Urban Water Strategic Management in 21st Century[I]

Wei Yan
(Urban Water Management Strategy Specialist)

1. Introduction

Water supply development promotes economic growth, improves the health and welfare of the people. Failure of a water supply to a major city may have horrendous implications, it is not allowed development in water supply lags. One of the most important problems facing mankind in the 21st century will be water, because it is becoming scarce and there is considerable competition for its use.

Many cities in the PRC are experiencing serious water supply problems and their WSCs are in a poor financial condition as a result of sweeping changes brought on by almost two decades of economic reform. Reform has allowed the PRC to achieve one of the World‘s fastest rates of economic growth.

The economic reforms and resulting economic growth have affected WSCs in a number of ways. Economic growth has been the most important determinant of the growing industrial and domestic demand for urban water supply and the water shortages that many WSCs now struggle with. The economic reforms have also created a fiscal crisis among WSCs as pressure mounts for all state owned enterprises to achieve full cost recovery and end their reliance on state subsidies. With demand increasing more investment is required in this sector.

The policy to meet the rapidly increasing demands of water services is recommended in the proceedings of a regional workshop (Arrens and etc, 1996) that: Water has become the critical natural resources in most countries of the Asian And Pacific Regions. National action programs are needed to manage water resources and improve water services that will sustain human and economic development in each country in the coming decades. Governments should provide leadership, commitment, and a focus on principles to direct an effective water sector development process in each country.

The objectives of this urban water strategic study are to introduce international experience on institutional structure, operation, financing and cost recovery of water supply utilities; review urban water supply industry financing, propose a strategy of financing for water utilities and funding sources development; develop a strategy of cost recovery and advise on user charges.

This section introduces background information and objectives for this study. The section 2 provides international experience from several countries on institutional and legal information related with water utilities. The section 3 presents experience from a number of water utilities in overseas countries. It uses case study approach to illustrate institutional structure, financial, capital, budget technical management of the water utilities operation. The section 4 and 5 introduce major financing methods and cost recovery practice used in other countries. Overview of water industry in PRC is provided in the section 6. The review covers legal, financial and technical aspects. The section 7 proposes a strategy of water utilities financing including institutional, planning, financial and project. Developing funding sources and utilizing funds from various sources are discussed in the next section. Cost recovery methods are presented in the section 9 while user charges are discussed in the section 10.

2. Institutional Arrangement of Water Utilities in Overseas Countries

International experience concerns the institutional and legal framework of water supply services in overseas countries.

2.1 CANADA

In Canada, there are three levels of government; the federal government, the provincial and territorial governments and local municipal governments. The federal and provincial governments are separate and distinct entities with independent powers. The local governments operate under the authority of the provincial governments, so that the provision of urban water services also falls under provincial jurisdiction. The provinces generally turn over the responsibility for the provision of local water services to municipalities. In Canada, the federal government has no jurisdiction over water tariffs. This authority lies at the state or provincial level.

Based on survey of 138 water utilities serving 11 million retail population in Canada conducted in 1994-1995 (AWWA, 1995), all of the utilities are publicly owned and no private ownership was reported. More than 75% of the utilities are municipal or township systems, and about 25% are operated by water districts, boards, commissions, or special regional authorities. The utilities only supplying water accounts for one-thirds of the utilities, and the two-thirds of utilities provide water plus wastewater and/or other utility services.

There is one national water and wastewater association operating in Canada, the Canadian Water Works Association (CWWA), and a number of provincial organizations. Many of the provincial organizations are affiliated with the American Water Works Association (AWWA). These organizations are independent service organizations supported by the membership fees. Membership in them is voluntary.

The CWWA fulfills a number of roles at a national level. It publishes a monthly newsletter and a variety of technical reports and manuals. It also conducts special studies on the industry, acts as a spokesperson to government on behalf of the industry and participates in various national policy committees. The provincial organizations fulfill similar roles at the provincial level.

2.2 UNITED STATES

In the United States, the state governments establish local municipalities which assume responsibility for various public services including water supply. The water supply function in some cases may be provided on a regional basis. The federal government influences water supply services by setting national standards and offering grant programs.

