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Institutional development newsletter 7 August 1998
Much has been going on this year in the area of Institutional Development with the continuing tension between the need for public health and social welfare provision of water and sanitation for all and the equally vital demand for financially sustainable institutions to provide an acceptable level of service to all. The tension is most apparent in the continuing push towards privatisation, with Metro Manila being let as two contracts (French and British contractors with local partners) at much reduced tariffs, since increased again following the economic turmoil. The two concessions in Djakarta have also been let to French and British contractors with local partners, with the contracts cancelled following the resignation of President Suharto. The contracts have since been reinstated following 10 days or intensive diplomatic lobbying. The Thames Chief Executive yesterday thanked the British, French and Japanese ambassadors who had been closely involved in negotiations' (FT, 3/6/98). After almost five years with a private operator Buenos Aires continues with another price review to take account of special situations and to ensure access to the system by the poor - some reports suggest the promised levels of new investment have not been forthcoming. Kampala, Uganda has begun its Revenue Improvement Project with a private contractor taking over responsibility for distribution and revenue collection - with reportedly limited success to date. The bids are in for Lagos State Water Corporation's concession contract for 'water supplies on the Lekki Peninsula and the Islands'; and Karachi is waiting - as our research network correspondents report: 'I presume that the network includes persons who are not absolutely gung ho about water privatisation. We are engaged in a critique of the water privatisation in Karachi (compiled by, you guessed it, the World Bank).' 'Other than a series of newspaper articles, two position papers have been prepared by our partners: Ercelawn and M. Nauman, Restructuring Water and Sewerage Services in Karachi: Citizen Consent or Coercion? delivered at the SHEHRI Seminar on Citizens Role in Governance, Karachi (November 1996). Asad Sayeed et al. Transforming City Water Services: Hard Choices in High Stakes for Karachi, Karachi (June 1997).' 'A third is in preparation as the critique of an Asian Development Bank financed wastewater project in Karachi. The project is so ill-conceived that we are planning to write to the Inspection Panel against the project. Best regards. Aly Ercelawn and Muhammad Nauman - creed - alliance in reforms for efficient and equitable development - what we ask for is acknowledgement, not disdain; partnership, not subordination of civil society.' They also ask: 'Did your earlier issues include the paper, and article in the January issue of Ecologist, by Richard Schofield and Jean Shaoul about the distressing performance of UK private water? If not, the complete references are: Regulating the Water Industry: Swimming Against the Tide or Going Through the Motions'.' A Public Interest Report, Wept of Accounting and Finance, Manchester University (August, 1996), The Ecologist, vol. 27, no. I, January/February 1997, p 6-13.' Indeed it is an interesting paper but your Editor would argue that the issue is not 'the distressing performance of UK private water' which in fact is doing spectacularly well in terms of quality of output and financial performance. The main problem is that nobody, Regulator or Privatised Utilities, understood the extent of efficiencies which could be achieved in a profit-oriented system. Hence the fabulous profits of the companies, from which the Regulator has to claim back a share of the efficiency gains for customers at the next Price Review in 1999. As a member of an Ofwat Customer Services Committee I find it fascinating to see just how complex and difficult is the role of a Regulator of a privatised utility. A vital task for any institution considering large-scale concessions or BOOT's. One commentator has suggested that some countries may have to privatise their regulator as well as their utilities....! The four large service contracts in Mexico City have still not moved on to their anticipated concession stage with the newly elected government of the city trying to understand how to share out efficiency gains between private suppliers and consumers. Many of the Mexico waste water BOOT's are having problems though I was able to visit the Biwater BOOT at Puerto Vallarta which appeared to be doing a very thorough job - with complaints from the local utility that it cost too much. Quality does cost but it is often cheaper than no quality. And so the debate continues - with Enron, the large American multinational gas and electricity supplier last week purchasing Wessex Water of UK for $2.2 billion to give itself credibility as a water operator as it proposes to begin bidding for the perceived $100 billion a year market in developing countries. 'It reckons there will be 20 privatisation's this year and competition for them is limited' (FT 25/~/98). Are there any interesting news stories of successful change management in water utilities that are not being 'privatised'? Surendra K. Jain writes from India that 'unfortunately the present day conditions prevailing in Developing/Undeveloped countries are such that corrupt practices are rampant and the limited financial resources that do become available get frittered away in non productive efforts. Creating appropriate awareness amongst the actively involved Youth/NGOs/CBOs representatives requires concerted efforts over a substantial period of time. Transferring the above to the projected beneficiaries would be the secondary step.' Eng. Hayal Msherbesh writes from Jordan that 'it is not only proper privatisation that is important, but appropriate water pricing is of utmost importance to both recover capital and operating costs, in addition to conserve water consumption by using proper pricing and social consideration of low-income consumers (using progressive pricing). Several people have written asking for copies of publications mentioned in previous Network News. Unfortunately we do not have any resources to do that - in practice we do not have any resources at all for the Network News, hence its annual appearance. However, there is so much information now available on the World Wide Web that we recommend finding access to the Internet to obtain further information. To try and ensure that this Network News remains useful, particularly to those without Internet access, please return the enclosed form to me if you would like to remain on the mailing list. Thanks. Richard
