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Water and Public Finance Tales from Albania PER Mike Webster, ECA-Infrastructure Public Finance Analysis and Management Course – April 2007 Core message: PER can help Line Ministry “make their case” to the Ministry of Finance Ministry of Water Ministry of Finance (sector policy etc.) (fiscal policy etc.) PER linked spending to outcomes •Spending •Outcomes •Budget allocation Slide 2 Outline 1. Spending 2. Outcomes 3. Linking spending to outcomes 4. Was it worth it? Slide 3 Outline 1. Spending 2. Outcomes 3. Linking spending to outcomes 4. Was it worth it? Slide 4 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 Slide 5 Institutional fragmentation Central Government MoF •Capital grant •Operating subsidy MoWater •Policy •Supervisory Boards of utilities MoI •Transfer ownership and Board to LG •Allocate investment Local Government 54 utilities 600 commune systems Slide 6 Central govt. financing of sector MoF / MoPWTT Capital grant Operating subsidy Utilities / Communes Capital costs Operating costs •Expansion •Tariffs •Rehabilitation •Subsidy Slide 7 Total spending by type and source (million Lek) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Capital spending GOA Donor Private sector 1,522 223 1,599 146 566 209 1,054 377 702 207 977 776 1,377 560 1,903 653 56 1,759 2,022 105 3,008 2,001 205 2,792 1,650 205 Operating spending GOA Utility Arrear (tariffs) clearance 139 590 31 550 45 400 136 700 55 850 72 916 77 1,108 1,100 280 1,085 1,521 1,604 1,621 1,500 927 2,130 2,000 1,254 2,130 991 GOA spending as % total as % of budget GDP 1,661 1,630 0.50% 611 0.20% 1,190 0.30% 757 0.20% 1,049 0.60% 0.20% 2,554 1.50% 0.40% 3,704 2.00% 0.60% 4,863 2.50% 0.70% 5,935 3.00% 0.80% 5,037 2.30% 0.60% Total spending as % of GDP 2,474 1.10% 2,327 0.70% 1,219 0.40% 2,267 0.50% 1,814 0.40% 2,741 0.50% 4,222 0.70% 5,499 0.90% 8,612 1.30% 10,272 1.30% 9,022 1.10% Slide 8 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” Slide 9 Financing utilities’ operating costs Operating costs increasing (due to cost of electricity) 6,000 Tariffs increasing (but not keeping pace with costs) 5,000 4,000 3,000 2,000 Gap between costs and utility revenues increasing; therefore operating subsidy and arrear payments increasing 1,000 2000 2001 2002 2003 2004 2005 Repayment of arrears GOA operating subsidy (less arrears) Collected Tariffs Operating cost (incl. depc) Slide 10 Outline 1. Spending 2. Outcomes 3. Linking spending to outcomes 4. Was it worth it? Slide 11 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% Slide 12 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 Slide 13 Water Production - (lcd) Tiranë WSSE Durrës WSSE Vlorë WE Permet WE Shkodër WSSE Elber WSSE Korçë WSSE Pogradec WSSE Lezhe WSSE Berat WSSE Kruje WSSE B. Curri WE Vau Dejës WE Sarandë WSSE Pukë WSSE l/c/d …e.g. non-revenue water 1,350 1,200 1,050 900 750 600 450 300 150 0 Water Sale - (lcd) Slide 14 100 90 80 70 60 50 40 30 20 10 0 0 Albania Moldova Russian Federation Ukraine Tajikistan Kazakhstan Kyrgyz Republic Azerbaijan Armenia Non-Revenue Water (%) Georgia Romania Armenia Albania Azerbaijan Georgia Kyrgyz Republic Croatia SAM Moldova Kazakhstan FYR of Macedonia Latvia Estonia Lithuania Russian Federation Ukraine Tajikistan ...particularly relative to ECA Staff Per 1,000 Connection 12 10 8 6 4 2 Slide 15 …but significant performance variation across the country Total water connections Tirana Durres Elbasan Vlore Shkoder Korca Fier Sarande Average for all utilities (2001-04) ECA Developing countries1/ European Standards Developed countries 122,072 43,287 30,886 27,611 23,501 21,000 20,776 4,727 +/- 600,000 Staff per 1,000 Non revenue connections water Albanian utilities 8.6 69% 8.7 76% 6.6 90% 6.4 79% 7.7 67% 4.0 25% 8.1 78% 16.0 87% 11.0 69% International comparators 4 38% 2 to 8 23%2/ 1.0 1 to 2 <12% 15% Collection ratio Operating cost recovery ratio 68% 52% 102% 60% 69% 98% 43% 78% 66% 150% 54% 104% 75% 83% 180% 27% 60% 55% 93% Approx. 80% >95% 100% 88% 30-80% >130% >100% Slide 16 …and inequitable distribution .8 .6 .4 .2 % Served Income inequality in service quality, and poor households generally not connected 1 Population Served with Running Water 0 2 4 6 8 deciles of real per capita consumption, in New Lek Urban 10 Rural Source: LSMS 2005 Rural urban divide 6 4 2 Some regional disparity 0 by MoTAT, 2002-2005, per capita Log of average annual water investment 8 Water Investment and Poverty Rate 0 .2 .4 .6 Poverty rate, 2002, mapped by LSMS(2002) and Census(2001) .8 Source: Census(2001), LSMS(2002) and MoTAT(2005). Slide 17 Outline 1. Spending 2. Outcomes 3. Linking spending to outcomes 4. Was it worth it? Slide 18 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 19 Proposed tariff increases are affordable (% of monthly household income) Tariff Lek/m3 Minimum Low Medium High income income income 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 20 “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 21 Eliminating inefficiencies could generate almost 0.8 % of GDP in savings, annually Potential (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 22 Outline 1. Spending 2. Outcomes 3. Linking spending to outcomes 4. Was it worth it? Slide 23 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: i. Reducing operating subsidies ii. Designing a performance-based policy for investment transfers iii. Developing performance contracts between line ministry, Municipalities and Utilities Slide 24 Core message: PER can help Line Ministry “make their case” to the Ministry of Finance Ministry of Water Ministry of Finance (sector policy etc.) PER linked spending to outcomes •Spending •Outcomes (fiscal policy etc.) •Budget allocation •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 25 Full document on external website http://go.worldbank.org/7CX925BS30 Slide 26