Toolkit: Approaches to Private Participation in Water Services

1
Toolkit Approaches to Private Participation in
Water Services

• Module 5
• Setting Service Standards, Tariffs, Subsidies
  Financial Arrangements

2
Introduction Navigating through this E-Learning
Module
E-learning design davidstiggers_at_comcast.net
3
Elements of the Toolkit
1 ConsideringPrivate Participation
2 Planning the Process
9 Selecting an Operator
TOOLKIT
Appendix A Examples of PP Arrangements
8 Designing Legal Instruments
3 Involving Stakeholders
Appendix B Policy Simulation Model
4 Setting Upstream Policy
7 Developing Institutions
5 Standards, Tariffs, Subsidy, Financials
6 Responsibilities Risks
Additional Material CD-ROM
4
General Outline of Toolkit
Module 5
1 ConsideringPrivate Participation
2 Planning the Process
9 Selecting an Operator
TOOLKIT
Appendix A Examples of PP Arrangements
8 Designing Legal Instruments
3 Involving Stakeholders
Appendix B Policy Simulation Model
4 Setting Upstream Policy
7 Developing Institutions
Module 5 Setting Service Standards, Tariffs,
Subsidies Financial Arrangements
6 Responsibilities Risks
5 Setting Service Standards, Tariffs, Subsidies
Financial Arrangements
Additional Material CD-ROM
5
Module 5 - What will we learn?
6
Balancing Service Standards, Tariffs Subsidies
There is a need to balance Level of service
with Level of Tariffs. Better service costs
more. Governments have the task to decide what
is affordable. The diagram illustrates the
elements and the process followed in this Module
In this Module we describe an iterative process,
to answer the question How can we afford better
services under a new Arrangement?
Specify Services
NO
Estimate Cost
YES
Does it work?
Set Tariffs Subsidies
7
Balancing Service Standards, Tariffs Subsidies
In this Module we describe an iterative process,
to answer the question How can we afford better
services under a new Arrangement?
Setting Level of Service is an iterative
process. First, having chosen a proposed Level
of Service, then there is a need to Specify the
Services technically.
Then it is necessary to Estimate the Cost of
the level of service and of any related
investment.
8
Balancing Service Standards, Tariffs Subsidies
In this Module we describe an iterative process,
to answer the question How can we afford better
services under a new Arrangement?

• The Government then has decide
• whether the Cost of this level of service can be
  supported, and
• what Tariff Levels need to be set for effective
  cost recovery.
• if any Subsidy has to be used to make an
• affordable service to the customer including
  Type of Subsidy).

9
Balancing Service Standards, Tariffs Subsidies

• In the final sections of the Module we discuss
• Implications for Design of PP
• Arrangements
• Guidance on Structuring Finance for the
• Arrangement.

Estimating the Trade off between Level of Service
and Tariff/Subsidy is best done with a financial
model such as the one provided with the Toolkit.
If the Cost of Services proves too high then
the process is iterated, amending the elements,
until a satisfactory balance between Level of
Service and Tariff is found.
In this Module we describe an iterative process,
to answer the question How can we afford better
services under a new Arrangement?
When the Balance between Cost of Service and
Tariff is satisfactory, then we can proceed with
the design and Implementation of the chosen
arrangement
10
Specifying Service Levels
To start the process we need to choose preferred
Levels of Service and define the technical and
operational basis needed to reach these service
levels.

• First we look at how service goals are set for
  the Utility under the proposed Private
  Participation Arrangement
• Two main issues to be defined
• Coverage of service
• Quality of service

11
Specifying Service Levels
To start the process we need to choose preferred
Levels of Service and define the technical and
operational basis needed to reach these service
levels.

• First we look at how service goals are set for
  the Utility under the proposed Private
  Participation Arrangement
• Two main issues to be defined
• Coverage of service
• Quality of service

