Water and Public Finance

1. Water and Public Finance Tales from Albania PER Mike Webster, ECA-Infrastructure Public Finance Analysis and Management Course – April 2007

2. Ministry of Water • (sector policy etc.) • Spending • Outcomes 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

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

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

5. 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

6. 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

7. Operating subsidy Central govt. financing of sector Capital grant MoF / MoPWTT • Capital costs • Expansion • Rehabilitation • Operating costs • Tariffs • Subsidy Utilities / Communes

8. Total spending by type and source (million Lek)

9. View from the Ministry of Finance • 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”

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

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

12. 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%

13. 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 O&M costs) • Collections (only collect 66% of bills) • Resulting in utilities revenues covering 50% of operating costs

14. …e.g. non-revenue water

15. ...particularly relative to ECA

16. …but significant performance variation across the country

17. …and inequitable distribution • Income inequality in service quality, and poor households generally not connected • Rural urban divide • Some regional disparity

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

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

20. Proposed tariff increases are affordable

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/

22. Eliminating inefficiencies could generate almost 0.8 % of GDP in savings, annually • Using methodology developed in ECA • Reducing technical losses will require significant investment

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

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 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

25. Ministry of Water • (sector policy etc.) • Spending • Outcomes 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

26. Full document on external website http://go.worldbank.org/7CX925BS30