water and public finance
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Water and Public Finance
Tales from Albania PER
Mike Webster, ECA-InfrastructurePublic Finance Analysis and Management Course – April 2007
Slide 2
Ministry of Finance
(fiscal policy etc.)
•Budget allocation
Ministry of Water
(sector policy etc.)
•Spending
•Outcomes
PER linked
spending to
outcomes
Core message: PER can help Line Ministry “make their case” to the
Ministry of Finance
Slide 3
Outline
1. Spending
2. Outcomes
3. Linking spending to outcomes
4. Was it worth it?
Slide 4
Outline
1. Spending
2. Outcomes
3. Linking spending to outcomes
4. Was it worth it?
Slide 5
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
Albania
Slide 6
Institutional fragmentation
Central Governmen
t
Local Governmen
t
MoF
•Capital grant
•Operating subsidy
MoWater
•Policy
•Supervisory Boards of utilities
•Allocate investment
MoI
•Transfer ownership and Board to LG
54 utilities
600 commun
e systems
Slide 7
Central govt. financing of sector
MoF / MoPWTT
Utilities / Communes
Capital costs
•Expansion
•Rehabilitation
Capital grant
Operating costs
•Tariffs
•Subsidy
Operating
subsidy
Slide 8
Total spending by type and source
GOA Donor Private sector
GOA Utility (tariffs)
Arrear clearance
as % total budget
as % of GDP
as % of GDP
1995 1,522 223 139 590 1,661 2,474 1.10%1996 1,599 146 31 550 1,630 0.50% 2,327 0.70%1997 566 209 45 400 611 0.20% 1,219 0.40%1998 1,054 377 136 700 1,190 0.30% 2,267 0.50%1999 702 207 55 850 757 0.20% 1,814 0.40%2000 977 776 72 916 1,049 0.60% 0.20% 2,741 0.50%2001 1,377 560 77 1,108 1,100 2,554 1.50% 0.40% 4,222 0.70%2002 1,903 653 56 280 1,085 1,521 3,704 2.00% 0.60% 5,499 0.90%2003 1,759 2,022 105 1,604 1,621 1,500 4,863 2.50% 0.70% 8,612 1.30%2004 3,008 2,001 205 927 2,130 2,000 5,935 3.00% 0.80% 10,272 1.30%2005 2,792 1,650 205 1,254 2,130 991 5,037 2.30% 0.60% 9,022 1.10%
GOA spendingCapital spending Operating spending Total spending
(million Lek)
Slide 9
Total spending is relatively limited: 0.7% GDP, 2.5% of total expenditures
But sector’s 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”
View from the Ministry of Finance
Slide 10
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
-
1,000
2,000
3,000
4,000
5,000
6,000
2000 2001 2002 2003 2004 2005Repayment of arrearsGOA operating subsidy (less arrears)Collected TariffsOperating cost (incl. depc)