12
Estimating Cost of Services
Once initial objectives have been set,
Government should estimate the cost of providing
the service.
13
Cost of Service
When a Utility cannot cover its cost, service
will suffer
Estimating Cost of Service Once initial
objectives have been set, Government should
estimate the cost of providing the service.
Average costs are used as an effective basis.
This is an important step, since it will be
important to determine to what extent Cost
Recovery can be achieved by the chosen Tariff
level. The reasoning behind this assessment of
the level of Cost Recovery is that "When a
Utility cannot cover its cost, service will
suffer If you cut back on essential expenditure
(Examples Chemicals, Pump replacement or
expansion of the network) the services suffer.
Similarly reduction in maintenance, renewal or
expansion of the system may also increase the
costs of operation in the medium term Cost
estimating is difficult and technical, but need
to look at three main elements ? Operating
Maintenance Expenses ? Depreciation ? Return
on Capital
Essential to first have a clear idea of total
costs, then you can separately decide whether the
tariff should cover all of those costs, or
whether tax payers should subsidize the service.
14
Cost of Service
When a Utility cannot cover its cost, service
will suffer
Estimating Cost of Service Once initial
objectives have been set, Government should
estimate the cost of providing the service.
Average costs are used as an effective basis.
This is an important step, since it will be
important to determine to what extent Cost
Recovery can be achieved by the chosen Tariff
level. The reasoning behind this assessment of
the level of Cost Recovery is that "When a
Utility cannot cover its cost, service will
suffer If you cut back on essential expenditure
Examples Chemicals, Pump replacement or
expansion of the network the services suffer.
Similarly reduction in maintenance, renewal or
expansion of the system may also increase the
costs of operation in the medium term Cost
estimating is difficult and technical, but need
to look at three main elements ? Operating
Maintenance Expenses ? Depreciation ? Return
on Capital
Essential to first have a clear idea of total
costs, then you can separately decide whether the
tariff should cover all of those costs, or
whether tax payers should subsidize the service.
15
Cost recovery and tariff implications
Can we afford to pay for better services?
16
Cost Recovery and Tariff
To be viable Tariffs Subsidies Total Cost
of Service
If not full cost recovery from the Tariff (if
Cost of Service exceeds Tariff income) either
Subsidies will be needed, or Services need to be
lowered.
Next step is to determine how much should be
recovered through Tariffs.
Service Coverage
Service Quality
COST OF SERVICE
TARIFF INCOME
INCENTIVES
Cost of Service tells Government how much it will
cost to provide the service. In addition to
Service Coverage and Quality costs, Governments
need to consider ? Annual cash needs of the
utility and financial ratios required by lenders
(e.g. debt repayment rates) ?
Environmental or social costs that the government
decides should be borne by the
Utility
17
Cost Recovery and Tariff
To be viable Tariffs Subsidies Total Cost
of Service
Service Coverage
Service Quality
COST OF SERVICE
TARIFF INCOME
INCENTIVES
Tariff Setting Three reasons why a tariff for
full cost recovery may be considered too high ?
Willingness to Pay The extent to which
people are unwilling to pay the full cost of
service ? Social Acceptability People are
willing to pay but it is considered socially
unacceptable to pay what the service costs
require ? External Benefits Environmental
or Public Health issues make it beneficial to
charge less
18
Use of Subsidies
If Cost of Service exceeds Tariff income, then a
Subsidy will be needed
19
Types of subsidy
Private Participation can involve suitable
subsidy arrangements
Who Subsidy paid To
This Table illustrates some of the main
categories of Subsidies. Subsidies can be
categorized Where the money comes from? ?
Customer Revenue ? Government Revenue ?
Development Agency Grant or Loan with
concessional element. (These are generally
used to make structuring a subsidy fund
easier, or for easing in a new
tariff structure in the short term) Where
subsidies are paid to and for what?
Where Subsidy comes From
20
Types of subsidy
We will look at some specific Input and Output
Subsidy forms.
Input Based Subsidy Traditionally subsidies were
paid to help utilities recover their costs (Input
Based Subsidy). However, this supports the
costs, not the results.
Output Based Subsidy A better approach (and
especially where a Private Operator isinvolved)
is to make payment contingent on specific
outputs, or Output Based Subsidy.
Now we will look at the various forms of Input
and Output based subsidy in more detail
21
Types of subsidy
Private Participation can involve suitable
subsidy arrangements
22
Balancing Service Standards, Tariffs Subsidies
This is an iterative process. Can we afford
better services?
23
Finalizing Tariff, Subsidy and Service Level
Develop options, looking for an acceptable
trade-off between tariffs, services and subsidies
Following our Process, we have 1. Arrived at
Cost of Service
Finally we have 3. Evaluated any necessary
subsidies
Balancing the cost tariff issues
Following our Process, we have 2. Looked at
acceptable Tariff scales
INCENTIVES