The USAID sponsored Environmental Health Project (EHP) has established an information network on the decentralisation of water and wastewater organisations in Central America and the Caribbean. The purpose of the network is to promote the exchange of information and collaboration among water and wastewater! organisations involved in decentralisation efforts/research in Central America and the Caribbean. Decentralisation has become an important area due to a new consensus on sustainable and integrated water resources management calling for ownership and authority at the "lowest appropriate level." This network will provide a discussion forum for those working or interested in decentralisation. It will focus on lessons learned, current or proposed projects and research, and provide a periodic bulletin on news from network members. If you have any questions concerning the list or would like a copy of the Scope of Work for the network, please email the list administrator, Dan Campbell of EHP at campbelldb@cdm.com. All email to DECNET should be addressed to: decnet@erols.com To send a command to the list server, type the appropriate command word in the subject section of your email. DEC-SUBSCRIBE. This command subscribes you to the mailing list. Putting DEC- first tells the server to recognise it as a command to be processed and not a message to be sent to the mailing list. Mario Buenfil of IMTA, Mexico has web pages regarding use of performance indicators in water utilities: http://atl.imta.mx/~cth/MBuenfil/english/sect_eng.html
To emphasise the research aspects of the network I am proposing to build up a list of current research if you know of current research that should be on this list please let me know so that we can update it on a regular basis. Water Sector Capacity Building - Delft 2- Alaerts for UNDP Management of water supply - the delegated public management model - IHE for IMO, WSSCC Contracting Out of Water and Sanitation Services WEDC for DFID Role of Government in Urban Water Supply:, Zimbabwe, India, Cote d'Ivoire, Argentina and Urban Water Privatisation in South Africa, IDD for DFID Pricing and service differentiation of watsan utility for the urban poor, IHE and WEDC for DFID Public Water PLC's for Low-Income Countries As our main offering in this edition I am pleased to be able to share the following abstract from a forthcoming book by Maarten Blokland and Okke Braadbaart of the Water Sector and Utility Management group (IHE). The book, which is preliminarily titled Public Water PLC's for Low income Countries investigates the potential of the public limited corporation (PLC) as a mode of organisation of the water supply sector in developing countries. Introduction The main thrust of this book is to provide a correction to the emerging new consensus on appropriate water supply management. By the new consensus we refer to the viewpoint that far-reaching private involvement in water services provision is the optimal form of management for urban and periurban areas, whereas rural systems should preferably be managed by user communities. This paper argues that, even though basically sound, the policy prescriptions of the new consensus are incomplete. Banking on the private sector may be an appropriate strategy for dealing with mega-cities in developing countries. Furthermore, community management may be the appropriate solution for the small settlements that dot the countryside of the developing world. But this still leaves us with the question of what to do with the secondary cities, towns and larger villages. We hold that secondary urban nodes are too large for effective user management but too small and too numerous to be privatised. Privatisation will not work, for one, because the number of qualified private operators is far too small to cover aggregate demand for water services of these nodes. For another, private operators will not be easily attracted to service secondary towns because profit margins are likely to be much lower than in metro cities. In 1990, roughly a quarter of the world's population, or 1.2 billion people, lived in settlements defined as 'urban' but containing less than 500,000 inhabitants. Of these, approximately 800 million could be found on the Asian, African, and South American continents. Stated differently, a substantial part of the population in developing countries lives in smaller cities, towns and larger villages. In terms of sheer numbers of separate municipal units, secondary urban settlements far outnumber primary urban nodes. Whereas the developing areas boasted less then 400 large primary cities in 1990, the number of secondary urban nodes ran into tens of thousands. This means that not only do we face a problem of providing water services to large numbers of consumers but these are also to be provided through a huge number of independent supply systems. We argue, furthermore, that publicly owned Public Limited Companies (PLC's) may be an appropriate form of management for such secondary urban nodes. The 'public water PLC' combines the strengths of market and state governance by offering! a combination of private management and public ownership. Under this mode of organisation the water utility is an autonomous for-profit