Water Sector Financing

1. Water Sector Financing PPP-Rwanda By: Eng. Eugene Dusingizumuremyi

3. Background of the development of DWS systems management • Up to the fifties, the Rwandan population was only using natural water points (springs, rivers, lakes…) for water supply. • Only from 1952 that springs started to be protected and piped water laid by the Fond du Bien-êtreIndigène (FBI). • In 1964,water supply facilities were placed under the responsibility of AIDR (International Association for Rural Development1), an association which signed with the GoR an agreement for development and maintenance of the existing and to come water supply facilities, in the framework of the Belgium/Rwanda cooperation. • From 1980, following the increase in number of water supply systems, the cost of this structure became too high, and the Rwandan government realized it was not possible to supply indefinitely water supply services for free to a growing population. • The gratuity practice translated also into lack of users‟ ownership, reaching even vandalism and facilities destruction

4. PPP Evolution in Rwanda • In 1997, a sectoral policy for Water and Sanitation was put in place. This policy emphasized the need to: • adopt an approach based on demand, in order to restore and develop drinking water supply services in a durable manner and with the participation of the population; • reform the institutional framework of the sector by decentralizing the responsibilities, the design, the construction and the management of installations; • reform the policy for recovering costs; • carry out capacity-building at local level to enable them to successfully take charge of their new responsibilities. • In 2004, the approach aimed at involving the private sector was, reiterated in the new sectoral policy of 2004 and the objective of the EDPRS‟ national strategy is to have 50% of rural DWS systems operating under private management contracts from now to the end of 2012.

5. Current Status of PPP in Rwanda • Whereas in 2002 private operators were virtually unknown in the sector, • By the end of 2007, 16% of systems were being operated by private operators, rising to 20.3% in 2009. • Moreover, 58 systems (7%), supplying the equivalent of over 17 000 households, are managed by private institutions, such as parishes, monasteries, hospitals and factories. • However, the management of these systems is not subject to formal contracts.

6. Population Served Under PPP in Rwanda

7. Type of Contracts-PPP in Rwanda • When the central government ceded the networks to the districts, the districts passed on daily management to the users through ad-hoc committees. • The drawing up of formal contracts was introduced during the privatization of management process where contracts were signed between the districts and private operators. • In Rwanda, the current contracts are between “management contracts”, where the operator is only responsible for the water supply operation, and “lease contracts”, where he has to assume some investments and commercial risks for the networks he manages. • The contracts currently being agreed with these private operators are mainly „leasing‟ type contracts, but with „limited responsibility‟, whereby the operator is responsible for the management and maintenance of the existing DWS system, but not for any expansion of the system in response to increased demand.

8. PPP and Cost Recovery in Rwanda • The government of Rwanda is looking to attain the objective of water supply for all in rural area. • Current socio economic conditions of rural households do not favor an increase of water tariff but rather a decrease. • However, in the context of recovery cost principles, a decrease in water standpipe tariff should be treated with care and complementary actions are to be taken in order to maintain positive cash flow for private operators. • According to the survey, current prices at public stand posts, in half of the systems studied, range from 1.3 to 3.4 USD/m3. • As a result, the water consumption in rural areas is very low, often less than 5 l/day/inhabitant.

9. Levels of Cost Recovery: Case of Rwanda   • Regarding water tariff in rural areas, the government of Rwanda defined three levels of cost recovery of capital and operational costs of water supply systems in rural areas: • Level 1: running costs for operating a water system • Level 2: running costs + all repairs (including pumps replacement) • Level 3: running costs + all repairs + depreciation of assets (Public Utility)

10. Modeling subsidies: Cross Subsidy Options • Cross subsidy between One gravity system and One complex system: The association of the two systems with one equilibrium tariff has the impact of decreasing complex water tariff but increasing simple system tariff. • Cross subsidy between Two gravity systems and One complex system: the equilibrium tariff will tend to decrease even further compared to the previous option. • Exemption of the VAT on energy bill of the water operator: it is suggested that exemption on VAT expenses on energy costs or even exemption of energy costs could allow a reasonable decrease in water tariffs • Exemption of operator energy bill: Overall exemption of VAT on energy costs has a very low impact in equilibrium tariff and a negative budgetary impact for the government • Water consumption subsidy (output based aid): This subsidy means that for each cubic meter sold by the water operator to the population an amount of money is given in return by the public authority

11. Challenges and Strategies • Lack of follow-up of delegation contracts: In order to make up for this situation, an efficient monitoring has to be set up including monthly report to the Districts. • Reporting: Monthly reports are too often stored without being analyzed and don’t allow a good information of the district in case of difficulties in the network operation. • Strategy: Restrict the reports to a single annual report, which will be presented during a meeting gathering the operator, the mayor (or his representative) and a national representative (from RURA or MININFRA), in order to settle the potentials disputes. • Benefits: The meeting is an opportunity for the operator to inform of the results (investments realized, problems faced) and to present the investment plan for the next year (together with an estimate of the costs of works). • Meters: Lack of meters might be a problem. Each new water supply systems should have meters to ensure accuracy and equity

12. Price Setting and Strategies • Price setting : In general, prices are fixed by the districts and are stated in the contracts signed with the private operators. • Calculation for Setting Tariff: The first thing to note is that the calculation for setting the tariffs is rarely based on the operator’s actual or forecast operating costs and that it hardly ever considers the level of total cost recovery. • The price setting should be based on competition of private operators. The winner should be having reasonable low price analyses based on operation and maintenance requirements

13. Water Production and Price Setting Guidelines • Costs vary a lot between water systems: Gravity and Pumping • Capital and running costs are generally higher for diesel/electrical water systems than for gravity water systems. • Estimation of operating costs of water operators should be as follows: • Production costs (energy, chemicals) • Distribution costs (maintenance of networks) • Renewal of equipments (electrical and mechanical equipment) • Staff costs • District fee (sold water is invoiced by the district) • Operator profit margin(=15% of costs) which is not a cost but need to be included in the cost component to calculate equilibrium tariff

14. Recommendations for PPP Improvement in rural area-Rwanda • Every operator should maintain a simple but reliable accounting book in order to follow the evolution of the main costs factors. • Priority in electric water systems. The breakdown of costs shows clearly that diesel complex systems are the most expensive for production and distribution of water. • Increasing availability of water with lower water tariffs to consumers in increase water consumption (Tariff and cost recovery will remain high as long as volume of water sold will be kept low). • District fee can be fixed based on water produced. This fee can be adjusted according to the yields of the system.

15. Recommendations for Contract Improvement • The main recommendation is to move towards lease contracts, strictly speaking, by giving more autonomy to the operators for the service management as well as encourage them to invest in the renewal and the extension of the water supply network. • The effects of this decision would be: • a contract duration lengthening, according to the investments to carry out (particularly when the operator take over networks that need rehabilitation works); • direct allocation of a part of the lease fee to finance renewal or extension works for the network, without passing through a special fund managed by the district;