Although the legal organization of a water utility may take many different forms, they can be categorized either as investor-owned or government owned. The most common form of organization of water utilities is as a department of a general purpose local government, either a city or a county. In the United States, approximately 22,000 publicly owned and 37,000 investor-owned water systems serve about 187 million people.

Water utilities follow the development of economic and environmental regulations. This authority lies at the state or provincial level. Many state commissions regulate utilities through economic legislation while the federal government has no jurisdiction over it. They have broad authority to establish rates for service, prescribe service standards, review and approve rules and regulations, and approve long-term financing programs. The jurisdiction exercised by each commission is prescribed by state legislation and therefore varies from state to state.

The regulation of drinking water quality is legislated under the Safe Drinking Water Act, which has the most potential for impact on water utilities, and has as its objective the improvement of public health. The regulation of wastes generated during the drinking water treatment process is legislated under the Clean Water Act, Resources conservation and Recovery Act, and Toxic Substances Control Act. All environmental regulations promulgated under these acts are done by the United States Environmental Protection Agency (EPA). The water utilities are committed to compliance with all applicable environmental mandates and routinely support environmental protection initiatives.

Most government owned utilities are operated as self sustaining enterprise funds. AWWA believes the public can be served best by self sustained enterprises adequately financed with rates based on sound engineering and economic principles.

AWWA is a water industry organization with over 54,000 individual, corporate and government members in the US and other countries. AWWA is involved in every area of public water supply and acts as a clearinghouse for water supply information and expertise. Its services include technical conferences, a peer-reviewed journal, and hundreds of publications, including the AWWA Standards.

2.3 U.K.

The Water Act of 1973 created nine Regional Water Authorities for England and one in Wales. These consolidated about 200 water and 1,400 wastewater service providers. These authorities were responsible for water supply, wastewater, and river basin management. After initial gains, they had difficulty in carrying out large scale, capital-intensive projects. This resulted in deficient investments in water and wastewater systems.

The Water Act of 1989 abolished the Regional Water Authorities and established 10 privatized water and wastewater service companies. The Water Service Companies (WSECs) are responsible for providing water and wastewater services with new government agencies established to provide regulatory functions. The regulation of the WSECs falls into two areas

Water Quality Regulators - government organizations that are involved in the regulation of water quality aspects of the WSECs include the Department of the Environment, the Environment Agency and the Drinking Water Inspectorate. The need to meet minimum water quality standards of the European Union has had a significant effect on the WSECs.

Economic Regulator - the Office of Water Services (OFWAT) regulates customer service and tariff-setting practices and assures that service companies have adequate funding. It also endeavors to promote efficiency.

It has been almost 10 years since the WSECs were established. Water utility regulation in the UK is comparatively young. Inevitably, policies and processes are constantly evolving in response to lessons learned and new issues and pressures arising from various sources. A particularly controversial topic has been the increased cost to customers and the perception that standards of service have not always improved to the same extent as have the costs.

Several distinct factors have a significant impact on the WSECs:

- Monopoly - Unlike telephone, gas and electricity generation companies, the provision of urban water systems has no immediate prospects of competition.

- Local Activity - the provision of water is a local or regional function. This regional element and the differences between regions are important factors in the way in which the industry is regulated. In particular there is a need for strong customer representation at the regional level.

- Investment Requirements - Deteriorating infrastructure and increased quality standards means that a considerable level of capital investment is required. Thus, while prices for other utility services have fallen in real terms since 1989, water and wastewater company customers have seen continuous real tariff increases.

OFWAT‘s main regulatory duties as set out by the Water Industry Act 1991 are to assure that the functions of the WSECs are properly carried out; and that companies can properly finance their work by securing reasonable returns on their capital. Subject to the above, OFWAT must protect the interests of customers as regards charges and quality of service; promote economy and efficiency on the part of companies; and facilitate effective competition.

A recent submission by the Director General of Water Services (OFWAT, 1997) proposes a different emphasis for the regulatory activity of OFWAT: "Attention has often been drawn to the secondary nature of the duties to protect customers‘ interests. It is in customers‘ interest that companies fulfill their functions (which are to provide services to customers). To do so they must have sufficient finance. OFWAT does not consider that, in practice, the customers‘ position is prejudiced, vis-à-vis the company, by the present framework of duties. By the same token, however, giving primary place to the protection of customers‘ interests would not prejudice the interests of companies. Accordingly, the Director suggests that confidence in the system would be enhanced by a single primary duty to protect customers‘ interests, both as regards charges and service quality; and that all other duties are made subject to this. This would clarify the position of the current regulator and establish clear objectives for future regulators."