• 4. Now we have reached the point where we have to
  consider if we have reached a Balance between
  Costs and Tariffs. If the tariff/subsidy revenues
  are not sufficient then we can look at various
  alternative ways of adjusting our tariff/cost of
  service arrangements, for example
• Adopt cost recovery tariffs for all customers
• Set Tariffs below cost for some customers
  and apply a subsidy
• Reduce costs (and thus necessary tariff
  levels) by reducing coverage and service levels

Once we are happy with the balance between Cost,
Tariff and subsidy we can proceed to incorporate
them into the design of the Private Participation
Arrangement.
24
Design ImplementDesign Issues
What key issues should we include in the Private
Participation Arrangement design?
25
Design Issues
PP is possible even if Tariffs dont cover costs

• The Arrangement has to cover various issues
• Cost of Service
• Management Costs Operations Capital
  Investment
• Operators fee in a Management Contract may be
  financed by others, and payment linked to
  outputs.
• Investment elements in lease and management
  contracts can be partially financed by
  governments, investors and operators
• Concession models have been developed that can
  include subsidy, such as using Output Based Aid,
  retaining Government control of how the subsidy
  is used

The Private Participation Arrangement has to be
clearly defined to show where the funds to cover
all costs of service will come from. These costs
include the cost of Management and all necessary
Capital Investment as well as the Operational
Costs needed to provide the Service.

• Examples
• Guyana Management Contract
• Donors finance the Operators Management Fee
• Operator not affected by financial health of
  utility
• Amman, Jordan
• Performance-based Management contract
• Operators performance links to a profit sharing
  incentive

26
Design Issues
PP is possible even if Tariffs dont cover costs

• The Arrangement has to cover various issues
• Cost of Service
• Management Costs Operations Capital
  Investment
• Operators fee in a Management Contract may be
  financed by others, and payment linked to
  outputs.
• Investment elements in lease and management
  contracts can be partially financed by
  governments, investors and operators
• Concession models have been developed that can
  include subsidy, such as using Output Based Aid,
  retaining Government control of how the subsidy
  is used

• Example Partial Investment by Operator
• Senegal, ONES
• Affermage- lease contract with Operator used to
  transfer substantial responsibilities to the
  Operator but with only a limited investment
• Total investment too large to be financed by the
  private operator, covered by Government. The
  Government asset holding company took remaining
  major investments in bulk water transport and
  distribution

Comment Use of Aid in Concession models For
Concessions it was sometimes though that either
the tariff had to have full cost recovery or the
government was committed to increase tariffs
accordingly. This is because in a concession the
operator has to cover all costs, including
investment, from revenues. However, subsidies can
be combined with concessions, and Output based
Aid can help to recover costs as well as improve
services
27
Design Issues
PP is possible even if Tariffs dont cover costs

• The Arrangement has to cover various issues
• Cost of Service
• Management Costs Operations Capital
  Investment
• Operators fee in a Management Contract may be
  financed by others, and payment linked to
  outputs.
• Investment elements in lease and management
  contracts can be partially financed by
  governments, investors and operators
• Concession models have been developed that can
  include subsidy, such as using Output Based Aid,
  retaining Government control of how the subsidy
  is used

28
Design ImplementFinancing Implications
How to involve private and public finance?
29
Private Finance

• The actual project funding could be a mix of
  various finance sources.
• For example The operator could put up 30 of
  the investment required, with the remainder from
  banks or other financial institutions.

• What might be the potential sources of funding
  for a prvately financed project?

30
Private Finance

• What issues to consider when involving Private
  Finance?

• The way that the arrangement is designed, and the
  security offered against risks will affect the
  perception of operators, investors and lenders
  about the level of risks involved and ultimately
  the viability and cost of the project . This in
  turn will affect the level of investment cost,
  and in this in turn affects the cost of provision
  of service under the Private Participation
  arrangement Risk allocation is an important
  subject dealt with in Module 6
• - The cost recovery potential and tariff
  stability are issues that will have a direct
  bearing on this.
• Need to consider the views of potential lenders
  at the arrangement design and bid stages to
  ensure that a viable project can be put out to
  bid, and that investors will be interested to be
  involved
• The amount of investment required needs to be
  considered, to ensure that debt levels and risk
  are viable. The phasing and type of investment
  can be considered in order to rapidly increase
  cash flow, allow the operator to reduce costs and
  free up cash later for more investment
• .