Slide 11
Outline
1. Spending
2. Outcomes
3. Linking spending to outcomes
4. Was it worth it?
Slide 12
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%
Poor sector performance
Slide 13
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 O&M costs)– Collections (only collect 66% of bills)
Resulting in utilities revenues covering 50% of operating costs
Inefficient utilities…
Slide 14
…e.g. non-revenue water
0
150
300
450
600
750
900
1,050
1,200
1,350
Pukë W
SS
E
Sara
ndë W
SS
E
Vau D
ejë
s W
E
B. C
urr
i WE
Kru
je W
SS
E
Bera
t W
SS
E
Lezhe W
SS
E
Pogra
dec W
SS
E
Korç
ë W
SS
E
Elb
er
WS
SE
Shkodër
WS
SE
Perm
et W
E
Vlo
rë W
E
Durr
ës W
SS
E
Tiranë W
SS
E
l/c/d
Water Production - (lcd) Water Sale - (lcd)
Slide 15
...particularly relative to ECA
0102030405060708090
100
Tajik
istan
Lithu
ania
Russ
ianFe
dera
tion
Ukra
ine
Eston
ia
Latvi
a
Kaza
khsta
nFY
R of
Mace
donia
Moldo
va SAM
Geor
giaKy
rgyz
Repu
blic
Croa
tia
Azer
baija
n
Alba
nia
Arme
nia
Roma
nia
0
2
4
6
8
10
12
Geo
rgia
Arm
enia
Azer
baija
n
Kyrg
yz R
epub
lic
Kaza
khst
an
Tajik
ista
n
Ukr
aine
Rus
sian
Fed
erat
ion
Mol
dova
Alba
nia
Non-Revenue Water (%) Staff Per 1,000 Connection
Slide 16
…but significant performance variation across the country
Total water connections
Staff per 1,000 connections
Non revenue water
Collection ratio
Operating cost recovery ratio
Albanian utilities Tirana 122,072 8.6 69% 68% 150% Durres 43,287 8.7 76% 52% 54% Elbasan 30,886 6.6 90% 102% 104% Vlore 27,611 6.4 79% 60% 75% Shkoder 23,501 7.7 67% 69% 83% Korca 21,000 4.0 25% 98% 180% Fier 20,776 8.1 78% 43% 27% Sarande 4,727 16.0 87% 78% 60% Average for all utilities (2001-04)
+/- 600,000 11.0 69% 66% 55%
International comparators ECA 4 38% 93% 88% Developing countries1/
2 to 8 23%2/ Approx. 80%
30-80%
European Standards 1.0 <12% >95% >130% Developed countries 1 to 2 15% 100% >100%
Slide 17
Income inequality in service quality, and poor households generally not connected
Rural urban divide
Some regional disparity
…and inequitable distribution
Water Investment and Poverty Rate
02
46
8
Log o
f avera
ge a
nnual w
ate
r in
vestm
ent
by M
oT
AT
, 2002-2
005, per
capita
0 .2 .4 .6 .8Poverty rate, 2002, mapped by LSMS(2002) and Census(2001)
Source: Census(2001), LSMS(2002) and MoTAT(2005).
Population Served with Running Water
.2.4
.6.8
1%
Serv
ed
0 2 4 6 8 10deciles of real per capita consumption, in New Lek
Urban Rural
Source: LSMS 2005
Slide 18
Outline
1. Spending
2. Outcomes
3. Linking spending to outcomes
4. Was it worth it?
Slide 19
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
Slide 20
Proposed tariff increases are affordable
(% of monthly household income)
Tariff Lek/m3
Minimum
income
Low incom
e
Medium
income
High income
Current average residential tariff
27 3.2% 2.0% 1.1% 0.7%
O&M cash cost recovery tariff (no depreciation)
41 4.8% 3.0% 1.7% 1.0%
O&M cost recovery tariff (with depreciation)
52 6.1% 3.9% 2.2% 1.3%
Full cost recovery 74 8.7% 5.5% 3.1% 1.9%
Slide 21
“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/
Slide 22
Eliminating inefficiencies could generate almost 0.8 % of GDP in
savings, annuallyPotential (annual) Savings from Eliminating “Hidden Costs” (1)
Source of potential savings (annual) Lek millions
A- Collection failure (improve collection ratios from 70 to 95 percent) 835
B- Under pricing (raise tariffs to cover O&M costs from 70 to 100 percent)
857
C- Excess losses (reduce NRW from 69 to 20 percent) (2) 5,042
Total Savings 6,734
As share of GDP 0.8%
(1) Using methodology developed in ECA
(2) Reducing technical losses will require significant investment
Slide 23
Outline
1. Spending
2. Outcomes
3. Linking spending to outcomes
4. Was it worth it?
Slide 24
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 DPOImprove the central government budget allocation system to water
utilities to leverage improvements in their financial & technical performance by: i. Reducing operating subsidiesii. Designing a performance-based policy for investment transfersiii. Developing performance contracts between line ministry, Municipalities
and Utilities
Slide 25
Ministry of Finance
(fiscal policy etc.)
•Budget allocation
Ministry of Water
(sector policy etc.)
•Spending
•Outcomes
PER linked
spending to
outcomes
Core message: PER can help Line Ministry “make their case” to the
Ministry of Finance
•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
Slide 26
Full document on external website
http://go.worldbank.org/7CX925BS30
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