2.4 FRANCE

In France, both local municipal governments and the French government are involved in various ways in the provision of municipal water and sewer services. The four administrative layers are briefly described as follows (Tariff, 1999):

- National - the main direct role of the central government is water quality management. The Ministry of the Environment is the most important national agency in this regard.

- Regions - there are 22 regions. Each is headed by a prefect appointed by the central government. The federal regulations are enforced by this level of government. It is involved in water and sewer system financing and the setting of water and sewer charges in certain areas. Two of the main government ministries involved are the Ministry of the Interior and the Ministry of Economics and Finance.

- Financial Basin Agencies - This is at the same level as the Regions. The Regions are grouped into 6 Financial Basin Agencies. These Agencies are financially autonomous bodies. They are solely involved in financing and have no policing or operating role. They are funded by water withdrawal charges and sewage effluent discharge charges which are levied on their behalf with the local water and sewer bills sent to retail customers. Public and private water supply enterprises collect these fees from all customers as part of the charges for the supply of water. The funds are redistributed, based on need, in the form of capital and operating grants, rebates and subsidies, to communities, industries and businesses. Basin Committees control and advise the Financial Basin Agencies. They are made up of representatives of the national government, local authorities, private operators and various categories of water users.

- Departments - there are 96 departments. They are more directly involved in policing water quality matters and in ensuring the financial soundness of the municipalities. Each is headed by a prefect appointed by the national government.

- Communes - This is the final government level and includes some 36,000 municipalities varying is size from cities to small villages. Members are locally elected and include mayors and municipal councils. The responsibility for providing and financing water and sewer servicing is at this level. Where communes are small, they can join together to form district water and sewer servicing groups or syndicates.

The central government has a strong policy role through its three layers of government, central, regional and departments, but the local municipal level, the commune, has the responsibility for providing water and sewer systems.

In France, the local municipal governments or communes can provide water and sewer services using municipal staff, or they can delegate the task to private contractors. Where the servicing is done by the municipality, it may be organized as part of the municipal government, or as an autonomous board owned by the commune.

There are different levels of private contractor or delegated management agreements: full service concessions (turnkey), leasing (affermage) or management contracts. France has had a long history of delegated management of their water and sewer systems as well as other utilities. This is accomplished by utilizing private contractors. The two largest, Compagnie Général des Eaux and Lyonnaise des Eaux, formed in the 19th century. In the 1980‘s, approximately 60% of municipalities had contracts with private companies.

At one time there were national regulations establishing the framework for the arrangements for private companies providing water and wastewater servicing for municipalities. However, these are now guidelines, but thought to be still widely used.

2.5 CHILE

Chile is divided into 13 regions. In each region, the central government has granted a franchise or concession for the provision and operation of drinking water and sanitation systems. These enterprises operate as shareholder companies. The water and sewer enterprises are share companies with private and government shareholders (Tariff, 1999).

The Production Development Corporation (CORFO), a state body with ministerial status, is the principal shareholder in the water and sanitation enterprises. CORFO has set out performance criteria and policies which require innovation, excellence in service to the customer, and efficiency in technical and economic management by the enterprises. To achieve this CORFO has introduced performance indicators to control management. These include financial, operative, quality of service and labor productivity performance indicators.

The enterprises are subject to oversight in several ways:

- Chief Inspectorate (Superintendencia) of Sanitary Services (SSS) - This body is formally independent from the state, but is associated with the State through the Ministry of Public Works. The calculation of water tariffs and their correct application are supervised by the SSS. The basis of the tariff review is a requirement of managerial efficiency.

- Health Ministry - Exercises quality control.

- Chief Inspectorate of Share Societies - regulates activities of share companies.

- In Chile, water supply enterprises are given the power to charge tariffs for their services. These tariffs enable the enterprises to be financially self-sufficient.

2.6 PHILIPPINES

There are a number of water administrative organizations in Philippines. Their responsibilities are briefed as follows (Arrens, 1996).

