Water Utility Turnaround Framework: A Guidance for Improving Performance

In many urban areas around the world, public utilities provide water supply and sanitation (WSS) services. While some of these urban public water and sanitation utilities (“water utilities”) perform well, others suffer from the types of performance issues observed in many public sector entities, such as low operating and investment efficiency. The World Bank is promoting a three-pronged approach to enhance water utilities’ performance: (i) strengthening the operational efficiency of the utility; (ii) improving the governing environment; and (iii) improving access to funding for WSS. This approach lies at the core of the water utility turnaround framework, elaborated in this report. A framework for turning around poorly performing water utilities will benefit the management of these utilities, governments with responsibilities for water utilities, and those providing technical and financial support for improving the WSS sector. Despite dedicating substantial time and resources to water utilities, efforts to improve their performance seem to have run out of steam. Yet if water utilities manage to sustain a successful turnaround, billions of people will gain access to safely managed WSS services. Improving the performance of water utilities is difficult because the problems they face are complex and multidimensional. Problems caused by dysfunctional political environments, combined with an entrenched backlog of inefficient practices, cannot be solved by applying standard technical and managerial techniques. Achieving a sustained turnaround requires a framework that integrates practical steps to increase a utility’s operational and managerial efficiency with measures to reverse the dysfunctional political equilibria in which it operates. Ultimately, this is only possible if a utility is led by a competent manager who can guide utility staff and carry out critical changes. Dedicated leadership is essential to identify early gains that build credibility with stakeholders and instill confidence in staff that a turnaround is possible. Using a comprehensive turnaround framework is the best approach to improve water utilities’ performance and efficiency, and increase their ability to access finance, including commercial finance. Why does this matter? Evidence shows that water utilities with access to commercial finance are much more likely to achieve the Sustainable Development Goals (SDGs). The Need for a Turnaround Framework What does the public want from its water utilities? The answer is simple: sufficient, reliable, convenient, and safe water services. Water provision should be transparent, financially sustainable, and responsive to citizens.1 Wastewater should be collected, treated, and discharged properly. The measures needed to improve the operational and managerial capacity of water utilities are generally straightforward—information is readily available on, for instance, how to efficiently procure and build water treatment plants, and how to install meters for data acquisition to monitor performance. Yet, although there are utilities that currently perform well, over half a billion people around the world still lack access to safe drinking water. The SDGs set the bar even higher: they require equitable access to safe and affordable drinking water for all. The problem is often that dysfunctional political economies tend to perpetuate the vicious cycles that sustain poor utility performance. Not surprisingly, as a water utility’s operations and management are often closely linked to the political economy in which it operates. Water Utilities’ Poor Performance, Despite Repeated Interventions While success stories are well publicized, many water utilities struggle to deliver safe water to their customers in a convenient and reliable manner. Today, over 660 million people lack access to safe drinking water, 157 million of whom live in urban areas. Over 159 million people use surface water to survive, risking water-borne illnesses that are often fatal (UNICEF and WHO 2015). Almost one infant death in five is due to water-borne illnesses (UNICEF and WHO 2009). Approximately 2.4 billion people lack access to sanitation, over 700 million of whom live in urban areas. Also, 946 million people defecate openly, 78 million of whom do so in urban areas (UNICEF and WHO 2015, 16). Many water utilities have continued to perform poorly despite countless interventions. Donors have invested billions to improve water utility performance in developing countries— providing lending (and some grants) for capital investments, institutional reform, and technical assistance. For example, OECD Development Assistance Committee (DAC) members committed $10.6 billion between 2001 and 2006 (OECD/DAC Secretariat and the WWC 2008). The World Bank alone financed an estimated $18 billion worth of WSS projects between 2007 and 2011 (Kayaga, Mugabi, and Kingdom 2013, 17). And between 2009 and 2013, it approved over $16.9 billion for WSS projects (World Bank 2014). Although past interventions have sometimes helped improve governing environments and utility management, many water utilities continue struggling to improve service sustainably. To a large extent, the political economy in which they operate is to blame for this. Understanding the political economy requires thorough mapping of and engaging with relevant stakeholders. The Dysfunctional Political Economy The political economies of poorly performing water utilities are often dysfunctional and perpetuate vicious cycles that sustain poor performance. As these vicious cycles worsen, water utilities’ low credibility, little to no accountability, and limited autonomy are further eroded. Utility managers must develop virtuous cycles that counteract the vicious ones and create the credibility, accountability, and autonomy required to perform successfully. In dysfunctional political economies, water utilities operate for purposes other than serving customers—for instance, to help government authorities secure votes by providing jobs or by promising water services to low-income customers at tariff levels below cost. Politicians sometimes even use water utilities for personal gain. As such political interference benefits government authorities, it is difficult to stop. When dysfunctions become the norm, vicious cycles that cripple performance develop inside the utility. This typically leaves managers with limited autonomy to make decisions about the allocation of resources for operations, the hiring and firing of staff, and capital investment projects. Against this background, it is unlikely that performance targets are set, let alone met. Under weak management, staff become apathetic and demotivated; the utility’s operations become inefficient and poor-quality service is the result. Governments transfer funds in a manner that is unrelated to performance, effectively compensating for inefficiencies and perpetuating the vicious cycles (Muller, Simpson, and van Ginneken 2008, 4). Turning around a water utility’s performance requires effectively transforming the dysfunctional political economy in which it operates. Doing so entails developing virtuous cycles that stop downward spirals and create the credibility, accountability, and autonomy—or at least space for reform—required to perform successfully. Through these virtuous cycles, governments, customers, and other stakeholders (re)gain confidence in the water utility’s ability to perform as expected, and to use its resources effectively and efficiently. Inappropriate Model for Funding Water Utilities Poorly performing water utilities waste much of their available funding on inefficient operations and poorly planned and executed capital investments. As a result, providers of capital are reluctant to commit resources they believe water utilities will use inefficiently. To counter this, the World Bank is developing a model that emphasizes efficient use of existing funding; better use of domestic funding; and leveraging concessional finance to attract more private finance to the WSS sector (Kolker 2017). A more effective use of funds may be attained by increasing the efficiency of water utilities’ operations and capital investments. Such efficiency enhancements will encourage governments to channel more resources to the sector, while also creating space for private lenders to provide substantially higher levels of financing. Improving the Operational and Managerial Capacity For a turnaround to succeed, it is critical to sequence and coordinate the steps to improve the operational and managerial capacity of water utilities, while at the same time remaining flexible enough to deal with unpredictable events. The actions that must be taken at different levels of maturity of a utility2 are generally well known. For example, installing meters, updating the customer database, installing a new billing and collection system, and mapping of the location of pipes in a geographic information system (GIS) are all actions that will improve technical and financial performance. However, carrying out these actions without proper sequencing and coordination—as part of an overarching strategy—will fail to improve a water utility’s operational and managerial capacity. Past interventions found it challenging to properly sequence and coordinate actions. A turnaround framework should help in designing a systematic, coordinated, and prioritized approach to improve operational and managerial capacity. Moreover, analyzing successful sequences and coordination strategies offers invaluable insights for a turnaround framework.