Municipal Pricing and Practice for Water and Sewerage Services in Kenya

1
Municipal Pricing and Practice for Water and
Sewerage Services in Kenya
ALGAF Video Conference July 7 2006,
NAIROBI Prepared by Eng. Malaquen
Milgo malaquen.milgo_at_gtz-wsrp.or.ke
2

• AGENDA

• Background
• Bottlenecks under the old Legal Framework (Cap.
  372)
• The Revised Legal Framework Water Act 2002
• The New Institutional Set-up for the Water
  Services sub-sector
• Outlook on Pricing of Water and Sewerage Services

3
Previously LAs provided water services as water
undertakers appointed by the Minister responsible
for Water

• Water Act Cap. 372

The Undertakers set Tariffs to be approved by the
Minister
Water Undertakers

• As of 2003 only 8 Local Authorities were water
  undertakers Nairobi, Kisumu, Nakuru, Nyeri,
  Eldoret, Nyahururu, Nanyuki, Kericho
• The Director of Water and National Water and
  Pipeline Corporation a state corporation were
  the major undertakers
• The conflicting role of the Ministry responsible
  for water Undertaker and Regulator at the same
  time explains the small number of LAs
  operating as Undertakers

• Approval by Minister for Water took a long time
• Most LAs exploited a loophole in the Local
  Government Act Cap.265 to obtain approval for the
  Local Governmnet Minister under Fees and
  Charges
• In most cases tariffs were set rather arbitrarily

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Municipal water and sewerage rates were set
rather arbitrarily, a factor that made it
difficult for municipalities to ensure coverage
of costs and provide a sustainable service

• FACTORS INFLUENCING LA DECISIONS ON TARIFFS

Factors
Resulting Weaknesses

• Financial factors especially those relating to
  debts
• Historical reasons
• Political considerations
• Policy issues that were in most cases not
  written

• Elements of unfairness, especially to low income
  earners
• Failure to categorize or classify consumers
• Some rates charged were too low
• Failure to cover costs

5
Any rate setting process must be objective in
order to result in an effective and appropriate
tariff that takes into account the actual cost of
offering the service

• COST OF WATER AND SEWERAGE SERVICE

2. OPERATIONS COST The costs arising out of
using the infrastructure for its intended purpose
eg. Chemicals, Energy, Staff etc
1. INVESTMENT COST Construction costs Initial
creation of infrastructure or increasing its
capacity or geographical extent Rehabilitation
costs Restoring the facility to its intended
operational status and capacity These costs are
usually in the form of loan repayments etc
COST OF OFFERING THE SERVICE
3. MAINTENANCE COST Cost of keeping
infrastructure in a fully functioning or
operational condition Prevetive, Corrective,
Routine, Periodic
Infrastructure is a set of systems in a work
environment utilized for service delivery
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Several objective approaches have been utilized
to set water and sewerage rates in municipalities

• ALTERNATIVE METHODS

Advantages
Disadvantages
1. The Revenue Unit Method (RU)

• Billing system is simple
• Minimum charge includes all fixed costs
• Easy to calculate
• Revenue oriented

• No consumption blocks
• High consumption not recognised

2. The Quantity Block Method (QB)

• Consumption blocks considered
• Minimum charges are uniform
• Easy to calculate
• Flexible in reaching revenue target
• Rates are progressive

• Too many arbitrary choices to be made
• Non computerized billing relatively difficult

3. The Compromise Method (RU QB)

• Generates more revenue on minimum charges
• Consumption blocks considered
• Rates are progressive

• Calculation is longer
• Arbitrary choices of factors
• Non computerized billing is complicated

4. The Geometric Method (GM)

• No arbitrary choice of factors
• Rates are progressive
• Minimum charges generate more revenue

• Calculation is relatively complicated
• Non computerized billing relatively complicated
• Applicable for up to three blocks only

5. The Linear Method (LM)

• Subsidizes low income groups
• Calculation is easy
• Billing is relatively easier
• Progressive rates are charged
• Revenue oriented

• No progression without subsidy

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To a large extent the capacity and useful life of
infrastructure is undermined by the failure to
cost and carry out maintenance as opposed to
operations and maintenance

• REPERCUSSIONS FROM LACK OF MAINTENANCE

Economic Financial
Technical
Social, Health Environmental

• Direct economic inefficiencies and financial
  losses (water leaks wastes chemicals, labour and
  energy drainage neglect may result in floods)
• Rise in costs of other services eg.
  Transportation etc
• Unncecessary investment in rehabilitation or
  reconstruction
• Effectively planned maintenance could promote
  local contracting skills and generate employment
  opportunities

• Incresaed burdens especially to women and the
  urban poor
• Increased prevalence of water-borne diseases, and
  increase in child morbidity and mortality
• Leaks may allow infiltration of raw sewage into
  water mains
• Degradation of the environment and contamination
  of acquifers. Poor raw water quality implies
  higher treatment costs
• Soil erosin and degradation of land resources

Ignoring maintenance may result in major
technical problems in another sector eg. Dams
breaching, wash-outs causing landslides etc
The ability of infrastructure to deliver its
intended purpose is undermined or curtailed
altogether
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• AGENDA

