andsanitation


FINANCE

ernment unit (LGU)-run systems, anda number of small-scale privateproviders. Eighty percent of thecountry’s population has access towater supply, of which 67% have pipedconnections. Those with access areserved by Metro Manila privateconcessionaires (10%); water districts(23%); LGUs (50%); and small privateproviders (17%).

In terms of sanitation, 74% of thepopulation have basic sanitation butonly 4% have sewerage connections.On-site sanitation systems such asseptic tanks are the most common.Utilities currently allocate minimallevels of investment in wastewatertreatment facilities. However, with therecent passage of the Clean Water Act,it is hoped utilities will be compelledto increase investment in sanitation.

Water utility financing sourcesVirtually all water utilities in thePhilippines rely on some form ofpublic subsidy. Water districts, as agroup, operate efficiently and generatesufficient income to meet operationsand maintenance (O&M) and debtservice costs. While their tariff structures provide for full cost recovery, they do not, however generate sufficient revenue for systemexpansion. Conversely, the majority ofLGU-operated water systems generateinsufficient income to meet evenrecurrent O&M costs, much less thereplacement of capital infrastructure orsystem expansion. As a result, 60-70%of LGU expenditures on water servicesgo toward offsetting O&M losses.

The main financing sources of waterutilities still come from publicresources, either from local government budgets or from ODA re-lent through government financinginstitutions (i.e., local developmentbanks). Apart from the two MetroManila concessionaires and a handful of the small private providers,no utilities are able to access private financing.

Water districts are served mainly bythe Local Water UtilitiesAdministration (LWUA), which offerrates at par with commercial rates, butfixed over a 15-20 year tenure –historically three to four times longerthan what commercial banks offer.Water districts being autonomouscorporations, lending is on a projectfinance basis: i.e., lenders rely onrevenue streams for repayment. In caseof default, LWUA has ‘step in rights,’i.e., to exercise management takeover.LUWA loans also generally have seniorposition over other loans of the waterdistrict, meaning they take precedencein repayment.

LGU-run utilities rely on theirinternal revenue allotment (IRA);

loans from the Municipal DevelopmentFund, a government-administeredfund for LGU projects; or governmentfinancing institutions with ODA re-lending programmes. LGU loansare almost always secured by their IRA funds.

Financial market Private sector financing for waterinfrastructure projects has not developed due to several constraints.Central Bank and Commission onAudit regulations restrict water districts and LGUs from using private financing institutions (PFIs) asdepository banks. Consequently, PFIshave little familiarity with waterutilities. And since PFIs do not havecollateral business, they have nomotivation to develop the market forwater sector lending.

In the case of LGUs, existing financial record keeping procedures donot provide the depth of informationrequired by commercial banks to dodue diligence in assessing accounts.Because the bulk of their capital comes from short term deposits, PFIsgenerally do not lend beyond 7-10years – far short of the loan tenurerequired for the long term capitalrequirement of water projects.

Regarding possible access to privatefunds through a bond market, theindustry’s fragmented ownershipstructure and debt service cap of LGUs(up to 20% of regular income) restrictthe size of the bond offering. Waterutilities are also perceived as high risk;hence, bonds for water projects wouldlikely be less attractive to investors thanother available investments, such astreasury bills. Another constraint is thatinterest earned on bonds is still subjectto 20% withholding tax.

Rationale and objectives of PWRFTwo main drivers prompted thedevelopment of the PWRF: the‘funding gap’ required to achieveMDG targets in water and sanitation,and second, the need for a catalyticmechanism to implement the government’s new financing policy ofshifting creditworthy water utilities tomarket-based lending.

Funding gapThe investment costs of meetingMDG targets far exceed levels historically programmed bygovernment from internal resources

and official development assistance(ODA). Conservative estimates placethe gap at around $3 billion, whileestimated available government andODA resources are just over $1 billion,leaving a ‘funding gap’ of about $2 billion.

New financing policyTight fiscal constraints limit thegovernment’s budget and borrowingcapacity for new ODA loans. Inresponse, the government passedExecutive Order 279, a new financingpolicy to shift financing of credit-worthy water utilities to market-basedlending. Concessional financing (withgovernment and ODA funds as thesource) will be dedicated to the lessthan creditworthy utilities, but tied topolicy and governance reform conditionalities.

The transition to the new financingpolicy, and resultant bridging of thefunding gap, will not happen spontaneously. While PFIs have liquidbalance sheets and are on the look outfor new investment opportunities, theyare also highly risk averse. And to PFIs,water and sanitation infrastructurelending is unfamiliar territory. Thus, forPFI to participate in water sectorfinancing, they have to be assured of anattractive yield and an adequate creditrisk cover. An immediate shift to purecommercial financing is also notaffordable even to the creditworthyutilities. In particular, PFIs offer a termof 7-10 years maturity – far short ofthe economic lives of water andsanitation projects, which are typicallyover 20-25 years. This means that waterutility projects typically cannot supportshort repayment periods for long termcapital investments.

The PWRF supports the newfinancing policy by offering a mechanism to implement the policy in a practicable and affordable manner.By design, the PWRF will provideincentives to both water utilities andPFIs, and thereby catalyse and ease the transition for utilities from thetraditional concessional funding tocommercial lending; ultimately, thiswill support the move from commercial lending to the domesticcapital market.

ObjectivesThe objectives of the PWRF are to uselimited public resources to leverageprivate financing, ensure that financingis on terms and conditions affordableto local users and acceptable to PFIs,and establish a fund with revolving capacity.

PWRF financial structureBoth the objectives and associatedconstraints shaped the structure of

While the PWRF design is crafted to suit theunique conditions and constraints in the

Philippines, its basic underlying structure can bereplicated in other settings


the PWRF. The Philippine government does

not have the resources for a dedicatedfund to collateralise bond issues.Hence, for its immediate operations,the PWRF is structured as a directlending facility, and will rely on itsinternally generated resources to buildup a reserve fund that can be used ascollateral for future bond issue. Once in place, the reserve fundconstitutes the revolving element ofthe Fund.

Also, PFIs have no experiencelending to water utilities. As govern-ment entities, utilities are fraught withpolitical risk. Hence, to encourage PFIparticipation, the PWRF providescredit risk and liquidity enhancementsthat will help mitigate risk.

The PWRF financial structure isillustrated in Figure 1.

The main feature of the PWRF isthe blending of concessional funds andprivate funds. Funds come from twosources: a concessional JBIC loan to agovernment financing institution, theDevelopment Bank of the Philippines(DBP); and second, a lending PFI, mostlikely a commercial bank. The financing ratio (i.e., blend) can rangefrom 75%-25% to 50%-50% DBP vs.PFI loan share. The JBIC loan is be

backed by a sovereign guarantee fromthe Philippine government and beingan ODA loan, it has concessional terms,i.e., an interest rate far lower thanprevailing commercial rates, plus a long(30-year) tenure, inclusive of a 10-year grace period.

By blending concessional and PFIfinancing, the PWRF offers thefollowing benefits.

Affordable pricingThe resulting blended rate will belower than pure commercial financing,providing a critical incentive for bothborrowing utilities and participatingPFIs.

Longer maturityThe loan to end borrowers will have a20-year tenure. To enable this, thestructure includes a liquiditymechanism for the PFI loans: whilethe PFI loan component will have a20-year tenure, the PFI will be giventhe option to pre-terminate (i.e., cashout) the loan in the seventh year (sevenyears is currently the upper limit forcommercial bank loan tenures). TwoPWRF mechanisms are available forthis ‘liquidity risk enhancement’ –through a stand-by credit line from theDevelopment Bank of the Philippines

for water district loans, and from thegovernment’s Municipal DevelopmentFund Office for LGU loans.

Acceptability to PFIsThe PFI loan component will be lentat market terms. Lending decisioncriteria and due diligence will be basedon what the PFIs normally use. Inshort, PFIs will not be asked to compromise any of their terms toparticipate in the PWRF, and thePWRF will cater to creditworthywater service providers. Also, for LGU-run utilities, the loan’s security packagefeatures intercept of the IRA in case ofdefault and the establishment of a debtservice reserve fund.