31
These three types of arrangement have an
increasing involvement from private sector
finance, with a potential role for public sector
finance in all three types
Affermage- lease contracts Although the
utility may be generating sufficient cash flow to
cover operating costs, it may not be enough to
service borrowings. The operator can propose a
capital works investment program that will
achieve the operational and financial improvement
targets to be funded by the public sector. To
be successful there is a need to ensure that
there is adequate capital in the utility, but to
ensure that there is not excessive borrowing or
investment
Involving Public Financing
There is still a place for Public Financing. The
needs differ for each PP Arrangement type
Arrangement Type Private Operator Public Finance
Management Contract Operator brings efficiencies Operating cost income needed Capital investment needed Operating costs by government Investment needed to support effective operational improvement Capital investment needs are defined by government
Affermage Lease Operator brings efficiencies Revenues cover operational cost Insufficient cash flow to cover investment Operator can prepare investment program for needed improvements Investment for identified capital works Need to use operators insights in required investment Need to control size and use of investment
Concession Revenues cover operational and investment costs Can mobilize substantial amounts of private capital Government finance can subsidize to meet water sector goals. Involving development agencies may lower costs through cheaper finance
Management Contracts bring focused management
skills and efficiency to a utility. Where the
utility is in financial difficulty , then public
finance will be needed for operational and
capital investment costs. Public or development
agency finance will be needed to support the
reforms being implemented by the operator, for
example replacing pumps, emergency works,
training, as the major improvements will not be
attained with management effort alone.
32
Involving Public Financing
There is still a place for Public Financing. The
needs differ for each PP Arrangement type
Arrangement Type Private Operator Public Finance
Management Contract Operator brings efficiencies Operating cost income needed Capital investment needed Operating costs by government Investment needed to support effective operational improvement Capital investment needs are defined by government
Affermage Lease Operator brings efficiencies Revenues cover operational cost Insufficient cash flow to cover investment Operator can prepare investment program for needed improvements Investment for identified capital works Need to use operators insights in required investment Need to control size and use of investment
Concession Revenues cover operational and investment costs Can mobilize substantial amounts of private capital Government finance can subsidize to meet water sector goals. Involving development agencies may lower costs through cheaper finance
33
Involving Public Financing
In practice it is possible to adapt the main
contract models, to form Hybrid Arrangements to
suit the specific PP needs
Arrangement Type Private Operator Public Finance
Management Contract Operator brings efficiencies Operating cost income needed Capital investment needed Operating costs by government Investment needed to support effective operational improvement Capital investment needs are defined by government
Affermage Lease Operator brings efficiencies Revenues cover operational cost Insufficient cash flow to cover investment Operator can prepare investment program for needed improvements Investment for identified capital works Need to use operators insights in required investment Need to control size and use of investment
Concession Revenues cover operational and investment costs Can mobilize substantial amounts of private capital Government finance can subsidize to meet water sector goals. Involving development agencies may lower costs through cheaper finance
Hybrid Arrangements These main contract models
can be adapted or tailored to suit actual project
conditions. As an example Limited investment
by the Operator in a Management Contract or
Affermage can sometimes be obtained, often with
additional guarantees provided for the Operator,
in order to support key investments necessary to
ensure operational improvement (e.g. network
meters, spare parts).
34
A Development Agency Finance Arrangement
One possible model for securing effective
disbursement

Example The operator makes new connections as
part of his contract . For those in low income
areas he receives a specific fee say, for
example, 150 per connection

• This figure illustrates one possible structure
  for incorporating government and
  development-agency financing in an arrangement,
  showing a public investment or subsidy fund
  established by Government and a development
  agency. It is not the only model, but gives some
  ideas of one approach.
• This incorporates two options
• Investment lending
• Finance from the public fund as a loan
• to the operator to invest in
• infrastructure
• Payment per output
• The subsidy fund would make
• payment when the operator provides
• specified services

Example Major investments needed to replace
decaying pipe networks could be an unacceptable
risk for the private operator if he had to
provide the necessary investment himself.
35
Reviewing Module 5
In this Module we have considered the elements
and process of establishing affordable Levels of
Service, and some of the design and financing
implications.
Specify Services
NO
Estimate Cost
YES
Does it work?
Set Tariffs Subsidies
36
Checklist Module 5
..and the process is detailed in this
Checklist
37
More Information Module 7
38
Supporting Material