shareholding company with local and provincial government as majority stockholders. Performance-wise, public water PLCs have proven their mettle in both industrialised and developing countries, as will be made clear in what follows. Modes of Sector Organisation Overview Table 2 presents six basic modes of water supply sector organisation. The scheme offers a useful shorthand for the discussion of complex water supply organisation issues following below. The adapted scheme distinguishes six basic modes of water supply sector organisation in terms of: ownership of utility infrastructure, that is treatment plant, network, and other assets; the identity of the system operator; the legal status of the system operator; and the ownership of the shares of the operating company, where applicable. The direct public/local management mode comprises the municipal waterworks departments found in countries as diverse as Indonesia, the United States, and Spain. It has also recently grown into a dominant form in the transition countries of Central and Eastern Europe. The direct/supra-local management option refers to large government departments, at state/province or national level charged with the management of multiple schemes that serve a large number of municipalities on state or national scale. us form is e.g. found in the State Public Health Engineering Departments in India. Corporatized utility describes the prevalent management situation in most developing countries, where one tends to find large organisations, e.g., the State Water Boards in India or the Ghana Water Supply and Sewerage Corporation, responsible for water supply and assorted other services on a country or state-wide scale. Delegated private management describes what is known as the French system of outcontracting construction and O & M activities to private firms. Delegated private management is also the management option currently favoured by the World Bank. In the developing world, it can be found mainly in mega-cities, e.g., Buenos Aires and Manila. The direct private mode describes what is also known as the British model. More precisely it refers to the current situation in England and Wales, whose water utilities are both privately owned --shares are traded on the Stock Exchange-- and privately managed. Finally, the public-owned water PLC refers to a mode of organisation where both the utility's infrastructure and the shares of the water company are owned by local and provincial government representatives while the operator is a PLC, that is, an autonomous for-profit organisation falling under commercial law. On page 12 of this newsletter a graphic overview of the basic modes of organisation in the water sector is presented. The public water PLC is crucially different from French delegated private management in that the operator is owned by public rather than private shareholders. Furthermore, the public water PLC is mostly a permanent concessionaire where its French counterpart is a temporary concession-holder. The public water PLC also differs from direct public management, and it does so in two important respects: consumer influence and autonomy. First, under the public water PLC structure the utility's consumers have a direct say in strategic decisions, e.g., their representatives must approve of the annual budget, an investment plan, or a proposal to change the tariff. Second, unlike direct public management, the public water PLC is always an autonomous for profit entity. Unlike the municipal waterworks of direct public/local management, it does not form part of the administrative apparatus of a town or village. And unlike direct public/supra-local management, it does not form part of a technical agency such as the Ministry of Water Supply, the Department of Interior Affairs or a Public Works Department. Public Water PLCs. the Dutch Case The performance of Dutch water supply utilities is excellent and still improving. Table 3, which provides a comparison of the performance of the Dutch water industry with that of other developed countries, underscores this point. It is evident that in terms of water price, labour productivity (number of connections per employee), and maintenance state of the distribution network (as expressed in Unaccounted-for Water), Dutch water utilities are high performers. In addition, the quality of Dutch drinking water conforms to European standards and supply interruptions occur only sporadically if at all. The public water PLC structure is integral to the success of the Dutch water supply sector. First, all stakeholders --local government, water utility management, employees, and water consumers-- are involved in strategic decision making. Second, utility management has sufficient autonomy to pursue its mandate of commercial policy-making. Country Context, Evolution of Water Supply and Current Characteristics The origins of Dutch public water supply date back to the 1 9th century. Initially, water supply development was a matter of local, often private, initiative. Local governments and private entrepreneurs established piped water supply systems under direct public and direct private management. They did so particularly in the larger and richer municipalities, where attractive rates of return on investment could be achieved. By comparison, the provision of rural municipalities stayed behind. From 1910 this started to change. At the national level, funds were allocated for water supply, and in 1913 a national agency, the National Institute for Drinking Water (RID), was created to advise and assist with drinking water supply development in the less profitable rural areas, particularly through the establishment of regional water supply systems. In tandem with restrictive legislation and licensing policies at the provincial level, the RID promoted the development of the regional water supply companies under delegated public management at the expense of other institutional forms. After World War II rapid economic development and