GuaranteeAnother important credit enhance-ment for PFIs is a credit risk guaranteefor to 85% of the PFI loan. This guarantee is provided by a privatedomestic guarantee corporation, theLGU Guarantee Corporation(LGUGC), and backed up by a co-guarantee from USAID for up to 50%of LGUGC’s exposure. As a result, PFI’sexposure is limited to 15%.

Revolving capacityTo build the capital of the PWRF, DBP

FINANCE

Figure 1. Financial structure of the Philippine Water Revolving Fund

Acronyms:

DBP - Development Bank of the Philippines LGUGC - LGU Government Corporations

GRP - Government of the Republic of the Philippines MDFO - Municipal Development Fund Office

JBIC - Japan Bank for International Cooperation PFI - Private Financing Institutions

LGU - Local Government Unit USAID-DCA - United States Agency for International Development - Development Credit Authority


will deposit principal repaymentsduring the 10-year grace period of theJBIC loan into a trust account. Thesereflows can be re-lent or invested inlow-risk government securities, andplaced in one of two PWRF Funds.The first, a Reserve Fund, will set asidefunds needed for repayment of theJBIC loan, with the remaining fundsplaced in the Revolving Fund. Oncesufficiently capitalised, the RevolvingFund will be used for refinancing PFIloans, to leverage new loans, or used ascollateral for bond issuances.

Challenges and risksAs the fund moves from establishmenttoward operations, the followingchallenges and risks being addressed.

Competition from concessional fundingsourcesNotwithstanding the issuance of the financing policy, existing creditprogrammes still offer concessionalterms to all utilities, regardless ofcreditworthiness status. The PWRF,which will offer higher rates intendedto catalyze the transition to the newfinancing policy, can not and shouldnot compete with other, purely concessional, sources. It is critical thatgovernment rigorously enforce thenew policy of using concessionallending only for the less than creditworthy utilities. This is the mostcritical risk to the viability of thePWRF. USAID is currently supportingthe Philippine government’s efforts toprepare and enforce guidelines torationalise credit programmes for the sector.

Deal flow riskThis risk is caused by lack of preparedprojects and/or low demand fromwater utilities. JBIC plans to provide atechnical assistance loan facility toaccompany the PWRF and providefunding for project preparation anddesign, as well as for systems andmanagement improvements critical tothe viability of projects. In the case oflow demand from water utilities, thisrisk will be addressed through anintensive marketing strategy to promote the value proposition of thePWRF, and advocacy with industryassociations and local governmentleagues to prioritize investments in thesector, and among sector constituenciesto pressure utilities to provide better services.

Poor participation by private financinginstitutionsPFIs look for profit maximising invest-ments with manageable risks. PFIinvolvement in the PWRF’s conceptu-alisation has helped the design teamcome up with incentives attractive to

PFIs. However, until the PWRF isactually up and running, the level ofPFI participation will remain anunknown. The Philippine governmentis working to provide an additionalincentive, by including PWRF loansamong its eligible ‘developmentprojects’ scheme. Current banking lawsrequire banks to set aside at least 25% oftheir loan portfolio for developmentprojects (e.g., agriculture, socialisedhousing, etc.). Banks are penalised for non-compliance, and therefore eager tolend to such projects – should water beincluded, PFIs will have an additionalincentive to participate.

Conclusion and way forwardThe PWRF offers several benefits: itmobilises new resources by openingcommercial sources of credit previouslyuntapped by the sector; because of itsrevolving capacity, it creates a sustainable financing mechanism thatcan continue to operate beyond theinitial ODA loan; it is the most practicable way to catalyse the transition of water utilities fromconcessional to market-based lending;and credit ratings and appraisal guidelines (to be supported separatelyas part of the reform process) will helpfoster hard credit discipline amongutilities that will consequently lead tobetter utility management and therefore services.

While the PWRF design is craftedto suit the unique conditions andconstraints in the Philippines, its basicunderlying structure can be replicatedin other settings – indeed, its designdrew inspiration from pooled financingschemes such as the state revolvingfunds (SRFs) in the US and recently inIndia. It uses easily understood andcommonly used financial tools andlegal architecture. It expands theoptions for entry of private financinginto water and sanitation infrastructurefinancing, especially for utilities not yetready to move to purely commerciallending. Finally, it is acceptable to PFIs,since it does not compromise theirlending terms.

Finally, and looking further into thefuture, while the PWRF is initiallydesigned as a lending facility funded byJBIC loans, some favourable financialmarket trends can be noted; theseinclude growing PFI interest in funding water supply projects, the shiftof PFI preference from short- tomedium- to long-term debt instruments, and the initiatives byplayers to establish better infrastructurefor the bond market in the Philippines(see box). These trends bode well forthe eventual transition of PWRF fromdirect credit to pooled bond financing,and a much larger market for private funds. ●

FINANCE

Positive trends forPhilippines water sectorbond market development

Early PFI interest in some waterprojects Some PFIs are now actively in discus-sion with some water districts for projectfinancing for as long as 10 years, a trendthat was unthinkable just a couple ofyears ago when PFIs tended to shy awayfrom water infrastructure projects. Thisis partly due to the declining overall yieldon government securities, a traditionalhaven for excess liquidity for banks.With larger water districts having alreadyestablished years of profitable opera-tion, water service providers could proveto be an attractive market for PFIs.

PFIs going to bonds with mediumand long tenuresIn recent years, the maturity profile ofthe domestic bond market has changedsubstantially. In the past, the local bondmarket was dominated by short termsecurities with maturities of one year orless. However, the longer tenureinstruments are gaining in gainedpopularity. In 2006, medium termsecurities with 2-10 year terms account-ed for roughly 70% of the market. Thisis positive for the future of PWRF, whichwill rely on longer tenure bond issues tofund new water projects.

Bond market infrastructures beinglaid outThe Bankers Association of thePhilippines launched an electronicFixed Income Exchange in 2005. Theexchange provides an electronicplatform for trading, clearing and settlement, and depository and custodi-anship of fixed-income securities and itsderivatives. The exchange will likely leadto more secondary market trading andmore corporate bond issuances. As thismarket infrastructure continues todevelop, it will increase the options forthe PWRF to tap banks and mutualfunds for raising lending capital.

About the author:Daniel Moore is Chief of the United StatesAgency for International Development(USAID) Office of Energy andEnvironment in Manila, the Philippines.E: [email protected]


A question of cost: UK guidance on cost forecasting

PROCUREMENT

Recent research completed byindustry association British

Water identified a number ofissues raised by its members asimportant to the industry. Workinggroups were established to investigate these issues and provideguidance, with representationfrom water companies, contrac-tors, suppliers and consultants atvarious levels of responsibility.

The objective of each group is toanalyse the issues and establish what isbest practice, to provide guidance, andto deliver a tangible output.

Cost forecasting and reporting wasidentified as a real area of concern forthe industry. The quality and reliabilityof cost forecasting and reporting hasimplications for all organisationsthroughout the supply chain of theindustry, from project level through to water company boards and the regulator.

The challengeCost forecasting and reporting was seenas a significant problem area, with clientwater companies consistently identify-ing a need for improved performance.The water company efficiency targetsin the current five-year regulatoryperiod, which runs from 1 April 2005to 30 March 2010, are more challeng-ing than in previous regulatory periods.The targets will become even tougherin the next period, which starts on 1April 2010. Commercial processes andprocedures need to be more reliable,accurate and timely if we are to achieveand outperform the regulatory targets.

The systems and processes used for

cost forecasting and reporting in theindustry have been developed byindividual companies, largely inisolation and in the absence of anycommon best-practice code or protocol. Procurement methodologiesin the water industry have led to closer,more collaborative ways of workingover longer periods of time. Watercompanies have tendered for newframework agreements with theirsuppliers to coincide with the start of the new regulatory period. Theintention of water companies is toselect the most appropriate partners,which can best deliver the regulatorytargets for their capital investment andmaintenance programmes.