• The Toolkit Financial Model
• Toolkit Case Study material
• Toolkit Website
• http//rru.worldbank.org/Toolkits/WaterSanitation/
  
• For comments or further details contact Cledan
  Mandri Perrott at cmandriperrott_at_worldbank.org

39
Toolkit Module 7
End of Module

40
Toolkit Module 7
Return to Start

41
Toolkit Module 7
DO NOT MOVE or ERASE THE FOLLOWING SLIDES

42
Service Coverage targets
Back to Module
There are three main ways of defining service
coverage targets

New Connections or age of households connected
Served by direct connections, kiosks, standpipes
etc, and public latrines or other improved
services (for sanitation)
age of roads with tertiary pipe
Geographic area to be served
43
Service Coverage targets
Each solution for Defining Coverage has a
particular relevance to specific problems, but
each measure has to be used in a way that relates
to the actual conditions. For example Number
of new connections is relatively straight forward
to implement and monitor however Operators may
select to only connect cheap construction or
lucrative paying accounts, unless specific
targets for the poor are set. As Buenos Aires
Concession
Back to Module
There are three main ways of defining service
coverage targets

• DESIGN ISSUES TO CONSIDER
• TYPICAL PROBLEM Defining coverage only in terms
  of piped connections by the Operator to dwellings
  may increase costs. Customers may prefer other
  options that may be available to them at a lower
  cost. La Paz Alto Bolivia
• POSSIBLE SOLUTIONS Flexible definitions of
  coverage may allow the operator to provide
  several types of service, offer more choice to
  customers and reduce cost e.g.
• Bulk supply arrangements with other providers
  offering cheaper and rapid service to
• poor areas
• The definition of connected can be extended
  to allow standpipe provision for a
• number of houses, rather than a single in-house
  connection Manila concession
• People can be considered connected regardless
  of who provides the connection
• Manila concession private local
  networks, bulk water supplied by the Operator

44
Service Coverage targets
Back to Module
Each solution for Defining Coverage has a
particular relevance to specific problems, but
each measure has to be used in a way that relates
to the actual conditions. For example Number
of new connections is relatively straight forward
to implement and monitor however Operators may
select to only connect cheap construction or
lucrative paying accounts, unless specific
targets for the poor are set. As Buenos Aires
Concession
There are three main ways of defining service
coverage targets

• DESIGN ISSUES TO CONSIDER
• TYPICAL PROBLEM Defining coverage only in terms
  of piped connections by the Operator to dwellings
  may increase costs. Customers may prefer other
  options that may be available to them at a lower
  cost. La Paz Alto Bolivia
• POSSIBLE SOLUTIONS Flexible definitions of
  coverage may allow the operator to provide
  several types of service, offer more choice to
  customers and reduce cost e.g.
• Bulk supply arrangements with other providers
  offering cheaper and rapid service to
• poor areas
• The definition of connected can be extended
  to allow standpipe provision for a
• number of houses, rather than a single
  in-house connection
• Manila concession
• People can be considered connected regardless
  of who provides the connection
• Manila concession private local
  networks, bulk water supplied by the Operator

45
Service Quality Targets
Back to Module
It is usual to have more than one type of
quality target that can be set for the Utility

Example Should water be available 24 hours a
day seven days a week, or only at certain times?
Example At what pressure should water be
available?
Example Should the water be treated to strict
guidelines ( e.g. WHO or EU) or is flexibility
allowed for some none-critical parameters?
Availability of Service
Pressure
Water Quality
Example What percentage of wastewater should be
treated, and to what standard?
Example What payment methods? How are
complaints handled?
Effluent Treatment
Customer Service
46
Service Quality Targets
Back to Module
It is usual to have more than one type of
quality target that can be set for the Utility