population growth took place In 1957, a national Water Supply Act came into force. Apart from laying down quality standards and control mechanisms, the law also required the reorganisation of the drinking water sector into larger units able to exercise the required quality control, and face new technical and commercial challenges. Amalgamation of water utilities into larger vertically integrated units under delegated public management was the Governments preferred option. The government's intention was to reduce the number of water utilities from more than 200 to around 15. Now, more than forty years later, the number of companies is down to about thirty, and the original goal of fifteen companies is expected to be achieved and even surpassed in another few years. As per end 1994, the Netherlands had 35 water utilities, 30 of which were public-owned PLC's and the remainder being under direct public management The average utility supplies 35 mln m3 annually to 170,000 connections through 3,000 hens of network, and employs 230 staff (see Table 4). Most water utilities operate independent from other service providers, but an increasing number is integrated with power supply companies. Integration with pollution control boards or water management boards as is common m other countries is not practised in the Netherlands. Concerns surrounding the Dutch water utilities focus primarily on source quality. Both surface and ground water quality are threatened by pollution from the highly industrialised and densely populated environment of North Western Europe. The Netherlands has organised its water supply in a compromise between private and public concerns. While nominally a private firm with a view to efficiency, each company is controlled by public actors to ensure that the public interest is safeguarded. Nearly all water companies are constituted as a Naamloze Vennootschap' (N . V.) , equivalent to the British Public Limited Company (PLC), the American Stock Corporation, or the French Societe Anonyme. In the Netherlands, the shareholders of the water supply companies are municipalities joined in some cases by the provincial government By law, the PLCs management structure consists of a Managing Director, a Board of Directors (BoD), a Shareholders Meeting and a Works Council. The powers of each of the actors are set by law, and further defined in the company bye-laws drawn up before a public notary. The powers are complementary and as such there are no strict hierarchical relations between the actors. Extensive powers are bestowed on the Managing Director, who is the company's legal representative with full responsibility for its operations. The Board of Directors meets the MD every two months and is charged with the supervision of and counselling of the Managing Director, as wed as with the approval of important management decisions concerning investments, staff, take-overs and mergers, and so on, as defined in the bye-laws. The shareholders of a water supply company meet with the MD and the BoD twice yearly. It is charged with the approval of the Annual Report, the rolling Five Year Plan, and the tariffs, the amendment of the bye-laws, and changes in company activities and structure. The Works Council, finally, is empowered to be informed on nearly all matters affecting the company, and has powers to advise, initiate, and concur on matters of direct concern to the company's employees. The composition of the different bodies differs from one company to the other. Generally speaking the Managing Director, appointed by Shareholders or the Board, is a professional engineer, lawyer or administrator, and tends to be recruited externally. The board of Directors numbers between five and 15 persons and is generally made up of public representatives. The Board members are appointed either by the Shareholders or by the Board members themselves. Between 25 and 50 mayors and aldermen represent the municipal (and provincial) shareholders. This structure, in the first place, produces a clear division of responsibilities within the management structure. The Managing Director is in the driver's seat and carries the responsibility of running the business. Second, the other players respect the Managing Director, but hold considerable powers that force him to anticipate their position and co-opt their opinions in preparing his policies and decisions. Third, the Board and Shareholders are largely public representatives and will, in their dealings with the company, consider both company and public interest. The Second Key. Water Supply as Commercial Business Annual sales of the drinking water sector in the Netherlands amount to approximately Nlg. 2,400 mln, while investments total about Nlg.1,000 mln (1995, exchange rate at US$ I = Nlg. 1,75). Operating cost, depreciation and interest payments are recovered in full from the consumers (that pay an average price of about Nlg. 2.50 per cubic meter of drinking water). Investments are financed from depreciation, where necessary supplemented by commercial loans. State subsidisation of operating and investment expenditures is unknown in the Netherlands: the companies rely entirely on their consumers and commercial banks for their financial operations. Accounts - The accounts to be presented in the Annual Audit Report are prescribed by private company law, and include the Profit and Loss Account, the Balance Sheet and the Cash Flow Statement. The Profit and Loss Account includes operating cost, depreciation and interest payments. The operating costs are between 60 and 65% of total expenditure. Considering cost allocation by activity, production and distribution costs are at 40 to 45% each, sales account for about 5%, and overheads for about 10%. An analysis of the distribution of personnel costs over the key activities shows that about half the personnel cost is in distribution, a quarter in production and the remainder in sales and overheads. The Balance Sheet (table 6) shows relatively low solvability, about