The Department of Public Works and Highways is responsible for the development of integrated water supply plans and programs consistent with national plants and policies. It undertakes construction of Level 1 (point source) water systems but is limited to foreign assisted projects and these with national government appropriation. Level 1 facilities have been devolved to the local government units pursuant to the Local Government Code. The Development of Interior and Local Government provides assistance to local government units on the operationalization of pertinent provisions of the related legislations. Local Water Utilities Administration is a specialized lending institution for the promotion, development, and financing of local water utilities. Its chief concern is the provision of loans to water districts for the development of water systems.

Local government units are responsible for the construction of water supply projects. Water districts are local public entities created primarily to acquire, install, operate, maintain, and improve water supply and distribution systems for domestic, industrial, and municipal use of residents within the boundaries of the district.

2.7 MALAYSIA

Malaysis comprises two federal territories and thirteen states. All matters relating to water resources and supplies are the responsibility of the state governments. When the Government of Malaysia introduced privatization in 1985, the water supply sector was identified as one of the Government-owned services that would be suitable for privatization. The objectives of privatization were to relieve public financial and administrative burden, promote competition, raise efficiency, accelerate economic growth and public sector size reduction. As Malaysia is considered as advanced private involvement in the provision of water supply in the Asian and Pacific region, the private participation has the forms of management or service contracts, BOT, and mixed management and BOT contracts. Up to now, 57 water treatment plants with a combined capacity of 3.8 million m3/d have been privatized, which is about half the total capacity in the country. A private company was awarded a 25-year contract to operate 26 water treatment plants in the Sate of Selangor which surrounds the capital city, Kuala Lumpur, and it is now responsible for the supply of all of the drinking water in that state.

3. International Experiences of Water Utilities Operation

3.1 INSTITUTIONAL STRUCTURE AND MANAGEMENT

3.1.1 CASE STUDY ONE

In Bangkok, the capital of Thailand, water supply belongs to a state enterprise under the Ministry of Interior of the Central Government called the Metropolitan Waterworks Authority (MWA) while the Bangkok Metropolitan Administration (BMA) is responsible for sewerage and drainage. The MWA is responsible for clean water production for the Bangkok metropolis and its vicinity with a total area covering 3,080 km2 with 7.3 million people. It was founded by merging the Bangkok Waterworks Division and the waterworks in the vicinity The areas not served by MWA are served by individual suppliers.

The management functions are divided into administration and finance, operations, business, and engineering. Administration and finance include general works of financing, personnel and training, welfare, purchasing and inventory control. Operations are for production and distribution controls, maintenance of the system and control of water quality standards. Business section deals with overall customer services that are planning and development of customer service expansion and supervision of activities of the branch offices. Engineering includes engineering and development of technical approaches, survey and design, construction supervision and research of appropriate new techniques to be used in MWA water supply system.

In management of MWA, there are four goals to be achieved. These are (1) good service, to serve efficiently, promptly and with care; (2) good quality, to provide tap water with high standards of purity, volume, pressure and utilization of modern technology to the benefit of the users; (3) good managerial system, to achieve good administration, coordination, public relations and discreet internal auditing and control; and (iv) good cooperation, to achieve unity, discipline and loyalty to the organization (ADB, 1993).

The MWA encourage private sector to develop water production and distribution to help relieve water shortage. The water rates are about the same as those of MWA.

3.1.2 CASE STUDY TWO

Denver Water is an independent water agency with duties and responsibilities spelled out in the City Charter of Denver, U.S. Denver Water is governed by a five-member board appointed by the Mayor of the City for overlapping six-year terms. The Manager is appointed by the Board and holds executive discretion and serves solely at the pleasure of the Board. The Manager appoints the Division Directors, who manage the divisions. There are seven divisions, which are then further defined into sections. The total number of employees is 1036.

Denver Water has complete charge and control of a water works system and plant which supplies water to over one million people. The combined service area composed of the City and County of Denver and 74 treated water distributor contracts, totals 846 km2 and in addition, it serves several special contracts with fixed contract amounts. There are three types of distributors: total service that operates and maintains the district‘s facilities, read and bill which reads the meters and bills the customers, and master meter that sells water wholesale to the district and bills the district directly

Management of Denver Water is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of Denver Water are protected from loss, theft or misuse, and to ensure that adequate accounting data are compiled. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived; and the valuation of costs and benefits requires estimates and judgements by management.