Many water companies are usingperformance measures such as keyperformance indicators, (KPIs) tomeasure the performance of theirpartners and encourage knowledge

sharing and collaboration. Indeed,some water companies are linkingperformance with workload through aperformance partnering arrangement,in which good performance is rewarded with additional work andpoor performance with less, andultimately the loss of any further work

Representatives from across the UK sector have collaborated to preparea guide to improve cost forecasting. STEVE WHALLEY summarises the mainconclusions and explains how it will contribute to greater efficiency in the sector.

if the poor performance continues.In order to realise the maximum

benefit from these new arrangements,it has been recognised that a consider-able level of trust and cooperation isneeded between the water companiesand their supply chain. The resultingintroduction of integrated teams andthe allocation of responsibility to the party best placed to carry it, hashighlighted the need for accurate,timely and efficient communication at all levels.

This is apparent in the area of costforecasting and reporting – the ‘Guideto cost forecasting and reporting’ seeksto address the need for a set of clearbest practice guidelines in order toremove the uncertainty throughoutthe supply chain.

The methodologyThe investigation to prepare the guide began with a study, using a questionnaire to capture the issues andproblems that both water companiesand contractors experience with costforecasting and reporting. This questionnaire was issued to the watercompanies and their contractors, andreturned to management consultancyEC Harris. The findings were reviewed and the issues identified and confirmed.

The working group then sought toidentify proposals to improve thecurrent situation. This was achievedthrough a series of workshops, and thedraft proposals were circulated to thewider British Water membership forcomment, including economic regulator Ofwat. The comments werethen included in the final documentwhere appropriate.

The solutionOur solution, the ‘Guide to costforecasting and reporting’, waslaunched for the industry inNovember 2005. The guide is dividedinto five sections, whose main conclusions are outlined below.

ProcessesTime spent developing appropriateand adequate processes at the outsetwill be rewarded by efficient, accurateand timely reporting throughout the

The guidelines enable all participants in the cost reporting and forecasting regime tounderstand the client, stakeholder and

regulatory requirements, as well as enabling the supply chain to understand why it is being

asked to provide specific data.


PROCUREMENT

project. Planning the cost forecastingand reporting (CF&R) system isessential. All supporting processes such as risk management, schedulemanagement and change managementneed to support this system. The datarequirements, and how they link to theCF&R system, should be clearlyunderstood. This is a real area ofuncertainty if many of the processeshave been drafted in isolation.

PeopleAn integrated team using effectivecommunication techniques willproduce robust forecasts and valuabledata that will support the overallmanagement of a project. It is necessaryto build an extended team, with theright people in the right roles. A projectteam will have to work with peoplefrom other teams and from otherstakeholders if it is to achieve success,and it is important to recognise thatother people from outside the teammay hold the necessary informationrequired to achieve success. It is important to identify the key players in the CF&R system and give themownership of the results, involving theright people at the right time andcreating the right culture to enableteam working, visibility and communication to work.

Client requirementsUnderstanding and satisfying theclient’s requirements is paramount tothe success of the project. The outputsof the cost forecasting and reportingsystem determine the inputs, thoughonly too often inputs are designed firstwithout proper consideration of whatthe business requires from its CF&Rsystem. Client requirements shoulddefine the work that needs to be done,and responsible people and/or organisations should be allocated to deliver it.

For example, there is a need tomanage the client’s internal costs aswell as external construction costs, andfor accurate and timely data to facilitateproject management decision-making.Other requirements include the needfor early warning of change, and forcollecting data for the regulator. Thebusiness must also clearly understand allof its supply chain and stakeholders,and their expectations of the CF&Rsystem. The more onerous the client’srequirements become, the more costlyit becomes to provide the information.The client must be expected to pay forthe information it requires.

SystemsRobust and capable systems are necessary to enable the processes tooperate effectively and efficiently, andlinks should be forged between

systems. It is necessary to review whatis required to populate the clientreporting system and to seek electronicsolutions that provide only the data that is really necessary for your work,allowing the supporting details toremain in the feeder systems. It isimportant to remember that the focusof a CF&R system is providing analysisand conclusions – not data collectionand entry. The only value that information has is the story it tells.

Performance measuresKPIs are vital to monitor and measurethe effectiveness and accuracy ofsystems and processes alongside theproject teams’ performance, in order todrive continuous improvement. Thereshould be a mix of hard and softmeasures, to be sure that the CF&Rprocess is working, that stakeholderobjectives are being met and that it isliving up to expectations rather thanjust being an administrative burden.

People’s perception of performancehas a real impact on the overall success of the project. KPIs should becommunicated and agreed with all ofthe stakeholders whose performance is to be managed. We need to knowhow they are linked to performanceimprovement: are they really influencing performance? KPIs shouldbe tied into providing stakeholderswith incentives, and lead to more work, but less work decisions.

In summary, the guide:• defines what is required to establish

an effective cost forecasting and reporting system

• describes what information is necessary and why it is required to meet the client’s reporting requirements

• defines how this can be achieved through the implementation of people, processes and systems

• recommends that organisations measure the performance of their cost forecasting and reporting processes through the use of KPI’s.

The guide is directed at managementlevel, for adoption throughout thesupply chain. There is a small amountof jargon, but where used, it has beendefined. The guide is not prescriptiveand does not promote one systemabove another. It provides specificguidance on the issues, and enables allorganisations to review their currentcost reporting systems.

The benefitsThe guidelines enables all participantsin the cost reporting and forecastingregime to understand the client,stakeholder and regulatory requirements, as well as enabling the

About the author:Steve Whalley is with EC Harris and wasleader of the guide drafting team.

supply chain to understand why it isbeing asked to provide specific data.

Teamworking is essential if projectteams are to produce an effective costforecasting and reporting system. Thisencourages more collaborative ways ofworking and greater integration,which promotes commonality insystems and methodologies. It alsomeans that risks are identified andunderstood, so uncertainty is managedout of the process.

The guide, therefore, facilitates theadoption of best practice through thesupply chain, leading to increasedefficiency and improved performance.Good project control leads to goodproject management, which is nevermore evident than in cost forecastingand reporting.

What next?The aim of the new guide is to increaseawareness of cost forecasting andreporting throughout the supply chain. Use of the guide facilitates allorganisations to thoroughly review and challenge their cost forecasting and reporting system. It will identify, as well as promote, best practice codeand protocol.

Paul Mullord, the UK director ofBritish Water, commented: ‘BritishWater members identify issues andareas of concern in the water industry.Focused working groups have beenestablished to investigate issues, answerquestions and provide guidance. Thisguide follows on from our Guide tosustainable procurement, and will bethe first of a series that will includepartnering, framework agreements and KPIs.’

As lead sponsors, EC Harris isworking with British Water to roll out a series of presentations andworkshops to the water companies.Workshops have been held withSevern Trent Water, South West Water,Scottish Water and Northern IrelandWater Services. Presentations havebeen given to various water industryorganisations, including Ofwat andWater UK. ●

AcknowledgementOther sponsors of the guide include Purac,Franklin & Andrews, Saint-GobainPipelines, Costain, SEAMS and UnitedUtilities. Because of sponsorship, the guide isavailable for free from the British Waterwebsite, on www.britishwater.co.uk and theEC Harris website on www.echarris.com.


CUSTOMER SERVICES

Why water utility customers don’tpay their bills promptly

Field studies carried out inmany developing countries

have shown that cost recovery is akey prerequisite for sustainablewater service provision1, 2. Thechief means of recovering thecosts of service provision isthrough user payments for theservices provided. As a result, a key determinant of overall costrecovery efficiency is the serviceprovider’s ability to recover payment, within a reasonabletimeframe, for all the bills sent to customers.