• Background
• Bottlenecks under the old Legal Framework (Cap.
  372)
• The Revised Legal Framework Water Act 2002
• The New Institutional Set-up for the Water
  Services sub-sector
• Outlook on Pricing of Water and Sewerage Services

9
The overlapping roles and responsibilities of key
public actors in the Water Sector were the main
causes of conflicts and poor services in the
sector

• INSTITUTIONAL CONFLICTS IN THE WATER SECTOR
  (UNDER CAP 372)

MoLF
MWRMD
NWCPC
MoLG
SHG/NGOs
MoA
Livestock water
Irrigation
Policy Formulation
Conflicts on lead in policy formulation
Regulation
Conflicts on allocation of resources
Conflicts on checksand balances
Conflicts on checksand balances
Conflicts on checksand balances
LAs
Service Provision
Poor services
Local Authorities Source WSRS
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The inadequate institutional set-up resulted in
poor sector performance

• BOTTLENECKS IN THE WATER SECTOR (UNDER CAP 372)

• Poor coordination in Water Sector
• Poor policy accountability
• Poor attention to water resources management

Policy Formulation

• Lack of clear regulatory framework
• Lack of performance monitoring and evaluation
• Poor performance of water-undertakers

Regulation

• Poor management of water resources (Quality and
  Quantity)
• Failure to attract and retain skilled manpower
• Inadequate allocation of resources
• Poor service delivery
• Low coverage
• Inability to attract investments
• Dilapidated infrastructure

Service Provision
The absence of written policy in the past,
prior to the Sessional Paper No. 1 of 1999,
created room for sector actors to implement
policies devoid of holistic approach to sectoral
objectives Source WSRS
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The bottlenecks informed the review of both the
Local Government Act Cap 265 and the Water Act
Cap 372

• WATER ACT REVIEW

Old Water Legislation CAP 372
New Water Act 2002

• Core problems
• Inadequate and insufficiently harmonized legal
  and institutional frameworks
• Inefficient operational and financial management
  systems

• Solution
• Separation of policy formulation, regulation and
  service provision
• Separation of WSS and WRM services
• Devolution of responsibilities

Water Sector Reforms
Source WSRS
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• AGENDA

• Background
• Bottlenecks under the old Legal Framework (Cap.
  372)
• The Revised Legal Framework Water Act 2002
• The New Institutional Set-up for the Water
  Services sub-sector
• Outlook on Pricing of Water and Sewerage Services

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The Water Act 2002 separates policy formulation,
regulation and services provision separates
water resources from water services defines
clear roles for sector actors and provides a
decentralized institutional framework

• INSTITUTIONAL SET-UP UNDER WATER ACT 2002

Water AppealBoardWAB
Water ServicesTrust FundWSTF
MWRMD
Policy Formulation
National level
WaterServicesRegulatoryBoardWSRB
WaterResourcesManagement AuthorityWRMA
Regulation
WaterServicesBoardsWSBs
Catchment Areas Advisory Committees CAACs
Regionallevel
NWCPC
Services Provision
Water Services ProvidersWSPs
Water Resources User AssociationsWRUAs
Local level
Water and Sewerage Service
Water Resources Management
Consump-tion, Use
Consumers, Users
Details in new institutions flyer Source Wate
r Act 2002
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Clear roles and responsibilities defined to
sector actors will result in improved water
sector performance

• EXPECTED OUTCOMES UNDER WATER ACT 2002

• Improved coordination in Water Sector under one
  Ministry
• Clear policy accountability
• Focused attention to water resources management

Policy Formulation

• Clear regulatory framework
• Performance monitoring and evaluation
• Improved performance of water-undertakers

Regulation

• Improved management of water resources (Quality
  and Quantity)
• Ability to attract and retain skilled manpower
• Efficient provision of services leading to self
  sustainability
• Improved service delivery
• Increased coverage
• Ability to attract investments
• Improved infrastructure

Service Provision
Source WSRS
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• AGENDA

• Background
• Bottlenecks under the old Legal Framework (Cap.
  372)
• The Revised Legal Framework Water Act 2002
• The New Institutional Set-up for the Water
  Services sub-sector
• Outlook on Pricing of Water and Sewerage Services

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The Water Services Regulatory Board (WSRB) is
responsible for the regulation of water and
sewerage services in partnership with the people
of Kenya

• KEY RESPONSIBILITIES AND INTERACTION WSRB

MWRMD (policy and supervision)
WRMA MoH NEMA NWCPC KBS
Citizens, Civil society, and otherStakeholders
WSRB

• - Gives advice to Minister
• Licensing of WSBs
• Consent to agreement betweenWSBs and WSPs
• - Monitor WSBs and WSPs
• - Develop tariff guidelines
• - Develop model license agreements
• - Develop model performance agreements
• - Establish procedures for customer complaints
• - Inform the public on sector performance

PublicConsultation
WSBs WSPsConsumers
National Environmental Management
Authority National Water Conservation and
Pipeline Cooperation Kenya Bureau of
Standards Source WSRS
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The Water Services Boards (WSBs) are responsible
for the efficient and economical provision of
water and sewerage services within their areas of
jurisdiction