half that common in Dutch industry, and off late most water supply companies are aiming to correct this. Also other financial performance standards, such as interest coverage, profitability, and quick ratio are rather low. From the Cash Flow Statements of the same companies it can be seen that the investments, Nlg. 26 mln for WLF and Nlg. 95 mln for WML in 1995 were financed primarily from depreciation and supplemented, in the case of WML, by an increase in long term loans. Cost control - Given their similar magnitudes, cost control is equally concerned with all cost components. Measures to control interest and/or depreciation cost include, among others, re-negotiation of commercial loans during periods of low interest; structural improvement of key financial indicators to obtain favourable loan conditions; careful planning and cost-conscious design of new works to reduce and/or postpone investment costs and with that to reduce interest payments and lower depreciation. Efficiency improvements on operational costs include such measures as reorganisation; reduction of permanent and temporary staff; deciding in-house execution vs. outcontracting; improved logistics; setting time and/or cost standards for routine operations; adapted maintenance guidelines and procedures; use of cheaper materials; changes in criteria for meter replacement and overhauling, mains renewal, and equipment overhauling; professionalisation of procurement of goods and services; improved budgeting and cost control. Investment - An important party to the financial operations of the company is the financier providing capital for investments. Traditionally, commercial banks, insurance companies and pension funds have lent money to the water supply companies on favourable terms, on account of the water sector's low-risk profile: the combination of a government supported monopoly, municipal/provincial ownership and steady demand guarantees a stable and reliable return on their investment. The recent upturn in investments and associated demands for capital that was originated by the upscaling process, the increasing cost of treating water and the recent product diversification drive have caused investors to rethink their strategies, however. As a result, water supply companies are increasingly concerning themselves with financial performance standards such as solvency and profitability ratios, and aim to achieve a performance that is more in step with industrial standards. Customer relations - As it is the consumer who fools the bill for the entire operating budget of the company, it is but natural that (s)he gets the attention (s)he deserves. Billing and collection - Out of 26 water utilities, 23 have metered all their connections, and bill the consigners a standing charge plus a fixed amount for each m3 consumed. Large consumers are treated somewhat differently to promote cost-effective use of water supply infrastructure: customers showing peak draw offs are charged in excess of the standard m3 price and those able to avoid peak withdrawals get water at a lower m3 price. Meter reading and billing practices vary from one company to the other. The Chilean Public Water PLC's In Chile, a country with a 1993 GNP of US$ 3170 that puts it in the group of middle income countries, urban water and Sanitation services are well developed. Water supply coverage is about 99%, and 89% of the population is served by sewerage systems. Wastewater treatment is still very low, with only about 14% of the urban sewage being treated. Despite the latter, public health statistics for Chile are impressive, with infant and child mortality rates not far behind those of the OECD countries. The Chilean water sector has been undergoing reform since the 1970's and is now in its second phase. During the first reform, in 1977, water and waste water services were integrated and unit size was unscaled, thus creating two urban and eleven regional water and sanitation agencies that operated under a semi-autonomous management mode, and jointly served about 90% of the population. A department, the Servicio Nacional de Obras Sanitarias or SENDOS, with a nation-wide regulatory function and executive functions in the 11 regional agencies was set up in the Ministry of Public Works. Though sector performance improved since, the semiautonomous mode and the combination of regulatory and executive functions in SENDOS, were found to be inadequate. The second reform took place in the late 1980s. A series of three laws aimed to provide adequate water pricing; to separate regulation and service provision; and to further distance the provider from government. The Tariff Act (1988) establishes that the price of services is to reflect the long term marginal cost of providing these, and eliminates cross subsidisation. Prices are to be continually adjusted for inflation, and are recalculated in real terms once every five years using a 'model' company with benchmarked levels of efficiency. The Regulatory Act (1989) creates an independent regulator, the Superintendencia de Servicios Sanitarios (SSS). The regulator is charged with the supervision of the concessionaires, i.e. the proposal and control of norms and technical standards, the application and supervision of regulations on tariffs, the application of the concessionaire system and the interpretation of all relevant legislation. The Water and Wastewater Services Act of 1989 provides for the supply of water and sanitation services through concessions to be granted by the Ministry of Public Works to stock corporations only. The concessions concern a specific service area, are for an indefinite period and are granted separately for drinking water production, drinking water distribution, sewage collection, and sewage treatment. Once granted, a concession may be transferred to a third party only with the explicit approval of the regulator and the Ministry of Public Works. Subsequent legislation during 1989 transformed the existing 13 semi-autonomous agencies into