However, many water utilities,particularly in Africa, are unable torecover even 50% of their total billedamounts in any billing cycle.3

Customers struggle to pay their billsand eventually get disconnected,leading to the accumulation of hugeunpaid bills.

It also appears that this problem is not unique to less-developed countries. According to a study4

commissioned by Ofwat (the economic regulator for the waterindustry in England and Wales), thelevels of arrears, the amount of revenuewritten off and the numbers of customers in water debt have continued to rise since 1998-99 (thelast full year in which disconnection ofdomestic water supplies was permittedfor non-payment of water bills).

The report estimates that the totaldomestic revenue outstanding for up to48 months, for the period 2002 to2003, was £781 million ($1555 million), an increase of £115 million(17%, $229 million) since 1998-99.4

Recent figures from Ofwat reveal thaton average UK water companies arechasing close to £763 million ($1519million) per year in outstandingrevenue for up to 48 months, of whichclose to £100 million ($199 million) iseventually written off as bad debt.

Delayed bill payments and hugearrears can greatly undermine a utility’scapacity to deliver water services. Thisis particularly true for small waterutilities in developing countries thatdepend on a constant revenue stream

from their customers to survive. If autility is not able to collect the revenuefrom all the bills that are sent out intime, cash flow problems set in whichin turn impacts on the ability to coveroperating expenses and extend service coverage.

Such a situation may result in lowservice coverage and potentially poorcustomer service, leading to customerdissatisfaction, which may breed morenon-payers and trigger a cycle of poorperformance. Thus minimising theamount of bad debt and increasing therate of revenue collection is critical forsustainable service provision.

In order to respond to problemsinvolving delayed or irregular payments, utility managers need todetermine precisely why customersmight not be paying their water bills intime. Yet little empirical research exists in the literature on the factorsinfluencing customer decisions whenit comes to this issue.

As part of a wider research projecton bill payment behaviour in urbanwater utilities in Uganda (Box 1), weexamined customer attitudes towardspaying water bills regularly andpromptly and explored what theyperceived to be the facilitating factors

What makes customers reluctant to pay their bills? JOSSES MUGABI, SAM

KAYAGA and IAN SMOUT look at the lessons for utility managers from importantevidence gained in developing country studies.

Box 1: Study area and methods

Study areaThis article is based on a study undertaken in five small urban centres (towns) in Uganda, with populations in the range of 5000 to 25000 inhabitants. The centres included Nkokonjeru, Kamuli, Kayunga, Ibanda and Rakai.The study towns were randomly selected from a sampling framework of 32 towns with more than 10% of theircustomer accounts inactive in the 2004 to 2005 reporting period.

Water services in Uganda’s small urban centres are managed by private operators under managementcontracts with the local government water authority. Services in larger urban centres are provided by the NationalWater and Sewerage Corporation (NWSC), the national utility. The sampling framework did not include theselarger towns served by NWSC.

MethodsA combination of face-to-face interviews and focus group discussions was used. Between November andDecember 2005, 10 interviews were conducted with utility managers in each of the towns. The interview withmanagers was designed to obtain, among other things, basic information about customer accounts, tariffstructures and revenue levels, billing and collection procedures, as well as their perceptions of the reasons whycustomers fail to pay water bills regularly and promptly.

All five water utilities require customers to pay their water bills within 15 days of receiving them (the bills aredistributed between the 29th and 31st of each month). Focus group discussions with customers were basedaround the following questions:• what do you believe are the advantages and disadvantages of paying your water bills within 15 days of

receiving the bill?• what factors or circumstances would enable you to pay your water bills at the utility office within 15 days of

receiving the bill?• what factors or circumstances would make it difficult or impossible for you to pay your water bills at the utility

office within 15 days of receiving the bill?• are there any other issues that come to mind when you think about paying your water bills within 15 days of

receiving the bill?

As is customary with qualitative research, analysis of the resulting information involved identifying importantfactors, themes and relationships and making sense of emerging meanings. To aid this process, a procedure wasadopted in which emerging issues based on the above discussion questions were each given a count equal to thenumber of participants in the group. If a particular issue did not emerge from a group, it was given a count of zerofor that group. The counts for each theme were summed across all the five groups to generate an aggregatecount, which was used to rank the emerging issues and give an indication of the most commonly-held perceptions.

CUSTOMER SERVICES

and barriers to engaging in that behaviour. We also interviewed waterutility managers in the study areas tocompare their understanding of thereasons for irregular and delayedpayments and that of their customers.

This article draws on this exploratory research to shed light onthe motivations of water utility customers when it comes to payingpromptly for water. Based on theseinsights, we identify possible ways inwhich urban water utilities couldencourage prompt and regular paymentof water bills.

Paying bills promptly: what customers perceive as the benefitsand sacrificesAcross all the five study towns, customers generally believed promptpayment behaviour has a lot morebenefits than sacrifices (Box 2). Theygenerally consider the water bill to bean essential bill that has to be paid intime, although many admitted todeliberately delaying payments, especially when the service is unreliable: ‘It is very frustrating to payin time and yet the water supplycontinues to be on and off. I wouldrather keep my money to pay the watervendors.’ [Nkokonjeru focus group]

Box 2 shows, in rank order, whatmost customers believe to be thebenefits and disadvantages of payingwater bills in time. The primary benefitof paying promptly seems to be theassurance of uninterrupted services, as it is the only way to avoid disconnection. This is not entirelysurprising, given the vigilance of theutilities in disconnecting non-payingcustomers.

However, there are also indirectbenefits that emerged across all groups.Many customers believed that whenthey paid their water bills promptly the utility would be in position tocover operational costs, and mostimportantly, utility staff would have thenecessary facilities, equipment andmotivation to serve them better. Thisfinding demonstrates customer

awareness of the importance of payingfor water in time.

Paying bills promptly: what customersperceive as the barriers and facilitatorsIn addition to assessing attitudestowards paying water bills promptly, we also inquired into the factors orcircumstances that might facilitate ormake it difficult for customers toengage in this behaviour. Boxes 3 and 4show (in rank order) what mostcustomers believe to be the mainfacilitators and barriers respectively.

With the exception of the factorsthat relate to tariffs and whether or

not a customer has regular paidemployment, the other top five barriersand facilitating factors that emergedrelate to service delivery issues that areentirely within the control of the water utility.

However, when asked what theyconsidered to be the main factorspreventing customers from paying theirwater bills promptly, the responses ofutility managers differed significantlyfrom what the customers perceived asthe main barriers (see Box 5). Inparticular, all 10 managers interviewedpointed to low incomes as the mainbarrier to paying water bills promptly,whereas their customers mainlyidentified service delivery issues such asreliability, poor customer service, poorbilling systems and delivery, and faulty meters.

In conclusion, what motivates acustomer to settle an outstanding waterbill seems to relate mainly to the overallquality of the service provided. This hasimplications for water utilities and theirregulators in terms of policy, operationsand incentive mechanisms for

promoting prompt and regular payment of water bills. Based on thequalitative insights obtained in thisstudy, the next section briefly looks at managerial actions that can be implemented in the short to mediumterm to encourage prompt paymentsin the present context.

Encouraging prompt payments:lessons for water utility managersThe first step in seeking to respond toproblems involving irregular or delayedpayments is to determine why customers might not pay their bills. We attempted to gain insight intosome of the reasons with a view ofmaking some recommendationsapplicable to urban water services inUganda and elsewhere. Obviously, it isdifficult to make sound proposals foraction given the myriad of factors thatemerged. (A key objective of ourongoing research on bill paymentbehaviour is to determine, using asuitable theoretical framework, thefactors that significantly contribute tovariations in prompt bill paymentbehaviour.) However, by isolatingthose issues that are within the fullcontrol of a water utility, it is possibleto identify strategies that can beimplemented at the micro level topromote prompt and regular paymentof water bills by customers.

