TNAV

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TNAV Flow of TechnologyWater Challenges in
the Developing WorldA Perspective from the World
Bank Jan G. Janssensthe World Bank

• Antwerpen, December 13th, 2004

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Outline

• Introduction
• The water supply and sanitation sector
• The Millennium Development Goals
• The financing challenge, creating the enabling
  environment
• Utilities and public-private partnerships
• Performance
• Sequencing reform
• Private participation, possible reform paths
• The evolving World Bank Group business model

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Outline

• Introduction
• The water supply and sanitation sector
• The Millennium Development Goals
• The financing challenge, creating the enabling
  environment
• Utilities and public-private partnerships
• Performance
• Sequencing reform
• Private participation, possible reform paths
• The evolving World Bank Group business model

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The WSS sector is segmented with different
consumer needs and challenges.
cities (gt1m)
secondary cities (gt100k)
Size of population centre
towns (gt10k)
villages (gt500)
rural (lt500)
of population centers (increasing as size falls)
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Some noteworthy data as of 2001,

• Cities, towns, occupy only 2 of the earths
  landmass, but
• They house 48 of the world population
• They also use 75 of the worlds resources
• And generate 75 of the worlds waste

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World population growth will be mainly
urban
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Population growth will be especially high in
smaller cities
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There has been a tremendous achievement

• Every day for the last 10 years, huge numbers
  of people have gained access to improved
  services
• Drinking water about 250,000 every day
• Sanitation about 205,000 every day

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But population growth is about 215,000 a day

• And thus there has been little net progress, and
  there are still billions without service
• over 1 billion for drinking water, and
• about 2.5 billion for sanitation

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• There is a global consensus on the principles
  which govern sound water management

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The Dublin Principles

• The ecological principle
• holistic (including environment), comprehensive,
  inter-sectoral)
• The institutional principle
• stakeholder participation
• Subsidiarity (federal, state, municipality,
  users,
• Greater role for private sector, NGOs and women
• The instrumentprinciple
• Greater attention to economic value of
  alternative uses
• Greater use of economic instruments (water
  rights, user charges, )

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Cooperative arrangements for generating and
sharing benefits from international rivers can
have major security and development payoffs,
e.g., the Indus Treaty, the Nile Basin
Initiative,
The important case of peace and security
dividends from sharing benefits from
international waters
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Some changes in water supply and sanitation in
the past decade

• The Millennium Development Goals (MDGs) hopes
  and realities
• The role of the private sector euphoria,
  cassandra-ism and realism

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The MDGs Where do Water Supply and Sanitation
appear?

• Goal 7 Ensure Environmental Sustainability
• Target 10 Halve by 2015 the proportion of
  people without sustainable access to safe
  drinking water
• Indicator proportion of the population with
  sustainable access to an improved water source
• Target 11 By 2020 to have achieved a
  significant improvement in the lives of at least
  100 million slum dwellers
• Indicator proportion of people with access to
  improved basic sanitation
• Also contribute to Goals 1 (poverty), 3 (gender
  equality), 4 (child mortality) and 6 (HIV/Aids
  and other diseases)

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Two pillars for poverty reduction and reaching
the MDGs

• Building the climate for investment, jobs, and
  sustainable growth
• Stable macroeconomic conditions
• Governance and institutions
• Physical and financial infrastructure
• Investing in poor people and empowering them to
  participate in development
• Human development
• Access to information, participation,
  accountability empowering women
• Local organizational capacity
• Access to infrastructure services

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The MDGs a startling reminder of the financing
challenge ahead

• Translates into a doubling of investment needs
  from 15 billion to 30 billion per year for
  water supply sanitation alone (as part of 180B
  for all water)

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Investment alone without (needed) reform will be
ineffectual

• Ensure the most cost-effective use of resources
• Ensure allocation of resources to highest
  priority investment needs
• and
• Increase resource mobilization from all sources

Getting the enabling conditions right is first
priority
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The financing challenge
Who Pays
How Financed
User Tariffs Govt. Subsidies Public or Private
Debt
Consumers Taxpayers
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Creating the enabling environment

• Financial Sustainability
• Increasing Efficiency
• Controlling and Reducing Costs, by better
  management, sound OM, least cost solutions,
  financial planning
• Affordable Standards, Efficient Delivery
• Increasing Revenues, by collecting bills,
  adequate and improved pricing, subsidy policies
  targeting the poor, , improving service
• Good Governance, including
• Establishing a Regulatory Framework
• Defining public and private roles
• Increasing Effectiveness (and Equity)
• Increasing access, serving the poor