PLC's. These 13 companies, under a provision in the Water and Wastewater Services Act were granted all four concessions in their respective service areas. The law does not specify shareholdership of the PLC's in the case of EMOS and ESVAL; in the case of the 11 regional water supply companies, government is to hold at least 51% of the shares. The original plan to sell the shares to investors was not pursued under the democratic government elected in 1990, so that, unintended perhaps by the original lawmakers, public water PLC's were in fact formed. At present, EMOS and ESVAL shares are owned for 65% by a State owned holding company, the Corporacion de Fomento de la Produccion (CORFO), and for the remaining 35% by the Ministry of Finance. In the 11 regional companies, the shareholders are the same, but CORFO holds 99% of the shares. Share holdership by company workers is also allowed but is de facto insignificant. Under the present and previous modes, the agencies are allowed to outcontract any function to the private sector and actively do so, examples of which are the outcontracting of meter reading, billing and collection, the arranging of a BOT for a waste water treatment plant, or even the granting of a time-bound concession to a private company for the execution of all the functions in part of the concessional area Running a Business and Serving the Poor: the case of EMOS S.A. Scale and scope - The service area of EMOS covers the 40 or so municipalities that jointly form the greater Santiago area with a population of about 5 million people (1995). EMOS, holding an four concessions, is responsible for the entire water cycle, from abstraction for drinking water supply to the treatment and disposal of sewage. ~ 1995, the company produced 178 mln m3 of drinking water, and distributed this water to 1.02 mitt water connections. Sewage was collected from 0.99mln connections. Management Structure - As in the case of the Dutch water PLC's, EMOS has a Managing Director, a Board of Directors and Shareholders. IN addition there are two more, external players, i.e. the Regulator SSS, and Ministries of Finance and Planning. The Regulators role has been described in the section on sector reform The concerned Ministries have to approve the annual plan and budget. Local interests, i.e. the EMOS consumers, staff and the local government are not linked into the management structure. The Board of Directors is appointed by the Shareholders, i c. the majority shareholder CORFO. The composition of the Board, that was first constituted after the 1990 national elections was changed following the 1994 elections, suggesting a direct linkage with national politics. The majority Shareholder CORFO is both a State development agency and the holding company for nearly all publicly owned companies. Performance - the performance improvement of EMOS S.A. over the period 1987 -1995 is a good example of 'doing more with the same'. Whereas water production remained is practically unchanged at 475 mitt m3/yr, the number of water and sewerage connections grew by 35, respectively 50% and the billing ratio rose to 79%. Turnover quintupled and brought the company in the black, even allowing for substantial dividend payments to the shareholders. Coverage for water supply rose by one percentage point to 1000/D> and sewerage coverage rose from 90 to 97%. Serving the Poor - about one half of the Z70,000 new water and 330,000 new sewerage connections over the period 1987 - 199S were provided to the urban and peri-urban poor. To enable the provision of these services to this group of customers, several measures were executed concurrently aiming at making the services affordable. Distribution networks extensions, where required, were funded by municipalities and user groups, sometimes with additional financial support from EMOS. Connection fees by new customers were allowed to be paid in up to 60 instalments. Then, individual subsidies were granted by local government to those in need, thus ensuring full payment for services provided. Finally, training was imparted to housewives to reduce wastage of water. Conclusion Sector reforms in the late 1980s created Public Water PLCs in Chile that, in the case of the Santiago utility were able to show good commercial performance together with significant improvement of water and sewerage provision to the urban poor. The key to success is thought to be a combination of the incorporation of the utilities as private companies with public shareholdership, the regulated tariff structure that prescribes the calculation of a price that ensures full cost recovery, the replacement of a social tariff for the first 10 m3 by a targeted, individual subsidy to the needy, and the efforts to increase efficiency and productivity. The management structure with national rather than local stakeholders, and the conspicuous absence of staff, customer and municipal voice, does contain a potential for bureaucratic and political hurdles, but these were counterbalanced by strong political support for the results EMOS was able to show. The Philippines ' Water Districts In the Philippines, over 500 Water Districts serve the needs of urban populations outside of Metro Manila. Although wide differences in size and operational effectiveness may be observed between Water Districts, they share a common organisational structure. In the first place, Water Districts provide water services. In the second place, the assets managed by Water Districts are public-owned. In the third place, the Water District has the status of a private or 'quasi-public' corporation in that it works on the basis of recovering all cost (operating and capital cost)) from its customers. It does not strive for profit maximisation. Its primary goal being to serve the public interest. Size, coverage, stakeholders and performance Size and coverage - At the time of writing, around 550 water districts provide water services in 650 out of a total of 1,564 municipal areas in the Philippines. In