First, in the current context, ensuring reliability of supply – that is,consistency and adequacy of supplyaccording to the promised service level– seems to be the single most impor-tant action that managers can take topromote prompt bill payment. In thelong term, this may require additionalinvestment to increase productionlevels in areas such as Ibanda andNkokonjeru, where there is a substantial supply deficit.

Second, managers need to work on improving customer relationsthrough appropriate and timelycommunications in the event ofservice failure, providing a quickresponse to customer complaints,payment reminder notices or visits, and

Box 2: Abridged list of perceived benefits / disadvantages of paying water bills promptly

Perceived benefits:• an uninterrupted supply of water to my house (no disconnection)• staff at the utility will have the necessary facilities, equipment and motivation to serve me better• the utility will be able to meet all its operation and maintenance targets so I can continue to get a reliable

water supply• I will avoid accumulating large debts• it gives me peace of mind

Perceived disadvantages:• there is an unreliable service after paying bills promptly• I will be foregoing other household needs to make water payment the top priority• it is difficult to remain consistent

Box 3: Facilitating factors / circumstances

• reduction in tariffs• reliability of supply• bills delivered on time• having a regular paying job• threat of disconnection• selling water to neighbours• reminder visits / radio announcements• regular promotions / discounts to promote prompt payments• quick responses to repair requests• good water quality• good customer care• flexibility and choice in payment options

By isolating those issues that are within the full control of a water utility, it is possible

to identify strategies that can be implemented to promote prompt and regular payment

of water bills by customers.



CUSTOMER SERVICES

generally improving the quality ofservice relating to the interactionprocess between customers and theorganisational elements such as staffand the service environment.

Third, there is a need to improvebilling systems and procedures, ensuring the minimum errors inbilling, timely delivery of bills tocustomers and providing flexibility andchoice in payment options. In linewith this, utilities need to segmentcustomers into categories based onhow quickly they react to water bills.This would enable managers to design targeted strategies for debtmanagement and recovery.

For instance, those considered to behigh risk would be flagged for personalfollow-up immediately a payment ismissed; those deemed low-risk would be sent a reminder letter andvulnerable customers, who are struggling to pay, could be offeredadditional help and advice. Adoptingsuch a proactive customer-centricstrategy has potential not only totransform revenue collection but alsoto increase customer satisfaction. Smallurban water utilities need to takeadvantage of their relatively smallnumber of customers by adopting acustomised approach to debt management and recovery.

Fourth, incentive mechanisms suchas discounts or vouchers for promptand regular payment could beexplored, perhaps for a limited periodof time. These could be designed to

incentivise customers who have found it difficult to pay their waterbills, rather than rewarding those whocan afford to pay.

Last, although the disconnectionstrategy seems to be working well inthe current context as a facilitator forprompt payment, it appears that insome instances it is being implementedindiscriminately without due consideration to the particular circumstances of customers.

For instance, it would be particularlyinappropriate to disconnect customerswho are facing short-term paymentdifficulties. Moreover, disconnection ofservice in these circumstances does notprotect the utility against any futureloss of revenue. Instead, it has thepotential to affect customer relationsand hence satisfaction levels, which

might be damaging in the long term.The key message is that utility managers should adopt a customisedapproach when dealing with customersin arrears.

ConclusionsThis article has provided some insightinto the motivations of water utilitycustomers when it comes to payingtheir water bills promptly. Based on anexploratory study in five small urbanutilities in Uganda, we found evidenceof a positive attitude towards regularand prompt paying of water billsamong utility customers. However,what motivates a customer to settle anoutstanding water bill seems to relatemainly to the overall quality of theservice provided by the utility.

Contrary to the usual explanationthat low-income levels are responsiblefor the low cost recovery levels indeveloping countries, we foundevidence that supports the view that poor service quality is a keyconsideration for customer decision-making when it comes to paying waterbills regularly and promptly. This hasimplications for small urban waterutilities and their regulators in Ugandaand elsewhere.

In particular, these findings suggestthat cost recovery strategies that relyheavily on revenues from customers areunlikely to succeed if aspects of theservice itself (such as service quality,reliability, operational costs/tariffs andso on) are not addressed appropriatelyat both the micro and macro levels.

At the macro level, the key lesson for policy makers in the sector is toappreciate that cost recovery throughcustomer payments is affected by amultitude of factors and differentaspects of service design and operation,which are rarely fully acknowledgedwhen implementing urban water projects.

When cost recovery is viewed as theneed to collect enough revenue fromusers to cover the costs of the installedsystems, the challenge of getting peopleto pay becomes apparent. Althoughthere may be strategies that can beadopted at the operational level topromote payment (such as thosediscussed above), there are also long-term policy issues that need to beaddressed, particularly those relating to tariff structures, technology andservice level choices.

Getting customers to cover the cost of services provided is a well-established approach to improvingcost recovery. But utilities and theirregulators need to realise that changingthe cost or the characteristics of thoseservices can also contribute to improving cost recovery. ●

References1Evans P. Paying the piper: an overview of community financing of water andsanitation: Occasional Paper 18. TheHague: IRC International Water andSanitation Centre; 1992.

2Katko T. Paying for water in developingcountries. Tampere: Tampere University ofTechnology; 1991.

3Kayaga S, Franceys R, Sansom K. Billpayment behaviour in urban water services:empirical data from Uganda. Journal ofWater Supply: Research and Technology-AQUA 2004; 53(2004):339-349.

4Accent Marketing and Research. Paying forwater: customer research. London: Reportprepared for UK WaterVoice and Ofwat;2003.

About the authors:Josses Mugabi is a research scholar at the Water, Engineering and Development Centre(WEDC); Sam Kayaga is an assistant programme manager and Ian Smout is a director atWEDC.

This article is based on the preliminary results of a wider research on the determinants ofutility water customer decisions to pay water bills promptly. For further details contact:[email protected].

Box 4: Barriers to paying bills promptly

• poor customer care/complaints not addressed in time• incorrect bills and mistakes in reading meters• unreliable service• faulty meters• high water tariffs• lack of money• irregular income (especially during the dry season)• unexpected circumstances such as death or illness• poor water quality• failure to understand the bill• presence of alternative water sources• misappropriation of funds by authorities• ignorance about government water policy

Box 5: Utility manager’s perceptions

What do you consider to be the main factors preventing customersin your service area from paying their bills promptly?• low incomes• customers are not used to paying for water• political interference• intermittent supply • low production• water quality problems• high water consumption leading to high bills

Small urban water utilities need to takeadvantage of their relatively small number

of customers by adopting a customised approach to debt management and recovery.


COMPETITION

likely to evolve. In doing this, sixpossible scenarios for the water supplyand sanitation sectors are identified:• scenario 1: delegation of contracts

and strong regulation• scenario 2: delegation of contracts

and extreme competition• scenario 3: outsourcing• scenario 4: regulated monopoly• scenario 5: direct public management• scenario 6: community management

In the light of these six scenarios, it canbe seen that only two correspond tothe models identified for networkindustries. The first, delegated contractsand strong regulation, recognises the need for regulation despite competition. It clearly corresponds tothe second model presented above. The second, delegation of contractswith extreme competition, follows themodel of increased competition.

Both of these scenarios are influenced by a key driving force, that is, the desire to introduce morecompetition. In fact, this reveals themain assumption in network industryliterature – competition, at least in thelong-term, is always possible for everysector and only technical barriers slowdown this process. This may be provedto be wrong, at least for water supplyand sanitation. Indeed, even these twoscenarios do not consider the idea of third party access as it has clear limitsin the water supply sector. None ofthem actually corresponds to thederegulation or re-regulation modelsdescribed above.

The four remaining scenarios followdifferent paths. Their main features arenot necessarily based on competitionbut a combination (or not) of theperceived specific issues of waterservice provision compared to other network industries and/or themodernisation of management methods. By modernisation of management methods, we meanincreasing the professionalism andautonomy of the various servicesprovided by water and sanitationoperators, as well as improvingaccountability and defining clearresponsibilities within the organisational setup.