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THE CAMDESSUS PANEL REPORT PRESENTED IN KYOTO

• Focused on how to increase investment in water
  infrastructure (public and private, domestic and
  international)
• Important innovations
• Guarantees
• Devaluation risk facility
• Sub-sovereign lending
• But a sobering view of the prospects

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Emphasized that there would be no private
investment (nor effective public services)
without a reliable revenue base
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Very little private investment in the poorer
parts of the world
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Where countries have sound policies and a
population which can pay,the private sector is
still interested and willing
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Outline

• Introduction
• The water supply and sanitation sector
• The Millennium Development Goals
• The financing challenge, creating the enabling
  environment
• Utilities and public-private partnerships
• Performance
• Sequencing reform
• Private participation, possible reform paths
• The evolving World Bank Group business model

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Most water utilities in developing countries
perform very poorly
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And the poor are always at the end of the line,
paying 10 times and more, what those with access
pay for a gallon of water
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Price of water by type of service provider
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There is now a much greater appreciation for, and
progress towards transparent, balanced regulation

• Protect consumers (both present customers and
  non-connected poor households)
• Promote other social interests
• Protect service providers
• Promote economic efficiency

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Back to design issues

• should regulation be performed by central, state,
  local government agencies?
• agency, contract or both? how much discretion?
• multi-sector utilities commission or sectoral?
• combine price regulation with standard-setting?
• Regulation by contract?

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Regulatory functions

• Writing the regulatory rules
• Monitoring collecting analyzing information
  about performance
• Formally seeking compliance with regulatory rules
• Applying the rules to yield a binding decision
• Handling appeals on decisions
• Enforcing decision if operator does not comply

Rarely are all functions combined in one entity
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The natural, economic and political challenges
facing developing countries vary enormously..
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Initiate reform where there is a
powerful need, and demonstrated demand, for
changeDevelop a sequenced, prioritized list of
reforms
Some general lessons on what must be done to
translate principles into practice
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Sequencing of sector reform
performance
Our goal
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Maintain progress
Broad sector reform
Service provider reform
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Pressure to improve
time
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Pressures to improve (triggers)

• Sector crises
• Water resources crisis (i.e. drought)
• Level of service drops to levels unacceptable to
  customers (intermittent supply, unsafe water
  quality,)
• Political shifts
• Decentralization
• Elections
• Threats and opportunities
• Threat of privatization
• Donor pressure
• Persuasive arguments analysis

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A changing world calls for adifferent way of
approaching reforms

• Be realistic Pace the reforms and build on early
  progress
• Be inclusive Social buy-in critical to success
• Be daring Different models for countries under
  stress, work with communities and local
  institutions
• Think creatively and outside of conventional
  policies (i.e targeted subsidies, community cost
  sharing)

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The political economy of reform of public
utilities

• Reforms must provide returns for the political
  decision makers who are willing to make the
  changes.
• Initiate reform where there is a powerful need,
  and demonstrated demand, for change
• Nothing succeeds like success
• Best fit rather than best practice
• Realistic goals and timeline
• Develop a sequenced, prioritized list of reforms
• Match available human, financial and knowledge
  resources
• Take one step at a time, but lock in progress

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Tools of central and local governments to spur
reforms

• Remove barriers Shift from input controls to
  increase autonomy of utility
• Mandate Put basic rules in place
• Provide incentives Establish binding performance
  targets through contracts
• Facilitate Equip utilities local governments
  to take advantage of reform

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Moving from best practice to best fit requires a
personal touch

• Personal leadership was an element of success in
  all of our case studies (and all other successful
  reform processes)
• Scaled up efforts to improve and expand WSS
  services requires leadership development
• There is a critical shortage of change management
  skills in the WSS sector

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A typical public utility...
A Government department(either ministerial or
municipal),
that both owns the assets and operates the system

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Balancing external accountabilities
Owners
Policy makers Regulators
Financiers
Corporate oversight board
Service provider
Civil society
Customers
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Unbundling of WSS sector functions
Sector reform Service provider reform Broad
sector reform
always public
Policy making
Policy making Regulation Asset ownership Corp.Over
sight Service provision
Regulation
reform
Asset ownership
public, private, or PPP
Corp. Oversight
Service provision
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Possible reform path transfer of assets
Government department
Statutory body
To a public body that is more autonomous
Government owned PLC
To an entity partly owned by the private sector ?
partial divestiture
Joint Stock Company
Non for Profit Private Entity
To a privately owned entity (a company or a
non-for-profit trust) ? full divestiture
Private Company
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Possible reform path delegation of management
delegated management contract
Asset owner
Operator