Denver Water maintains budgetary controls through a formal budget process, which involves:

- Maintaining a ten-year plan for addition and replacement of water system facilities based on projected demands for water, which is used as a basis for projecting capital expenditures in the budget and is updated annually.

- Maintaining a ten-year plan for operation and maintenance activities.

- Developing a ten-year financial plan for adjustment of water tariffs and issuance of debt.

- Developing annual work plans by program based on the ten-year plan, for operation and maintenance activities and capital projects.

- Establishing cost control center budgets for labor, materials, and services for each of the projects or activities listed on the annual operation and maintenance and capital work plans, which are combined on a total entity basis.

- Providing explanations for significant variances between budgeted and actual expenditures on a quarterly basis.

3.1.3 CASE STUDY THREE

American Water Works is the largest investor-owned company in U.S.‘s water service industry in terms of volume of 968 million m3 water supplied in 1997 and the revenue of approaching US$1 billion. American Water Works is a public traded company and is the parent company of 22 wholly owned utility subsidiaries serving more than 7 million people in 859 communities in 21 states. The growth of American Water Works has come from investing in its utility subsidiaries and from strategic acquisitions. Typically half of American Water Works‘s annual earnings are retained for reinvestment even tough strong earnings have funded a robust and growing dividend stream for shareholders.

The principal business of American Water Works Company is the ownership of common stock of companies providing water service. The American Water Works Service Company, a subsidiary, provides professional services including accounting, engineering, finance, water quality, information systems, human resource administration and training, purchasing, insurance placement and management services. The 22 regulated utility subsidiaries provide water service under the rules of both federal and state environmental protection agencies. The utility companies are usually subject to the economic regulations prescribed by state regulatory commissions.

There is an unalterable link between quality service, responsive regulation, and financial success. Three basic principles are observed under this management philosohy:

1. The preservation and efficient utilization of capital assets are best assured by a management approach that draws upon prudent planning, builds consensus and acts decisively on a timely basis.

2. A utility subsidiary must exhibit the ability to attract the capital it requires as a prerequisite to the initiation of construction of facilities needed to meet water service demands.

3. The ability to attract needed capital is dependent upon consistently achieving adequate earnings. This dictates an aggressive pursuit of regulatory decisions acknowledging this principle.

The Company seeks to enhance the value of its shareholders‘ investment through consistent earnings growth and dividends per share.

Earnings growth has resulted from increased investment by the Company in its subsidiaries funded by the sale of securities and reinvestment of income. This reinvestment defers shareholder payment of income taxes so earnings growth can be compounded on a larger investment base. It also permits consistent and reliable dividend increases. Investors preferring a greater current yield can supplement their cash flow by occasionally selling a portion of their enhanced investment in the Company.

3.1.4 CASE STUDY FOUR

The Water Department of the Public Utilities Board (PUB) is a government authority to develop and manage water services for 3 million people of Singapore. Tariffs and top management appointments are subject to government approval. The Public Utilities Board has a well developed management information system and it follows a rolling ten-year Development Plan.

The Public Utilities Board and the relevant authorities have managed water resources and supply through the following measures (ADB, 1993):

- Planning and implementing water resources ahead of demand
- Judicious land use planning
- Strict anti-pollution legislation
- Strict enforcement of anti-pollution measures
- Proper catchment management
- Full metering
- Comprehensive program on water conversation
- Intensive leak detection program
- Mains replacement and rehabilitation programs
- Regular servicing and maintenance program
- Strict legislation on illegal draw-off and wastage of water
- Proper accounting of water use
- Proper treatment and quality control on water quality at works as well as in the transmission and distribution
- Automation and computerization to alleviate the shortage of manpower
- Levant to the changes in technology, management, etc.
- Quick response to customer‘s complaints and rectification of faults, and
- Proper and continuous training to quip personnel with good knowledge to remain re
- Marketing approach in customer service.

3.1.5 OTHER

In Canada about 90% of the utilities use single water source and the rests use multiple source systems. The utilities supply 100 million m3/d. The relationship of population served to the number of employees is about 2,300 people per employee.