size terms, water districts vary from medium-sized utilities with connections on the order of 10,000 or more to tiny utilities with a handful staff and a few hundred connected customers. Performance - The Water District/Local Water Utilities Administration structure, set up in 1973, is undisputedly the best-performing part of the Filipino water and sanitation landscape. Indeed, even in a wider Asian context the water district structure stands out by the good performance of a large number of individual districts. For example, average non-revenue water figures for 200 water districts, 29 % in 1995 (see Table 9), compares favourably with the 40% NRW reported in 1997 by 50 large Asian water utilities (ADB 1997). The water districts also compare favourably on other counts. For example, 98% of the connections of the 200 water districts were metered as against 83% for the above 50-utility sample; the water district labour productivity score was 123 connections per employee as against 83 for the Asian sample; and the water district average operating ratio (operating costs as percentage of revenues) 79% where the Asian utility average was 105%. Stakeholders-The National government is the theoretical owner of a District's assets. The local government, i.e. the mayor or district head appoints the Board of Directors who in turn govern the Water District. The Local Water Utilities Administration acts as a dedicated monitoring, lending and support agency. The General Manager of the District is responsible for the management of the Water District. The 1973 Act, Water Districts and the Local Water Utilities Administration The 1973 Provincial Water Utilities Act, in one brief document, brought the entire Water District governance and management structure as it functions today into being. It created the Water District structure and a central agency alongside it, the Manila-based Local Water Utilities Administration (LWUA). LWUA provides the districts with loans at interest rates below market rates as well as with technical assistance in engineering, finance, and management. LWUA staff, although Manila-based, make frequent visits to keep in touch with the Districts. Its core tousles have been the building of in-house capacity in Water Districts and the provision of technical advice in tandem with the provision of capital. Its role of financier provides LWUA with up-to-date information on the financial situation of its Water District clientele and gives it the leverage to push through reforms when required. However, LWUA does not interfere in day to day management. Only when a district has failed to meet its financial obligations for three consecutive months does LWUA step in: LWUA then sends in a team who temporarily take over management of the district to bring the house in order. This crisis management does not last beyond a year, however, when the district is returned to the municipality. How the Districts are shielded from local politics The Water Utilities Act of 1973 was carefully designed to minimise the scope for political interference with the water supply business of the districts. Two potential meddlers hover over the district: local government, in particular the elected mayors, and national government, the theoretical owner of the utility's assets. Let us look at the first potential meddler. The mayor can exercise indirect leverage on the WD through the Board. However, a mayor is limited by the fact that (s)he can only replace a maximum of two Board members and only in even years. This means it will take about three years for an incumbent mayor to gain a majority vote on the Board through appointment of her proteges and so indirectly exercise control over the WD. It is also possible for a mayor to influence the WD indirectly. (S)he might withhold building permits, excavation permits and road-breaking permits from the WD, and in this way obstruct its operations. This would be a self-defeating policy, however, as it would hamper the water supply operations of the district. National government: owner of Water District assets The Provincial Water Utilities Act of 1973 defines Water Districts as Quasi-public corporations performing public service and supplying public wants". According to Filipino law, the term quasi-public corporation applies either to a private corporation that renders public service or supply public want, or to a private corporation that is under contract with the State to perform public duties. This did not help much to clarify the status of a Water District, however. The many legal issues raised by this ambiguous definition were resolved only in l9gl when the Supreme Court ruled that Water Districts were government owned or controlled bodies. This ruling had the following practical consequences. First, Water District profits do not accrue to local- municipal-government. A law was passed in 1994 that states that half of the Water District's profits arc to be remitted to the National Treasury. But the Districts have not received a request to fulfil this obligation so far. Second, up to 1991 Water District management had a free hand in staffing and salarisation. Now the Water Districts are bound to Civil Service recruitment procedures and salary scales, which have decreased their flexibility in the staffing field. However, management can still lay off personnel when it sees fit to do so. Third, Water District accounts are investigated by the Commission on Audits rather than by a certified public accountant. A number of matters remain unaffected by the ruling. Water Districts are governed by a Board of Directors appointed by local government, and managed by a General Manager appointed by its BoD their formation is based on a transfer of ownership of assets from local government exercise a right to protect water resources in its watershed area. Management and the Board of Directors The Water Districts are managed by a team of Division Managers headed by a-General Manager. The General Manager in turn is accountable to