Targets for Input Based Technical Standards In
addition to these output based Quality Standards,
target levels for input based technical standards
will often be specified for the Operator to
follow (such as minimum depth and diameter of
pipes). Input standards might be important where
Operator investment is not crucial (as for short
duration contract). However, input standards do
not provide incentives for the Operator to
provide the most cost effective way to provide
service to customers
Availability of Service
Pressure
Water Quality
Effluent Treatment
Customer Service
47
Buenos Aires Service Levels
Back to Module
Service Levels Precise geographic areas specified for expansion. Targeting poor areas. Five year expansion program. Objective to increase connected households from 49 to 79 for water and from 21 to 40 for sewerage.
Tariff
Subsidy
Finance Targeting poor required 15 percent of investment but only brought 1 percent more revenue. Structured to bring a lot of private finance near the start of the contract to bring early major new infrastructure (over 1.6 billion)
Scope Water and sewerage utility serving major conurbation, with plan for improving existing infrastructure and expansion of served connections. 1.6 million connections in first 8 years, half of those connected live under poverty line.
Model Concession
48
Cost of Service
Back to Module
The Cost of Service has three elements
Day to day expenses involved in providing
services and keeping the system functioning,
including labor, electricity, chemicals,
maintenance etc..
Operating Maintenance Expenses
The interest on debt and the return on equity.
The weighted average cost (of debt and equity) is
an appropriate measure of return on capital
Reduction in value of the assets over time or
the amount of money needed to be set aside to
replace assets as they wear out
Depreciation
Return on Capital
49
DepreciationCapital Maintenance Approach
Back to Module
50
(No Transcript)
51
Output subsidy
Back to Module
Output based subsidy supports delivery using
explicit performance based targets






OUTPUT BASED

INPUT
-
BASED





Utility
or

Paid to

Customer to
Utility/
Operator
Utility/
Operator
Operator
as

help pay

for
out
puts

for
inputs

implicit or ad hoc
Money

Social security provision linked specifically to
water services. For example subsidies can be
targeted to help to low income families to pay
their Water bills. In the Chile case study the
municipalities pay the water operator to do this.
The municipalities assess which households should
benefit, central government provides the subsidy
and the operator administers it.
the

bill

support


from

• Donor financed output base aid to Utilities.
• New structures have been developed which allow
  development
• agencies to support utilities directly through
  subsidy linked to a
• government controlled subsidy fund, that in turn
  pays a subsidy
• fund that can pay the Operator when particular
  outputs are
• produced, e.g.
• Link payment to new connections
• Cushion the move to cost recovery tariff, by
  paying
• subsidy for a transition period
• Subsidize disadvantaged groups
• Subsidize achievement of externalities, such as
• environmental targets

C
ustomer


Customer

Cross
-
subsidy
bail
-
o
ut


Revenue









Implicit

Social security
Government

subsidy or
provis
i
ons

Revenue


bail
-
out



Development





Donor

Agency grant

Financed


Input sub
s
idy


or loan
with


Outp
ut

based

concessional


Aid

element

52
Output subsidy
Back to Module
Output based subsidy supports delivery using
explicit performance based targets






OUTPUT BASED

INPUT
-
BASED





Utility
or

Paid to

Customer to
Utility/
Operator
Utility/
Operator
Operator
as

help pay

for
out
puts

for
inputs

implicit or ad hoc
Money

the

bill

support


from







C
ustomer


Customer

Cross
-
subsidy
bail
-
o
ut


Revenue









Implicit

Social security
Government

subsidy or
provis
i
ons
Example Social Subsidy Santiago Chile

Revenue


bail
-
out



Development





Donor

Agency grant

Financed


Input sub
s
idy


or loan
with


Outp
ut

based

concessional


Aid

element

53
Input subsidy
Back to Module
Care must be taken with input subsidy as it
supports cost regardless of output

• Implicit Ad- Hoc subsidies
• Governments sometimes provide subsidies in ways
  that are not immediately obvious, and there is a
  need to consider how to avoid unintended
  subsidies.
• Examples
• Subsidies for cost of debt lending money at
  concessional rates or debt
• write-off.
• Bearing of business risk by government
  Government guarantees for the
• operator. May be necessary for the arrangement
  to proceed at all.
• Customer bailouts operator risks are covered by
  unplanned tariff increase
• e.g. Manila tariffs increased above planned
  level because of unexpected
• exchange rate depreciation.
• In-kind grants and tax exemptions Land and water
  rights grants, tax
• exemptions etc. given to public authorities may
  be extended to the private
• operator

• Direct Cash Input subsidy to the utility
• Financing support There is a general issue of
  the financing of new infrastructure, or renewal
  and expansion of existing works. When not covered
  by the tariff, the financing of this is often
  carried by the Government, and amounts to an
  input subsidy
• Cash subsidy to reduce tariff The operator can
  be paid to keep tariffs below the economic level,
  for social reasons. This can be phased out over a
  planned period, with the operator expected to
  reduce his costs through increased efficiency.
• Example the Guinea 1990 lease contract subsidized
  operator costs linked specifically to (a) foreign
  currency costs and (b) debt servicing costs, and
  tapered out after 6 years.