Singapore‘s Public Utilities Board (PUB) is an excellent example of a public utility which pays its staff and management well and so obtains top quality performers. This PUB has a small but efficient staff (McIntosh and etc, 1997).

A responsible water utilities will publish an annual report on its operations within 6-9 months of the end of the reported year. The report should be closely examined by a regulatory authority, the management of the utility, donors and the public. The attention must be directed at ensuring quick and accurate auditing of the financial statements.

Private participation in the Asia and Pacific Region includes build-operate-transfer (BOT), management contracting, leasing arrangements and concession agreements. The contracting out of services to the private sector has increasing recently. Kuala Lumpur, Malaysia is a good example of high efficiency with the use of the private sector in supplying water, billing and collection. The reasons of considering private participation are mainly from funding and efficiency. The private sector can bring in funds for required capital although the terms of such financing will normally be much more severe than conventional sources such as international development banks. The private sector can also bring in management efficiency and service quality

3.2 OPERATION

3.2.1 CAST STUDY ONE

The performance of Metropolitan Waterworks Authority (MWA), Bangkok is favorable. MWA started earning profit from 1985 onwards because of operation improvement and tariffs increase. The operation improvements of the MWA, Bangkok were expedited by taking measures:

- Decentralization of the organization: MWA has set up ten branch offices to better serve all customers.
- New connections: The application process for new water service installation has been simplified and payment procedures made more flexibles.
- Receipt service card: MWA provides business receipt cards to customers that allows self-recording of meter readings when meter readers are unable to record readings
- Options for water charge payments: MWA offers several alternatives of payment for water fees such as bank account transfers, through automatic banking machine or at any branch office.
- Provision of public plant watering: Sprinkler facilities for plant watering are now being expanded since sprinkler trucks add to the traffic congestion in the city.
- Emergency services: Broken and leaking pipes can be reported to any branch office for immediate repairs by mobile units.
- Water meter replacement: Water meters are regularly replaced for accuracy and reliability. It is planned to replace meters every five years.

3.3 PLANNING

Denver Water is used as an example to illustrate water utility‘s plans in various aspects.

Denver Water has developed a Strategic Plan that incorporates long range goals and objectives which is the basis for setting priorities and determining future direction. These goals and objectives drive its long range plans that are financial expressions of the governing factors over a ten-year period. The annual budget is the definition of needs and allocations of available resources to accomplish the next year of the long range plans.

The long range plans are ten-year capital, operation and maintenance and financial plans that are updated annually. The capital plan projects additions, improvements and replacements to water system facilities, based on projected demands for water, governmental regulations and ongoing system requirements. It is used as the basis for projecting the capital work plan budget. The operation and maintenance work plan includes the ongoing costs of operating and maintaining the water system and the impact of the capital work plan on operations. The financial plan projects the year-end total designated balances. These balances result from the application of projected receipt sources available for projected capital, operation and maintenance and debt service expenditures. Alternative financial plans that address estimated revenue shortfalls are also projected as a part of the long range planning effort.

The detailed annual work plan budgets for operation and maintenance activities, debt service and capital projects are developed during the budget process each year. These budgets are substantially based on the budget year projections provided by the long range plans. These work plans itemize the cost of activities and projects within each program. The annual budget is prepared on a program budget basis that follows the flow of water from the sources of raw water to customer‘s taps and cuts across organizational boundaries.

There are six operating divisions totaling 88 budgeting units or cost control centers. All cost control centers prepare their budgets on a capital project, operations and maintenance activity by type of expenditure by month basis. Budget development, monitoring and control reports are then available to budgeters and managers from both the cost control center and project perspectives at summary and detail levels. A centralized computer system will then have all entries of the budgets of the cost control centers. This system is able to provide budget and actual information for combinations of cost control center, project and activities and types of expenditures for any month or year to date of months. The cost control center budgets are then combined to collect costs, on a department wide basis, for each of the projects and activities in the work plans.

Period reports are provided to the Board of Water Commissions, Managers, Divisions Directors, Cost Control Center Managers and Budget Coordinators. Key reports include monthly reports of budget status report, budget performance report, budget variance explanation report, cost control center budget report, and cost control center by Master Plan Item report.

Urban Water Strategic Management in 21st Century[II]