The third scenario, outsourcing, isprobably the best illustration of thisprocess, at least in terms of increasingprofessionalism and defining responsibilities. All the services areclearly defined and separated in orderto get the benefit of using firms and/orindividuals that specialise in theseareas. In this scenario, it is possible tohave a strong combination of privateand public actors, each contributingaccording to their specific expertise.

In the fourth scenario, the regulatedmonopoly, one of the main features is

Understanding the majorchallenges relating to

private sector participation andliberalisation of water servicesprovision and comparing thewater supply and sanitation sectors with other network industries is crucial at a time whenthe Directorates General of theEuropean Commission are discussing possible extension ofinternal market rules to the watersector, following the same modelas other network industries.

The European Union is responsiblefor ensuring that competition in theEuropean internal market is notdistorted. Underlying this is its aim ofcreating an internal European marketin terms of goods, services and peopleas defined in the Treaty of Rome andsubsequent treaties. Until well into the 1980s, the European economicintegration process largely ignored thenetwork industries. However, neweconomic theories and experiences incountries across the world led theCommission to reconsider its position,and it decided to open up competitionin these specific sectors.

This strategy was based on the idea that by separating the network infrastructure (transmission lines for electricity, water pipes for the watersupply industry, or cables for tele-communications) from the servicesprovided over this infrastructure, itwould be possible to introduce new forms of competition. TheCommission is pursuing a pro-competitive policy, which wouldinvolve enabling third party access tonetworks, a process that has had aconsiderable impact on the management of network industries.

Two different models describe andforecast the evolution of networkindustries. The first is based on theassumption that network industries areno different to any other industry, andconsequently the final outcome oftheir liberalisation is that they will begoverned by general competition rules

(that is, not by sector regulation). Fromthis perspective, it has been suggestedthat the opening up of networkindustries to competition has paved theway for potentially replacing thetraditional regulatory paradigm with

competition policy. Some authorsdefend the need to introduce morecompetition in the water supply andsanitation sector, reducing regulationboth in scale and scope (for instanceRobinson, 1997: 167).

The second model, the ‘re-regulation’ approach, is based on the assumption that the gradualintroduction of competition will notmake it possible to reduce the intensityof regulatory control. According to thisview, regulation is not a transitionalperiod but an end state in itself.Neither of these approaches under-considers the specifics of differentnetwork industries but both of thembelieve that the liberalisation processwill lead to a common outcome.

Models of network industry evolutionIn this context, water supply andsanitation services have usually beendepicted as one of the last remainingnetworks to be completely transformed and, as such, they are seenas being in a preliminary stage of thisevolution. In the light of the findings of a new book from IWA Publishing(see box), it is possible to ask whetherthe water supply and sanitation sectoris likely to evolve towards one of these models.

This book, which is the result of alarge European research project, aimsto answer all these questions and lookat the extent to which the sector is

Water and liberalisation ofservices: European scenariosEuropean Union policy is directed at increasing competition in industries with network infrastructure. A recent assessment looked at the challenges of implementing this policy in the water sector. JEREMY ALLOUCHE describes the findings, which are the subject of a newbook from IWA Publishing.

Two different models describe and forecast theevolution of network industries... In the light ofthe findings, it is possible to ask whether thewater supply and sanitation sector is likely to

evolve towards one of these models.


COMPETITION

increasing the autonomy of the operators, which is directly related tothe modernisation of managementmethods. In the fifth scenario, directpublic management, new measuressuch as separating the accountingsystem also contribute to this so-calledmodernisation of management methods. Finally, in the last scenario,the community management scenario,modernisation of management methods is triggered by the introduction of decentralised tech-nologies, leading to a greater degree ofresponsibility for the different users.

According to the scenarios identified in the book, there are manyindicators that the water supply andsanitation sector may not follow thesame path as other network industries,for which there are three reasons. The first one relates to the limits ofintroducing competition in thissector. Compared to other networkindustries, the main form of competi-tion is competition for the market (asopposed to competition within themarket). There is a tendency to opt forshorter term contracts to introducemore competition, but the limits ofthis form of competition are clear-cut.

Another possible form of competition in water supply andsanitation is comparative competition.Germany, Italy, The Netherlands andthe UK have already introduced thistype of competition. The logic behindit is that competition by comparison is useful in stimulating the under-performing companies to emulatethose that are performing better.However, some specialists emphasisethat such a system is not very successfulas it is very difficult to standardisesufficiently to make cross-companycomparison useful.

In addition, many specialists aresceptical about the real possibilities ofintroducing competition in themarket. England and Wales haveintroduced compulsory third-partyaccess to the water networks for the supply of industrial customersfollowing the adoption of the WaterAct 2003. In this Act, several methodsare set out in order to increase competition in water supply andsanitation management, namely insetappointments, cross-borders supplies,connection agreements and commoncarriage. However, the first resultsseem to indicate that the possibilitiesand dynamics of this type of competition are restricted, at least for the moment.

Overall, the scope for competitionin this sector is very limited comparedto other sectors. The second reasonwhy the water and sanitation sectormay not follow the same route as othernetwork industries is the lack of any

major technological innovationsaltering the structure of the industry, ashas been the case in other sectors. Thisis linked to the scope of competition.With major innovations, the currentsituation in the water sector couldradically change. For example, if filterscould allow people to make goodquality drinking water from lowerquality drinking water coming fromthe grid at a low cost, it would then beeconomically viable to build a nationalgrid, shared by a number of drinkingwater companies which could sell thefilters and provide other services forcustomers at competitive prices.

Finally, the main network

industry theories also considerablyunderestimate the specific perceptionpeople have of water compared to theother network services. In the minds ofmany peoples water is (still) somethingvery special, and as such reflects anancestral view of our civilisation’srelationship with one of its most vitalresources: water, it is said, is an essentialgood, something that humans andcultures rely on for their existence anddevelopment, not to mention the factthat water also has religious meaning.In short, water, in overall perception,remains public and special, somethingthat cannot be commodified, commercialised, or traded. ●

New book: Water and liberalisation: European water scenariosEstablishing an understanding of the general evolution of the water supply and sanitation sectors in Europe is thepurpose of a new book from IWA Publishing called Water and liberalisation: European water scenarios. Inparticular, it aims at analysing the major challenges pertaining to private sector participation and liberalisation,and to compare the sectors with other network industries.

The book is in two main parts: the first one describing the water supply and sanitation sectors today in Europe;and the second one focusing on possible scenarios for the evolution of the water sector, and their main implications in social, economic, and environmental terms. The book concludes with the main theoreticalcontribution of our project in the field of water management. More precisely, part one provides a clear picture ofthe main dynamics of the water supply and sanitation sectors in Europe, and it is divided into four chapters.

Chapter I presents a framework designed for analysing the sector’s market structure and dynamics. Then thisframework is applied to single out distinctive markets within it. Four closely interrelated markets are identified andtheir relevant driving forces to change analysed – the market for drinking water and sewerage services, the marketfor suppliers, the market for abstraction and discharge, and the market for delegated contracts. The chapter’sconclusion assesses the main characteristics of all markets, and an overview of their limits and scope.

Chapter II features a comparative policy analysis of the legislation at national level. It aims to present commontrends and differences in the current administrative regulatory frameworks that govern the sector at national levelin EU member states including Belgium, Germany, Spain, England and Wales, France, Italy, The Netherlands,Portugal and Sweden. These countries were selected because they are representative of the main water policiesconducted in Europe. By taking into account the most different institutional arrangements, water situations andpolitical systems, the comparative study seeks to isolate the relative influences of the different dimensions on theevolution of sector policies.

The following two chapters look in more depth at the two most important actors in the water sector in Europe,namely the different types of operators and the European Commission. Chapter III explores whether the currentEU policy for water standards, resources management and liberalisation of network industries could constitute ageneral framework for analysing the possible evolution of the sector in terms of liberalisation, while Chapter IVdescribes the different types of European water and sanitation service operators, and analyses their strategies.