• KEY RESPONSIBILITIES AND INTERACTION WSBs

MWRMD (policy and supervision) WSRB
NEMA WRMA LAs NWCPC RDAs CAACs WRUAs
Citizens, Civil society, and otherStakeholders
WSBs

• - Develop facilities
• Prepare business plans andperformance targets
• - Apply for license to provide waterand sewerage
  service
• Apply regulations on water servicesand tariffs
• Contract Water Services Provider
• - Purchase, lease or acquire water and
  sewerageinfrastructure and land

WSPs
WSPs
WSPs
WSPs
National Environmental Management
Authority Local Authorities Regional
Development Authorities Source WSRS
Consumers
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Water Services Providers (WSPs) shall be
contracted by WSBs to provide quality water and
sewerage (sanitation) services

• KEY FUNCTIONS AND INTERACTION WSPs

WSRB WSB
WRMA CAACs NEMA
Civil society
WSPs

• Bid for service provision
• Operate and maintain facilities
• Comply with quality standardsand service levels
• Billing and revenue collection

Consumers
National Environmental Management
Authority Source WSRS
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A WSP is defined to be a company, NGO or other
person or body providing water services under and
in accordance with an agreement with the licensee
(WSB) within whose limits of supply the services
are provided

• LINKAGES IN THE LIBERALIZED FRAMEWORK

1
2
3
Licence Requirements Technical and financial
capability of WSB and WSP to be contracted Sound
plan for the provision of efficient, affordable
and sustainable service Satisfactory performance
targets, planned improvements and tariff
structure Commercial orientation
WSRB and WSBs Licence
Service Provision Agreement Licence Requirements
cascaded down to WSPs with an inclination on
operations and maintenance of facilities
WSBs and WSPs SPA
Consumer Contract Obligations of either party
including terms of services provision and
payment WSBs are now promoting the development
of appropriate Customer Services Charters by WSPs
WSPs and Consumers Consumer Contract
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The Water Services Trust Fund (WSTF) shall assist
in financing the provision of water services to
areas of Kenya which are without adequate water
services

• KEY FUNKTIONS AND INTERACTION WSTF

WSTF

• Provide financing and support towards
• Capital investments for community water services
• Water services activities outlined in the
  National Water ServicesStrategy
• Capacity building activities and initiatives
  among communities
• Awareness creation and information
  disseminationregarding community management of
  water services
• Active community participation in the
  implementationand management of water services

Donors
Parliament
MWRMD
WSBs
Funding Consultation
Grants and loans Appropriations and
budget Also the NWCPC when exercising
residual power of Minister to provide water
services Source WSRS
WSPsCommunities, NGOs, CBOs
Water and Sewerage Service
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• AGENDA

• Background
• Bottlenecks under the old Legal Framework (Cap.
  372)
• The Revised Legal Framework Water Act 2002
• The New Institutional Set-up for the Water
  Services sub-sector
• Outlook on Pricing of Water and Sewerage Services

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Pricing for water and sewerage services shall now
be subject to PRICE CONTROL by the Regulator with
an aim to protect consumers while ensuring the
WSP not only remains viable but has an incentive
to operate efficiently

• PRICE CONTROL WHAT IT IS NOT, WHAT IT IS

The control is a rather a constraint on the
overall level of the WSPs prices. As long as the
WSP complies with this constraint it is free to
choose its prices, and it has every incentive to
act as efficiently as possible
Price control doesnot imply that the Regulator is
actually dictating prices the WSP can charge
PRICE CONTROL
The basic principle of price control regulation
is that prices should be set, in real terms, for
a predetermined period. During this time the WSP
is free to keep any additional profits it can
realize by operating more efficiently. It is also
exposed to the risk of losses if it becomes
inneficient
The Regulator must ensure the constraint is not
too harsh, for the WSP to remain viable, although
if the constraint is too loose, consumers will
pay unnecessary high prices, which is likely to
be undesirabe
Source EDI Development Studies, Resetting Price
Controls for Privatized Utilities, The World Bank
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The Process of Resetting a Price Control
Request Information (2 years ahead)
Assess and Amend Information (18 mths ahead)
Operating and Maintenance Costs
Demand Forecasts
Asset Base
Determine Form of Cap (15 mths ahead)
Investment
Select Candidate Price Cap (12 mths ahead)
Determine Rate of Return (15 mths ahead)
Calculate Revenue Needs
Predict Resulting Revenue
Compare with Revenue Needs, Check Cash Flows etc
If Not
If Appropriate
Propose Price Cap (at least 9 mths ahead)
WSP Accepts
WSP Rejects
Appeal Mechanism (9-3 mths ahead)
Source EDI Development Studies, Resetting Price
Controls for Privatized Utilities, The World Bank
Implement Price Cap (at least 1 mth ahead)
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Implementation of the new sector legal framework
may support realization of sector objectives

• POTENTIAL PAY-OFFS

Efficient use and Maintenance of Facilities
Improved Affordability and Willingness to Pay
Increased Accountability
Improved Service Quality and Quantity
Timely Investments
Realistic Pricing