Looking at the financial status of your water utility, would you classify it as a struggling service provider, a developing utility, or a performing service provider? And then, once you decide where it falls on the financial sustainability ladder, what are the best actions to move it up?
A new World Bank report, Achieving Financial Sustainability and Recovering Costs in Bank Financed Water Supply and Sanitation and Irrigation Projects, is geared towards helping you make the right diagnosis and provides a menu of remedies to systematically increase financial sustainability.
For example, a “Struggling WSS Service Provider” is characterized by an outdated customer list, inadequate or no metering, low bill collection, frequent service interruptions, and a reliance on subsidies to meet everyday expenses. In this case, the report suggests: strong technical assistance, a focus on system rehabilitation, limiting new infrastructure paid from grants, creating incentives to increase cash flow and a gradual increase in tariffs to meet operations and maintenance (O&M) costs within a “reasonable” time frame. A project covenant could be as simple as phasing out O&M subsidies.
Often, we work with a “Developing Utility.” Here O&M costs are covered from operations, there is a stable management structure, plants reliably produce safe drinking water throughout the year, and billing and accounting systems are computerized. New investments come primarily from the government or donors on concessionary terms, with debt service geared to the utility’s capacity. With this kind of utility, the report emphasizes capitalizing on efficiency gains to increase cash flow, undertaking only “justified” network extensions and implementing a formal pro-poor policy. Covenants become more complex and could include the requirement to cover O&M costs plus an increasing percentage of debt service through time, or a constant positive and growing cash position.
Much less often we work with a “Performing Utility.” In this instance, we find a significant portion of the budget dedicated to maintenance, few leaks or thefts, and a functioning wastewater system. Revenues cover not only O&M but also all debt service. New investments are made from a mix of concessionary and commercial sources, with operational revenues also contributing at least 25%.
The utility’s pro-poor policy is institutionalized and significantly increasing access. The overall objective here would be to expand service as quickly as sound financial health will permit. Therefore, covenants typically would include a required rate of return on assets and limiting new debt.
Whether you are just staring your career, working on utilities for the first time, or just moving to a new region or country, you will likely run across utilities on all three steps of the financial sustainability ladder. Understanding the basics and then keeping it simple is often what development is all about. In this context, knowing what you are seeing on the ground and then designing the right measures to assist is where the World Bank Water Practice’s new financial sustainability report can help.