Part two focuses on the future evolution of the water supply and sanitation sectors in Europe, and comprisesfive chapters. Chapter V integrates the main dynamics of the sector markets identified in part one in formulatinglikely European water scenarios. This set of contrasting scenarios represents what is plausible, not necessarilywhat is either desirable (that is, normative) or probable (that is, trend based).

Chapter VI addresses the economic implications of these scenarios. It aims at going beyond analysis of thetraditional indicators for financial-economic performance by addressing the degree of effectiveness and efficiencywith which the sector systems, under the various scenarios, are able to respond and react to various divergingsocietal and environmental demands.

Chapters VII and VIII analyses the environmental and social implications of each of the six scenarios on thebasis of a set of sustainable water management criteria. One of the key aspects concerns the incentives that theinstitutional and management framework of the scenarios sets in terms of sustainable water management.

Chapter IX addresses the main cross-cutting issues within each scenario. It provides a discussion of the mainregulatory issues characterising private sector participation and develops an assessment model aiming atevaluating the outcomes of alternative scenarios, considering environmental, economic and social aspects.

Water and liberalisation: European water scenarios. Editors: Matthias Finger, Jeremy Allouche and PatríciaLuís-Manso, European Commission Community Research, London. IWA Publishing, 2007. ISBN:1843391139. Pages: 264. Price: £65.00 / $130.00 / €97.50 (IWA members price: £48.00 / $96.00 /€72.00). This book can be ordered on the IWA Publishing website, www.iwapublishing.com.

About the author:Dr Jeremy Allouche is with the Swiss Federal Institute of Technology in Lausanne,Switzerland. Email: [email protected].

Why is it that the provision of water services is one

of the most important of allgovernment functions, yet so often the policies and governancestructures necessary for theireffective delivery are not in place?My view is that it is a complexsubject but one in which thenormal market drivers do notexist. Although there are attemptsbeing made now to introducedirect competition into watersupply, water services are amonopoly. This is due to thelimitation of having just onedistribution system, for both costand logistical reasons.

Monopolies have to be either publicfunctions or publicly-regulated functions. The complexity lies in thegovernance and regulation of thesepublic functions. I see a number of keyelements for success, which are criticalfor both developed and developingcountries although their applicationmay be different. In this short article itis not possible to cover any subject indepth, but I will try to give an appreciation of some of the mostimportant aspects.

Important policy mattersThere are a number of important high-level policy issues:• there should be an integrated

approach to policy and planning of water and sanitation services, preferably within one government department, or with a designated lead department having the authority to lead and coordinate

• policy, regulation and delivery should be separated to give focus to the application of the required expertise, and to provide transparency. This requires governments to establish policies andthen to allow independent regulatorsto implement and monitor them

• implementation of policies requires

an integrated planning and tariff setting process managed by an independent regulator. This ensures asense of realism within governments about what is achievable and affordable

• there can be a dilemma regarding thescale of operations, with the need forunits large enough to attract high quality management, yet devolved from central government to allow local public participation. However, decentralisation is not about scale of operations but rather allowing local management to operate without political interference

• for sustainable services, there should be a policy of full-cost recovery. Generally, a move to full-cost recovery requires a well-structured transitional phase with effective public participation

The above issues pose very difficultchanges for many governments. Inparticular, because government ministers feel responsible for waterservices, they believe that they have toretain direct control. This means thatthey are reluctant to release control ofregulation and operations, with theconsequence that they interfere in theoperation of both.

Their inputs are no doubt well-meaning, but often they lead tooperations being unsustainable. Themost common example is the unwillingness, due to likely publicreaction, to allow tariff increases even though they are essential forsustainability (see box). Another isrequiring utilities to retain or take onstaff to reduce unemployment. Suchactions are in one sense laudable, butthey result in increasingly inadequatewater services, to the detriment of thepopulation, especially the poor.

Also, experience tells us that generally government personnel arenot good at managing operations.These personnel incline towards policy

development and not the day-to-dayminutiae of utility operations. Efficientoperation of utilities with a focus ondelivery requires different skills topolicy determination. The above andother matters, such as the need forpolicy on how sanitation provisionshould be approached, suggest theneed for national water and sanitationplans. In considering the needs ofdeveloping countries, such plans areproposed in the UNDP HumanDevelopment Report 2006.

Regulation and regulatorsMy definition of regulation is the process of interpreting and implementing laws, policies andregulations, to achieve the intendedobjectives. World Bank ExplanatoryNotes give a definition of economicregulation as ‘the rules and organisations that set, enforce andchange the allowed tariffs and servicestandards for service providers’.

These definitions refer to thefunction of regulation, and not to theway in which it is carried out. Somepeople advocate self-regulation. Thishas been successful in some parts of theworld through associations: a goodexample is the Tankering guidelinesbeing developed in Ghana. However, itis the form of regulation practisedgenerally by local authorities, where sooften it has failed to produce efficientand sustainable water services. Themain reason for this is the setting ofwater charges for political expediencyrather than objectively, based onoperational requirements

It is also suggested that there can be‘regulation by contract’. Certainly,contracts define what has to be delivered, and the associated financialprovisions. However, water servicecontracts are usually made between acity authority responsible for waterservices and a service supplier. There isno independent scrutiny and littletransparency. Should there be failures

GOVERNANCE


Institutional governance andregulation of water servicesSome of the major challenges in successfully providing good waterservices lie in understanding the sector’s key basic governance andregulatory needs. MICHAEL ROUSE, author of a forthcoming book ongovernance and regulation, looks at the issues and solutions.


GOVERNANCE

leading to recrimination between theparties, the only recourse is arbitration.

Studies of failures, for example inAtlanta in the US, show that cities hadunrealistic expectations and thatservice providers either failed to obtain a good understanding of theoperational circumstances, or hoped torenegotiate later. To avoid these pitfallsthere is a need for an independentbody to set down the conditions onwhich contracts are based, and tomanage contract reviews to take intoaccount changed conditions.

The value of independent regulatorsis becoming increasingly recognised bygovernments, whether for private orpublic sector operations. A goodexample is the state of Victoria inAustralia, which is served wholly by public sector utilities. Initially,independent regulation was consideredto be unnecessary, but subsequently theneed for independence in tariff settingwas recognised.

I believe that this growing recognition is partly due to governments wishing to avoid beingseen as responsible for tariff setting, but because regulation requires specialskills and experience. The most developed regulatory systems are in theUK for both private sector regulation(England and Wales), and public sectorregulation (Scotland), and in Chile. In developing countries, the mosteffective model is in Zambia, where ithas been demonstrated that effectiveregulation can be achieved at low cost.

Financing and cost recoveryMost water service operations in theworld are under-funded because thereis low cost recovery from charges, andgenerally subsidies are insufficient tomake up the difference betweenrevenue income and that needed tomaintain the infrastructure. Thissituation results in deteriorating waterservices (see box).

The usual argument against full-costrecovery is that it would adverselyaffect the poor. The reality is that in many parts of the world, the inadequate service arising from inadequate revenue has a much moreserious impact on many of the poor,who are not connected to the publicsupply system and have to rely onwater vendors. They can pay up to 25 times the cost of tap water forsufficient, doubtful quality water just to survive.

The concern for the poor should beabout the method of payment. Thepoor live ‘day by day’ and are unable tosave. They are able to pay on a dailybasis (they pay water vendors for eachpurchase) but are unable to save up topay monthly or quarterly bills. Theyneed assistance with access connection

charges, and ‘pay as you go’ schemesthrough the use of prepayment metersor by some means of small regularpayments. Prepayment meters providethe opportunity to include a lifelinetariff specifically aimed at the poor.

Concern for the poor is not limitedto developing countries. Some countries, for example NorthernIreland, have set a limit on waterservice payments of not exceeding 3%of disposable income. I do not knowwhether that is an appropriate figure. Iwonder how much of disposableincome goes on mobile phone use indeveloped countries. A 3% limit indeveloping countries for this most basicneed is not realistic, and would becounter-productive in that it wouldreduce the prospect for full-costrecovery. The consequence would becontinuing deterioration of services,with the poor suffering most.