• The asset owner can contract out service
  provision operation of assets through a
  delegated management contract. Types of contracts
  include
• Service contracts
• Management contracts
• Leases/Affermages
• Concessions
• Operators can be publicly, mixed, or privately
  owned

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PPP Pre-requisites - 1
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PPP Pre-requisites - 2
MARKET TRANSPARENCY
REGULATORY FRAMEWORK
COST-COVERING TARIFFS
POLITICAL COMMITTMENT
OPTION
Low
Low to Moderate
Low to Moderate
High
Management Contracts
Moderate
Moderate
Moderate to High
High
Lease / Affermage Contracts
Moderate
High
High
High
Concession Contracts
High
High
High
High
Full Divestiture
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PPP Attributes Minimum Governance Requirements
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Choosing the best model according to risk and
tariff conditions
Costs/Revenues
Management Contract
Tariffs dont cover OM costs
Management Contract
Lease/Affermage
Tariffs cover OM costs only
Lease/Affermage
Concession
Tariffs cover total costs
Political and Regulatory Risk
LOW
HIGH
Operator willing to sink capital
Operator willing to take operating risk only
Operator wont take any risk
Source Water Operators Round Table, Nov. 2004
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Risk mitigation instruments

• Currency risk
• Forex debt and local currency earnings
• Regulatory risk
• Contractual stipulations vis-à-vis regulatory
  discretion
• Payment/performance risk
• Government fails to pay amounts due
• Sub-sovereign risk
• Water investments are often at the sub-sovereign
  level

• Partial risk guarantees
• Partial credit guarantees
• Political risk insurance
• Breach of contract coverage

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Choosing enhanced models
Source Water Operators Round Table, Nov. 2004
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Asset Owner
Operator
Delegated Contract Options
100 public
100 private
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Ownership of Fixed Assets and Ownershipof
Operating Company
Source Janssens (2004), adapted from Blokland
Braadbaart, IHE-Delft (1998)
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Attributes of a sustainable framework -Public or
Private

• Roles Must Be Clearly Defined and Incentives Must
  Be Internally Consistent When in Conflict, the
  Financial Trade-Offs Must be Explicit.
• Risks Should Be Allocated to the Party That is
  Most Capable of Managing Such Risks.
• Third-Party Agreements Should be Utilized to Hold
  Responsible Parties Accountable and to Convert
  Implicit Charges to Explicit Ones.
• Agreements Should be Arms-Length and Enforceable.
• There Must be an Appropriate Balance of Power
  No One Party Should Have Overwhelming Authority.
• Should Seek to Develop Institutions to their
  Natural End.

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Choice of Options for PPP

• It is not only the option chosen but the process
  by which the objectives of the reform process are
  achieved, that matters.
• The sustainability of reform and the long-term
  future of utilities will depend on the success in
  extending services to low-income communities.

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Increased attention tolocal private sector
involvement

• Formal
• consultants, contractors, suppliers, utility
  staff who bid for contracts to operate town and
  village systems
• main issue structure of transaction design
  bidding process, contract design
• Semiformal
• entrepreneurs, cooperatives/user associations who
  develop, finance and manage small water supply
  systems
• main issue exclusivity/monopoly service,
  regulatory framework, risk management

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Small-scale providers (SSP)
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Outline

• Introduction
• The water supply and sanitation sector
• The Millennium Development Goals
• The financing challenge, creating the enabling
  environment
• Utilities and public-private partnerships
• Performance
• Sequencing reform
• Private participation, possible reform paths
• The evolving World Bank Group business model

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the World Bank Group
..A financial cooperative owned by 180
governments of the world

• Mission
• To reduce poverty and improve the living
  standards of people in developing countries

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Banks Business Products

• Financial Instruments
• Investment Loans/Credits
• Development Policy Loans/Credits (formerly
  Adjustment)
• Risk Mitigation Instruments (Guarantees)
• Other Instruments
• Analytic work
• Dialogue/advice

