water and public finance

Water and Public Finance

Tales from Albania PER

Mike Webster, ECA-InfrastructurePublic Finance Analysis and Management Course – April 2007

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

Outline

1. Spending

2. Outcomes

3. Linking spending to outcomes

4. Was it worth it?

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

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

Central govt. financing of sector

MoF / MoPWTT

Utilities / Communes

Capital costs

•Expansion

•Rehabilitation

Capital grant

Operating costs

•Tariffs

•Subsidy

Operating

subsidy

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)

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

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)

Outline

1. Spending

2. Outcomes


4. Was it worth it?

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

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…

…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)

..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

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khst

an

Tajik

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Ukr

aine

Rus

sian

Fed

erat

ion

Mol

dova

Alba

nia

Non-Revenue Water (%) Staff Per 1,000 Connection

…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%

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

Outline

1. Spending

2. Outcomes


4. Was it worth it?

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

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%

“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/

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

Outline

1. Spending

2. Outcomes


4. Was it worth it?

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

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

Full document on external website

http://go.worldbank.org/7CX925BS30

water and public finance

Documents

total spending

outcomes slide

water supply utilities

financing utilities

ministry of financeslide

ministry of financeministry

line ministry

central government transfers