a Board of Directors (BoD). The BoD numbers five, or, when LWUA has furnished the District with a loan, six. The five Directors represent main interests (business, professional, education, civic clubs, women's organisation) in the coverage area and are appointed on a staggered basis by the mayor or district head. The sixth member is appointed by LWUA (see Figure). The BoD has the authority to appoint and dismiss the General Manager and must ratify any proposals anode by the latter The Board meets with the General Manager on a bi-monthly basis. Tariff revisions are not decided on by the BoD alone but are presented and discussed in a public forum before being ratified. The BoD functions are limited to policy-marring, that is, with governance, it cannot interfere in management. Chapter V, Section 18, of the Provincial Water Utilities Act of 1973 is unambiguous on this issue: ' Functions limited to Policy making. - The function of the Board should be to establish policy. The Board shall not engage in the detailed management of the district.. Conclusions The Water District structure in place in the Philippines carefully balances the local ownership and merit good characteristics of the piped water supply business with the need for commercial practice and managerial autonomy. In particular, the staggered schedule by which the mayor appoints the Board of Directors deserves mention as an effective shield between local politics and the district Local ownership and a direct accountability of District management to the customers are assured by the constitution of the Board. In addition, the presence of a LWUA officer on the Board supplies the technical (engineering and financial) expertise necessary for well-founded decision making. The issue of asset ownership is somewhat problematic, but does not constitute a threat to the Districts' autonomy as long as the national government remains a passive player. All this translates in many cases of Water Districts performing above Asian standards technically and finance-wise. Conclusion Few developing countries have so far experimented with public water PLC's. Quasi-public corporations, boards and authorities were set up in great numbers throughout the developing world in the 1970s and 1 980s. These parastatals operate under delegated public management, however, and lack the Public Limited status. Consumers have no power over these organisations through representation on a board or as shareholders. We believe that the persistent performance problems experienced by national or state-level parastatal agencies may be traced to the following deficiencies. First, the absence of a mechanism for feeding back consumer interests, wishes and complaints into the parastatal's decision making at management level; the governing boards of water parastatals are usually manned exclusively by top-level civil servants and lack consumer representation. Often this is a consequence of the fact that the parastatal covers an immense service area. Second, lack of autonomy. Many developing country water boards and authorities lack autonomy. Whereas many governments formally embrace the concept of an autonomous water utility, many have failed to put it into practice. It is a telling fact that the World Bank, in evaluating 120 water and sanitation projects carried out between 1967 and 1987, singles out the autonomy issue as a key reason for the failure of its projects (World Bank 1992:39-40). Third, the continuance of a 'government mentality' in the semi-privatised water utilities. Often, a government line agency was transformed into an autonomous water corporation from one day to the other. More often than not, this change of formal legal status did not effect the desired improvements in cost recovery, consumer orientation and operational efficiency. In many cases, after the shock effect of the corporatization had worn off, little had changed besides the name of the utility. We contend that the public water PLC, and particularly the option where local stakeholders are co-opted into the management structure, may provide part of the solution to this quandary and we do so for the following reasons: 1. Secondary urban nodes are unattractive to and far surpass the present management capacity of the private sector, and this will remain so for a long time to come. 2. The public PLC offers a useful compromise for those countries that consider French or British style privatisation a bridge too far. 3. The Public PLC limits the requirement for formal price regulation. 4. The introduction of the public-owned PLC structure gives consumers a clear voice in the utility's strategic decisions. This may help to solve the accountability problems that produce inferior services in so many developing countries. 5. The public PLC set-up may give utilities much needed autonomy in particular with regard to capital procurement and cost recovery. 6. The shift to a public PLC structure may work as a cure for the subsidy syndrome afflicting so many developing country utilities. Having said this, a number of caveats are in order for those countries willing to give the public PLC mode serious consideration. Political commitment to reform is a vital precondition for a successful transformation. The shift to public-owned PLC's will inevitably upset vested interests. Without broad based political support, there is little chance of overcoming such hurdles. Furthermore, sufficient time should be allowed for building commitment to the new mode of operations among utility employees as well as for preparing them for their new mission. As the disappointing experiences with parastatals have shown, a change in legal status alone will not suffice to produce results. Finally, the paper autonomy of many of today's water corporations teaches one to be wary of backsliding. Publicly owned PLC's will not solve all these problems in one blow. However, they may make the ride both faster and smoother. References Dr Richard Franceys Email: rwf@ihe.nl
Updated 03/03/03 |