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Lending instruments

• Investment lending
• Provides financing for specific expenditures,
  activities, or outputs
• Finances capital investment, institutional
  development, sectoral local capacity building
• Discrete time period generally long-term focus
• Stand-alone, or programmatic

• Development Policy Lending
• Supports a program of policy and institutional
  actions geared to promoting growth, improving
  social conditions, and reducing poverty
• Rapidly disbursing policy-based financing
  (including budget support)
• Moving toward programmatic lending, step-by-step
  phased reform, significant institution-building

Replaced adjustment lending in August 04
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The country sets its priorities through the PRSP

• Poverty Reduction Strategy Paper (PRSP)
• The basis for IMF/Bank debt relief and
  concessional assistance (HPIC/IDA/ESAF)
• Prepared by national governments
• Result of a participatory process in each country
• Leads to better and integrated country strategies
• Allows sector strategies to be seen through the
  lens of poverty reduction
• Has long-term perspective

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The Infrastructure Action Plan
Pragmatic result-oriented approach

• The WBG operates across the entire spectrum of
  public and private provision
• Cost recovery remains a goal, but there is
  greater flexibility in determining the period of
  time over to obtain this goal

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What does the Bank do in water supply and
sanitation?

• Strategy policy
• Guided by various Sector Strategy Papers
• The WBG program for WSS
• The Infrastructure Action Plan
• Lending portfolio
• Knowledge learning
• Partnering with others

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The WBG program for WSS
An overview of the WBGs activities in the Water
Supply and Sanitation sector
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The Bank focuses onfour business lines
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Guidance note on Public Private Sector Roles in
WSS Services

• Provides guidance to WBG Staff on
• suitability of available options for public and
  private roles in the financing and provision of
  urban WSS services
• Bank Group interventions to support countries
• Holistic and pragmatic approach
• Focus on urban WSS including towns

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Within the framework of World Bank sector
strategy papers

• The World Bank WSS business is guided by several
  sector strategy papers, such as

Health, nutrition population
Water resources
Urban local government
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The Bank supports countries to address
operational, policy, and institutional priorities

• Strengthen governance mechanisms
• Ensure financial sustainability
• Strengthen service delivery
• Target interventions to the poor
• Improve health outcomes

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Need for WBG involvementin all stages of reform

• Long term engagement ? do not overestimate pace
  of reform

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The evolving WBG business model
Private
Public
Engagement Anywhere Along the Spectrum
World Bank Group Combined Instruments IBRD/IDA
Loans, Credits and Guarantees IFC Loans and
Investments MIGA Guarantees

• Targeted Subsidies OK
• For Connections
• For User Charges

Cost Recovery Critical But At A Realistic Pace
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The evolving WBG business model

• A pragmatic result-oriented approach

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A world of engagement withPublic Utilities

• WBG will work with well-performing and credibly
  reforming public utilities
• Performance to be judged via benchmarking
• Reform programs to cover policy/reg. framework,
  financial sustainability, service to poor,
  performance improvements
• Revenues recovered from users within near term
  must cover OM costs
• Adequate governance and incentive framework for
  utility

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New approaches to better support WBG client
countries

• Sector Wide Approach (SWAp)an approach to
  support a country-led program for a coherent
  sector in a comprehensive and coordinated manner.
• Poverty Reduction Support Credit (PRSC)a
  programmatic approach for IDA countries that
  seeks to bolster a Governments Poverty Reduction
  Strategy Paper
• Output Based Aid (OBA)a strategy for supporting
  the delivery of basic services that ties
  disbursement of the funding to the services or
  outputs actually delivered

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The Bank is developing newinstruments to
leverage funding

• Combine public and private financing
• Smarter subsidies
• Output Based Aid
• Lending/guarantees at the sub-sovereign level
• Better contracts and bidding procedures
• Risk mitigation instruments
• Partial risk guarantees / Partial credit
  guarantees
• Political risk insurance
• Breach of contract coverage

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All four quadrants of intervention are
important for poverty reduction
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Conclusions

• Water management and development are vital for
  growth and poverty reduction - therefore critical
  for the Bank, like for countries, to be engaged
  in all quadrants of intervention in a coherent
  and mutually-reinforcing program - better water
  management AND development are essential.
• Better management is essential and difficult -
  The main management challenge is not vision but
  principled pragmatism.
• Most developing countries also need investment in
  priority water infrastructure.
• Solutions need to be tailored to particular
  circumstances.

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Thank You!
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