A lack of understanding of the needsand situation of the poor has also led to government decisions to bandisconnection of services for non-payment. This has resulted in anincreasing level of non-payment, withthe suggestion that it is not a matter ofnot being able to pay, but rather manychoosing not to pay. Ultimately thisaffects the charges of those who do pay,and puts sustainability of services atrisk. South Africa, which has gonefurther than most countries in makingprovision for the poor, has recognisedthat unless there is the threat of cut-off,people will choose not to pay. There is a

need for a safety net for those whogenuinely cannot pay. In parts of India, there is free water from publicstandpipes financed out of revenuefrom those who have a house connection.

In most parts of the world, decadesof insufficient cost recovery haveresulted in a lack of maintenance andrefurbishment of the infrastructure,resulting in high leakage levels and aneed for a substantial increase ininvestment in system replacement formany years to come. In England andWales, prior to privatisation in 1989,there were at least 40 years of under-investment in the infrastructure. This is reflected in undesirable leakagelevels, such as those currently found in London.

This cannot be solved overnight,largely due to logistical reasons –systems have to continue to operateduring refurbishment, and transportconsiderations limit the number ofstreets that can be dug up at any onetime. A useful measure of the scale of the underground structure is toimagine putting all the water mains inthe UK end to end – they would goround the world six times.

In developing countries the consequences of deterioration due tolack of refurbishment are much worse.For example in Ghana, system deterioration has resulted in increasedleakage and the inability of the systemto meet growing demand. The consequence has been less frequent

The case for water service reformI do not know who was the originator of the ‘vicious circles’ shown below, but that person should take a bow to theaccompaniment of a fanfare of trumpets. The circles are self-explanatory and require no additional comment,other than to raise the question as to which aspect is the ultimate cause.

I think it likely that water charges, plus subsidies, have generally been too low to adequately maintain theinfrastructure. This resulted in a deteriorating service, which in turn resulted in discontented consumers andlower revenue. A deteriorating service followed, ad infinitum.

Consumer circle

Salary circle

Subsidy circle

The vicious circles of water service decline.

State control

Dependence on subsidies

Low revenue

Low motivation

Low salary

Low revenue

Low initiative

Low motivation

Bad service

Low performance

Bad service

Discontented consumersLow revenue

Bad service

supplies for many people, as availablewater has to be rationed, and othershave to rely on road tankers. Theseunsustainable conditions arise largelyfrom low cost recovery resulting inunder-investment in the infrastructure.

General subsidies are unreliable –governments always have too manycompeting demands for money – andbenefit the rich (who consume morewater) more than the poor. Thereforethe most urgent reform should be tosubsidy and charging policies. Generalsubsidies should be phased out, andtargeted to assist the poor through theextension of distribution systems andpayment of access connection charges.In developing countries, internationaldonors have an important role to playwith the priority being substantialinvestment in the refurbishment ofdistribution systems.

Transparency and public participationTransparency is important in combating corruption and also preventing the concealment of politically-unpalatable informationsuch as water revenues being used forother purposes, or the concealment ofwater quality incidents from the public.There can be resistance to effectivepublic participation by governmentsnot recognising that strong publicinvolvement strengthens their positionrather than diminishing their power.

In those parts of the developedworld with consistently good waterservices, the public can be satisfied withthe knowledge that there is full andgood information available. Thesituation depends critically on whetherthe media are confident that there isfull transparency, as any suspicion thatsomething is being hidden will under-mine the credibility of the authorities.

However, in the developing world,public participation may be necessaryto provide the stimulus for betterservices and the means through whichimprovements can be achieved. Themost important ingredient may be ameans of achieving governmentaccountability to the people. This is theobjective of a recent initiative led byWaterAid, involving local NGOs. Earlyresults are very promising, with governments responding to the pressures coming from communitygroups. There are many good earlierexamples from India and Pakistan ofcommunities taking the initiative in theestablishment of affordable and well-managed water and sanitation systems.

Stimulating improved performancePoor performance is associated withthe malaise of poor cost recovery,general subsidies, political interferenceand poor motivation (see box). Full-cost recovery must not be full-cost

recovery of an inefficient operation, so a move to increased tariffs must be accompanied by improved performance. This can be done overtime through capacity building inutility management, as has beendemonstrated by a Finida-financedproject in Vietnam.

However, for more rapid progressthere is a need first for institutionalreform. Most fundamentally, thisrequires separation of operations fromgovernment and consolidation ofutilities to a viable size to attract goodquality management. Ideally, theestablishment of an independentregulator to provide objectivity andgive structure and improvement targets to the reform process shouldaccompany these changes.

Performance measures with metricbenchmarking provide a useful tool toassist the reform progress. There shouldbe just a few key measures that reflectpolicy priorities, with managementefforts concentrated on generatingaccurate and reliable data. In duecourse comparative competitionbetween utilities can be introduced, but initially it is more appropriate foreach utility to make year-on-yearimprovements. The International WaterAssociation has been very active inpromoting performance indicators andbenchmarking, and the InternationalBenchmarking Network for Water andSanitation (IBNET) provides advice onsetting up benchmarking schemes.

Private versus public operationsThere are examples around the world of good public water serviceoperations. In successful public utilities,there is separation of operationalmanagement from policy functions,and there is recognition of the need for full-cost recovery. Equally, there areexamples of the benefits of tappingcommercial energy in the privatesector; this relies on sound procurement practice, transparency and an effective regulatory system.

So all forms of water service operation can be successful, providedthere are sound government policies,some form of independent regulationor scrutiny, and incentives to performbetter. The public-private argument isunproductive, and detracts from thosepolicy matters that are important inachieving effective, efficient andsustainable water services. This isrecognised in the UNDP HumanDevelopment Report 2006.

SummaryThe development of sustainable waterservices is complex, requiring soundpolicies from central governments.Operating units should be of a sizelarge enough to attract good


GOVERNANCE

About the author:Michael Rouse is an independent expertadvisor on water industry issues, and isthe Immediate Past President of theInternational Water Association. Hecurrently chairs the Association’s Groupon Institutional Governance andRegulation, and is a DistinguishedResearch Associate at Oxford University,also managing the InstitutionalGovernance and Regulation module of theUniversity’s MSc Course on WaterScience, Policy and Management. He is amember of the Stockholm InternationalWater Institute Scientific ProgrammeCommittee and is Chair of the ChadwickTrust. In 2000 he was awarded the CBE(Commander of the British Empire) forservices to water. Mr Rouse was also headof the UK’s Drinking Water Inspectoratefrom 1993 to 2003, and before thatchairman of the Water Research Centre.

management. There is a need forseparation of policy and operationalfunctions, so that utility managers canconcentrate on the development ofeffective and efficient operationswithout political interference.

The public versus private argumentis non-productive and diverts attentionaway from the important issues. Onesuch key issue is full-cost recovery,which is essential for sustainability.Public understanding of this and otheraspects requires public participationand transparency. Independent regulators provide vital objectivity inmatching desirable objectives withaffordability, and can provide the publicwith confidence in the integrity of thegovernance structure. ●

Forthcoming book on governance and regulation

Michael Rouse is the author of the forthcoming book, Institutionalgovernance and regulation of water services, published by IWAPublishing.Publication: October 2007. ISBN: 1843391341; 100ppPrice: £50.00 / $100.00 / €75.00IWA members price: £37.50 / $75.00 / €56.25

Contents:1. Introduction2. Overview3. Separation of policy, regulation and delivery4. The need for an integrated economic/quality planning process5. Financing and cost recovery6. Measures to stimulate improves performance of water service

utilities7. Forms of water service providers and associated regulation8. Steps for successful use of the private sector9. Standards, monitoring and enforcement

For more information, visit www.iwapublishing.com.

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