Making Urban Services Work

For Poor People

January 19, 2004

Junaid Ahmad

2

Ground RealitySouth Asia as an example

Not one city or town in South Asia has 24 hour, 7 days a week water supply Hyderabad and Karachi : 3 hours every two days Delhi and Dhaka: 6-8 hours a day Intermittent supply: health implications

Unaccounted for water: over 50% Cities in South Asia: leaking bucket

Cost recovery: very low --- 20% of O&M Sanitation

Open defecation Little waste water treatment (less than 8-10%)

Decaying infrastructure: no O&M Scale without sustainability

30-40% not connected Use of infrastructure for patronage and politics!!

3

The Overall Context

The “ground realities” suggest that making services work is essential to making services work for poor people

Going from 15-16 hours of water a day to 24 hours (or increasing access by 10%) is a matter of money and technical solutions: it’s a managerial problem

Going from 3 hours every other day to 24 hours (or increasing access by 40%) is not a matter of money and technical solutions, it is an institutional problem

Don’t fix the pipes, fix the institutions that fix the pipes

4

Messages of the WDR

What kind of institutional reforms? Ones that ensure that the institutional relationships between key players in service delivery chain are such that they:

Empower poor people to Monitor and discipline service providers Raise their voice in policymaking

Strengthen incentives for service providers to serve the poor

So, what are these institutional relationships?

5

A framework of relationships of accountability

Poor people Providers

Client power: short route of accountabilty

(e.g. small-independent providers)

6

Poor people Providers

Policymakers

A framework of relationships of accountability

Long route of accountability

7

Poor people

Policymakers

A framework of relationships of accountability

Providers

voice

8

Mexico’s PRONASOL, 1989-94

Large social assistance program (1.2 percent of GDP)

Water, sanitation, electricity and education construction to poor communities

Limited poverty impact Reduced poverty by 3 percent Even an untargeted, uniform per capita transfer would

have reduced poverty by 13 percent

9

PRONASOL expenditures according to party in municipal government

Source: Estevez, Magaloni and Diaz-Cayeros 2002

10

A framework of relationships of accountability

Providers

Policymakers

Poor people

compact

11

Policymaker-provider:Contracting NGOs in Cambodia

Contracted out: NGO managed & could hire, fire, & transfer staff, set wages, procure drugs

Contracted in: NGO managed and could transfer but not hire and fire staff

Control group: Services run by government

12 districts randomly assigned to each category

12

Contracting for Outcomes: health services in Cambodia

Source: Bhushan, Keller and Schwartz 2002

Use of facilities by poor people ill in previous month

13

A framework of relationships of accountability

Providers

Policymakers

Poor people

compact

Client power

voice

14

Poor people Providers

National policymakers

Decentralization

Local policymakers

Applying the framework to Cities:

Changing Paradigms

16

The Context

A New Global Setting Urban Millennium

A New Management ChallengeCreating World Class-Cities

17

Important Implication

Municipal service delivery cannot be seen in isolated context;

How municipal services come together to serve the city-economy;

Managing cities to be credit worthy National economic growth and poverty reduction efforts

will be increasingly determined by the productivity of cities and towns

18

What will determine the economic potential of cities?

In the context of the “city economy”… …how the political and delivery institutions of the

cities are structured, will determine the contribution of cities to the national income

19

Models of Urban Governance

21

Which Model of City Governance?

Metropolitan Government Metropolitan Government with Economic

Decentralization Metropolitan Government with Political

Decentralization

22

Metropolitan Government

Water/Transport/Waste Management/ElectricityUtilities

Communities/Firms

Municipality1 Municipality 4

Taxes TaxesTransfers

23

Key Differences

In the political decentralized model, political and fiscal power is shared between the metropolitan and municipal tier.The metropolitan tier and municipalities jointly keep each other in check.

In the economic decentralized model, political and fiscal powers resides at the metropolitan level. The regions are only de-concentrated arms of the metro unlike the independent municipalities of the first model

24

Similarities Fiscal and political power is devolved to city

governments. Both models adopt corporate structures for the

financing and delivery of municipal services with user-charges.

In both models the city has share ownership with expected dividends from the corporations.

Danger of political deadlock.

25

Expenditure Responsibilities

Redistributive Spatial Planning Service delivery

Metro tier Metro tier, municipal Metro-wide companies

(economies of scale), municipal companies

26

Tax Assignment/Revenue Sources

Metro Tier

Municipal

Companies

(All three tiers)

Business Taxes, Commercial Property

Residential Property (land only?)

User-charges

(Capital markets)

27

Need for Decentralized Borrowing

Lumpy investment requirements Inter-temporal redistribution Signal of quality of governance Create accountability

28

Sources of Finance

Supra-local Government(s) and Public Financial Institutions Subject to patronage Inefficient allocation of resources

Private Financial Institutions Transparent and Market-based Subject to Moral Hazard

Need for suitable Regulatory Framework

29

Regulatory Framework

Information/Disclosure System Bankruptcy Laws/Penalties for default Own tax bases for collateral Separation of fiscal and financial systems

Independent Central Bank Public Sector out of Financial System Prudential Regulation of Financial System

Market Decentralization

30

Key Lessons

Expenditure and tax assignments: should be legislated

Capital market Access: Any implicit liability should be made explicit

31

Tradeoffs

Metropolitan Political

Decentralization

Economic

Decentralization

Macro Stability - -/+ Design

+

Efficiency: Allocative

- + -/+ Design

Efficiency:

Locational + -/+

Design

+

Efficiency:

Planning Coordination

+ -/+ Design

+

Equity + -/+ Design

+

32

City Restructuring:Johannesburg Example

33

Johannesburg’s Original Structure

4 municipalities and one metro Fragmented: no economies of scale Duplication of service delivery Typical line function responsibility No integrated planning

34

The Problem Chronic poor performance is the rule rather than

the exception in many publicly run municipal services

Technical losses Poor cost recovery Subsidies do not reach the poor

35

Why?