• Cross subsidies
• One customer pays more for the service so that
  other customers can pay less. Can help support
  social goals whilst overall the utility is self
  financing. Techniques used include
• increasing block tariffs where basic water
  needs (a
• block) are provided to all at low price, with
  volumes in
• excess of that sold at a higher price.
• Industrial customers charged at a higher rate
  than
• residential customers
• Cross subsidies are common, but care has to be
  taken to resolve potential disadvantages

C
ustomer


Cross
-
subsidy
bail
-
o
ut


Social security
Implicit or Ad-hoc subsidy
provis
i
ons



Input sub
s
idy


54
Targeting the poor
Back to Module
The objective of targeting benefits to the poor
needs careful design and implementation to be
effective, and the following issues should be
considered..

• Ensure that subsidies and the tariff level give
  the operator sufficient resources and a financial
  incentive to connect and serve poor households
• When many poor households are unconnected, prefer
  access or connection subsidy to consumption
  subsidies
• Ensure subsidies are targeted, transparent, and
  triggered by household demand
• Get enough information to tell whether a proposed
  tariff or subsidy will hurt or help poor
  households
• Because tariffs and subsidies have to be adjusted
  over time, work out how to incorporate concerns
  about the poor in decisions to adjust tariffs

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Output Based Aid OBA
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Santiago (Chile) Social Subsidy
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Service Levels Coverage incorporated in 5 year investment plans with interim targets. Services to nearly 100 of population in service area Quality As national regulations and 5 yr investment plans with interim targets
Tariff Cost recovery All cost recovered through tariff. Both fixed charge and variable charge. Separate volumetric charge for wastewater.
Subsidy Direct subsidy to those identified as poor, identified from social registers. Funded by central government, operator gives as discount to customers and is reimbursed by municipality. Subsidy covers a maximum of 100 of the first 20 cubic meters of monthly consumption to low income families, and can amount between 25 85 of total water and sewerage bill
Finance Donor financing not provided, but previous World Bank and other donor loans provide prior to privatization
Scope Water and sewerage utilities serving 18 communities with approximately 1.3 million connections
Model Divestiture. Aguas Andinas 50 owned by a consortium SUEZ and Agbar, the remainder by government agency, pension funds and other shareholders
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Morocco Towns OBA subsidy (review)
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Service Levels Objective to expand access to water and sanitation to the poor living in recently legalized informal settlements in urban and peri-urban areas. Studies required to verify connection costs, given that the incumbent is a private sector operator.
Tariff
Subsidy OBA subsidy proposed. Some care to be given to ensure that the proposed OBA structure adequately covers transfer of performance risk to the service provider. Subject of review by GPOBA 2005
Finance Targeting poor required 15 percent of investment but only brought 1 percent more revenue. Structured to bring a lot of private finance near the start of the contract to bring early major new infrastructure
Scope Water and sewerage utilities serving major conurbations, X million population with plan for improving existing infrastrucure and expansion of served connections
Model Concessions (Amendis in Tangiers and Lyonnaise des Eaux de Casablanca, in Casablanca) plus public sector incumbent in Meknes region.
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59
Amman (Jordan) Management Contract Cost
Recovery
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Service Levels Coverage disconnect some existing storm water connections Quality A number of quality targets including water and effluent quality, reduction in losses, improvement of constancy of supply, various technical system improvements and improved customer bill collection.
Tariff Cost recovery for operation and maintenance costs. Does not cover investment costs or depreciation. Residential tariffs based on a rising block structure with first 20 cubic meters at a flat rate. Commercial and industrial based on a higher fixed rate. Wastewater similar to water, but at lower rates
Subsidy None
Finance No operator finance. Donor financing for studies ( GTZ), an Operating Investment Fund ( World Bank) for rehab and renewal. Several other donors financing substantial capital investment, TA and the Project Management Unit (EU funds)
Scope Water and sewerage utilities serving Amman and several municipalities (300,000 water connections
Model Performance based Management Contract. Operator, LEMA, was a joint venture between SUEZ (75) and Montgomery Watson and Arabtech Jardenah ( 25)
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Toolkit Module 7
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