Water and Public Finance

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Water and Public Finance

• Tales from Albania PER
• Mike Webster, ECA-Infrastructure
• Public Finance Analysis and Management Course
  April 2007

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Core message PER can help Line Ministry make
their case to the Ministry of Finance

• Ministry of Finance
• (fiscal policy etc.)
• Budget allocation

PER linked spending to outcomes
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Outline

• 1. Spending
• 2. Outcomes
• 3. Linking spending to outcomes
• 4. Was it worth it?

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Outline

• 1. Spending
• 2. Outcomes
• 3. Linking spending to outcomes
• 4. Was it worth it?

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Albania

• 3.1 million people
• 2,600 GDP/cap
• GDP growth 5.5
• 18.5 headcount poverty rate
• Transition from communism in 1990
• Stabilization Association Agreement with EU in
  2006

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Institutional fragmentation

• MoF
• Capital grant
• Operating subsidy

• MoWater
• Policy
• Supervisory Boards of utilities
• Allocate investment

• MoI
• Transfer ownership and Board to LG

Central Government
54 utilities
600 commune systems
Local Government
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Central govt. financing of sector
Capital grant
MoF / MoPWTT

• Capital costs
• Expansion
• Rehabilitation

• Operating costs
• Tariffs
• Subsidy

Utilities / Communes
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Total spending by type and source
(million Lek)
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View from the Ministry of Finance

• Total spending is relatively limited 0.7 GDP,
  2.5 of total expenditures
• But sectors dependency on central government
  transfers has increased
• Operating subsidy increased 5 fold in 5 years
• Growing inter-enterprise arrear issue between
  water and energy utilities
• Utilities rewarded for inefficiency through
  operating subsidy
• And investment transfers are allocated no
  strings attached

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Financing utilities operating costs

• Operating costs increasing (due to cost of
  electricity)
• Tariffs increasing (but not keeping pace with
  costs)
• Gap between costs and utility revenues
  increasing therefore operating subsidy and
  arrear payments increasing

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Outline

• 1. Spending
• 2. Outcomes
• 3. Linking spending to outcomes
• 4. Was it worth it?

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Poor sector performance

• Low access
• Water supply 78 access (66 in rural areas)
• Wastewater 50 access, no wastewater treatment
• Poor service quality
• 6 hours/day
• poor water quality
• Vast investment needs
• Decrepit and deteriorating water systems
• Massive wastewater investments to meet EU
  requirements
• Need 0.6 of GDP annually, whereas current
  spending is 0.3

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Inefficient utilities

• High costs (increased 30 over past 5 years)
• Increased power costs (electricity increased 60)
• High staff costs (overstaffed utilities)
• High losses (69)
• Technical losses (leaks poor maintenance, old
  systems)
• Commercial losses (illegal connections, no
  metering, i.e., consumption much higher than
  billed amount)
• Low revenues
• Tariffs (set to recover 70 of OM costs)
• Collections (only collect 66 of bills)
• Resulting in utilities revenues covering 50 of
  operating costs

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e.g. non-revenue water
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...particularly relative to ECA
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but significant performance variation across the
country
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and inequitable distribution

• Income inequality in service quality, and poor
  households generally not connected
• Rural urban divide
• Some regional disparity

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Outline

• 1. Spending
• 2. Outcomes
• 3. Linking spending to outcomes
• 4. Was it worth it?

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Core finding MoF subsidy creates disincentive
for performance improvements

• Reverse incentive to increase own revenues
  higher the gap between operating costs and own
  revenues, the higher the subsidy
• Central financing at right level, but
  misallocated
• Operating subsidy should be reduced
• Capital grant should be increased
• Once operating subsidy reduced, utilities will be
  forced to increase their own revenues through
• Increasing collections
• Increasing tariffs
• Reducing costs
• Affordability analysis confirm there is ample
  room for increasing residential tariffs. If
  necessary, operating subsidy can be converted
  into poverty targeted scheme.
• Capital grant should include performance in
  allocation formula

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Proposed tariff increases are affordable
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Hidden cost analysis in ECA

• Hidden costs based on
• Collection failure
• Tariffs below cost recovery
• Excessive losses
• Single measure of hidden costs in infrastructure
  sectors
• Completed in energy and gas in 22 countries
• 26 in water
• Results at http//ecadata-worldbank.org/ecadata/

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Eliminating inefficiencies could generate almost
0.8 of GDP in savings, annually

• Using methodology developed in ECA
• Reducing technical losses will require
  significant investment

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Outline

• 1. Spending
• 2. Outcomes
• 3. Linking spending to outcomes
• 4. Was it worth it?

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What was the value added of the PER?

• Provided analytical framework for sector dialogue
  in the context of existing project lending (DPO
  and investment lending)
• Provided both external clients (MoF, line
  ministry) and internal clients (Country Team)
  robust analysis for major policy reform
• Performance-based incentives structures piloted
  in investment project (4 utilities) and scaled-up
  in DPO (30 utilities)
• Policy condition in DPO
• Improve the central government budget allocation
  system to water utilities to leverage
  improvements in their financial technical
  performance by
• Reducing operating subsidies
• Designing a performance-based policy for
  investment transfers
• Developing performance contracts between line
  ministry, Municipalities and Utilities

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Core message PER can help Line Ministry make
their case to the Ministry of Finance

• Ministry of Finance
• (fiscal policy etc.)
• Budget allocation

PER linked spending to outcomes

• Build capacity in govt. e.g. monitoring unit
• Benchmarking is most interesting to govt. and
  utilities
• PREM/sector collaboration is the value added for
  Bank and the client and can assist
  buy-in/collaboration between line ministry, MoF,
  MoI

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Full document on external website

• http//go.worldbank.org/7CX925BS30