Policy

Regulation Delivery

Define the Objectives– 24-hour supply– Clean water– Extended Access

• Define the Rules

Enforce the Rules– Monitor Compliance– Regulate Pricing

Deliver the Service Play by the Rules

.

36

Restructuring of Johannesburg

Delivery

Contract

Fiscal

Surplus

Water & Sanitation

Waste

Electricity

IT

Transport/Roads

•Slum-upgrading

•Primary Health•Peoples Center

R1

R2

R11

•Spatial Planning•Fiscal Budget•Local Economy

Metropolitan Government

37

Change Process

Time framework: 21 months

No one blue print for the companies

38

Organizing to Deliver service contract management contract lease concession divestiture

39

Organizing to Deliver

Low High

GovernmentInvolvement in

Running theBusiness

Government Ownership

High

Low

CorporatisedUtility

Fully-privatisedWater Company

Government-run,Joint Equity

Company

ManagementContract

Water Department

40

Johannesburg’s Choice

Electricity generation: sale of assets Water and Sanitation: Management Contract with

Incentive IT: sale and lease back services Roads: Corporatized Line Department Waste: Corporate utility Property Management: Private Management

41PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/ 6 DECEMBER 2001:

Water and Sanitation

PAST

Fragmented : 5 water, 5 sanitationand Sep Rev, HR, ITand Fleet

42% UFW : Capex Constr18% Technical losses24% Commercial losses

Non-payment : Sep of rolesnot commercial

Backlogs : Capexno invest plan

Customer Care : Bureaucracyno incentives

Comm delivery : inflexibleCapacity

PRESENT

SERVICEDELIVERY AGRMT

COUNCIL

BY-LAWEnables……

BOARD

Man. Contract

•5 Years•Share upside

• functions and obligations

• standards• tariff process•KPI’s•Funding of socialobligations steppedtariff/ subsidy

Produces 5yr + 1yrBusiness Plan

• Financial model• Capex plan• Delivery outputs• Perfomance targets• Dividends

Commercial:User Charges

42

Roads and Storm water

Council

• Owns Assets• Provides Finance• Develop High-level plans

Contracts

Roads AgencyRoads Agency

MDMD

Planning DivisionPlanning DivisionContracts DivisionContracts DivisionInternal

ContractRd & S Man Sys 5 yr ProgrammeContracts out - %Performance benchmarks

• Neg bid for work• Operations• Compete against benchmarks

Commercial:No User Charges

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Capital expenditure (R m)

0

200

400

600

800

1,000

1,200

1,400

1995/6 1996/7 1997/8 1998/9 1999/0 2000/1 2001/2 2002/3

R309m

R1280m

R949mR816m

R1100m

R592m

R375m

R975m

44

Operating surplus/deficit (R m)

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

'1995/6 `1996/7 `1997/8 '1998/9 '1999/0 '2000/1 '2001/2 '2002/3

+R102m

-R82m

+R2m +R2m+R0m

-R314m

-R74m

-R116m

Example: City Utility

46

Asset Holding Company

Operating Company

State Govt. Municipalities

shareholders

contract

customers

bulk buyersmunicipalities, SSIPs

customers

Regulator

47

Expenditure Responsibilities

Redistributive Spatial Planning Service delivery

(Regulator)

Metro tier Metro tier, municipal Metro-wide companies

(economies of scale), municipal companies

(Independent of the city structure)

48

Example: Medium and Small Towns

49

Need of Alternative Management Model

Too big to be managed by communities Large and dense enough to benefit from economies of

scale offered by piped water systems

Too small and dispersed to be managed by a conventional utility

50

Possible option

Regional or multi-town utilities Advantages

Economies of scale in management Minimize transactions costs of contracting Viable volumes of business

51

Criteria for Clubbing

Large enough population base Clusters of 1-2 million

“Manageable” overall distance Within a watershed boundary Voluntary or prescribed

52

International Examples: UK

Economies of scale up to population of 1 million 10 large utilities with population of 2-10 million 15 smaller utilities with population base of

250,000 to 1.2 million Jurisdiction based on watershed boundaries

53

International Examples: France

WSS responsibility of Local Governments Voluntary “Syndicates” 15500 undertakings for 37000 municipalities – 2/3

per grouping SEDIF manages water services for 144

municipalities and about 4 million customers

54

Regional Utility

Shareholders:ULBs, State government

ASSET HOLDING COMPANY

Contract

Private sector operator

Town 1 Town 2 Town 3

55

Rules of Engagement

“Top down”: Statutorily create the regions and enforce all ULBs to be members e.g. England, Scotland Need to ensure compatibility with 74th amendment

“Bottom up”: Voluntary association e.g. France Slow How to create incentives for association?

56

Governance

Vesting O&M control of water related assets by lease (or otherwise) to AHC/AMC

Share ownership proportional to asset value Voting rights possibly allocated on a more

equitable basis State government as shareholder, coordinator

and arbiter Rules of entry and exit

57

Reforming Institutions

Which path?

Through local governments: South Africa

Through the WSS: Chile

Which path for India?

58

Reforming Through Local Government: South Africa

City towns

towns

towns

State

capital

operating

capacity

incentives

Utilities,Departments,

Regional systems

59

Reforming Through Utilities: Chile

City towns towns

State

City Utility Regional Utility

consumers

60

Co-locating Reforms: 74th Amendment

City Utility towns

towns

State

City Regional Utility

consumers