Water Utilities in Africa: Case Studies of Transformation and Market · PDF file · 2010-07-21Water Utilities in Africa: Case Studies of Transformation and Market Access. 3 ... Organogram

Water Utilities in Africa: Case Studies of Transformationand Market Access

Water Utilities in Africa:Case Studies of Transformation and Market Access

Inputs to the Regional Practitioners’ Workshop on “Market Finance for African Water Utilities” in Pretoria, South Africa

Final Report

July 2007 (Revised 2009)

Acknowledgments

The original case studies wereprepared by consultants workingclosely with staff and managementof the utilities, based on guidelinesdeveloped by Meera Mehta,Thomas Fugelsnes and Johan Kruger.The consultants included: RachelCardone (South Africa and Kenya),Chimere Diop (Burkina Faso andSenegal), and Abdelaziz Limam andJomaa Habib (Tunisia). Antti Inkinenof WSP also contributed to the Kenyacase. WSP would like to commendRachel Cardone for her efforts indeveloping the case studies into theirpresent format for this volume.

Water and Sanitation Program alsowishes to acknowledge PPIAF’sfinancial assistance as well as theDFID-funded global program onUnlocking the Potential of DomesticPrivate Sector, which is beingmanaged by WSP.

The findings, interpretations, and conclusions expressed are entirely those of the authors and should not be attributed inany manner to The World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or thecompanies they represent.

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Water Utilities in Africa: Case Studies of Transformation and Market Access

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Contents

Introduction ...................................................................................................................................... 7

Acronyms and Abbreviations ........................................................................................................ 9

1. Nairobi Water and Sewerage Company (NWSC), Kenya ............................................... 11Summary and Lessons Learnt .................................................................................. 11Introduction ............................................................................................................... 11Transformation Process ............................................................................................ 12Financing Transactions and Environment ................................................................ 20Bibliography .............................................................................................................. 20

2. Société Nationale d’Exploitation et deDistribution des Eaux (SONEDE), Tunisia ...................................................................... 22

Summary ................................................................................................................... 22Introduction ............................................................................................................... 22Transformation Process ............................................................................................ 24Financing Transactions and Environment ................................................................ 28Bibliography .............................................................................................................. 32

3. eThekwini Municipality Water and Sanitation Unit, South Africa ................................ 35Summary ................................................................................................................... 35Introduction ............................................................................................................... 35Transformation Process ............................................................................................ 37Financing Transactions and Environment ................................................................ 48Bibliography .............................................................................................................. 51

4. Johannesburg Water, South Africa ................................................................................. 53Summary ................................................................................................................... 53Introduction ............................................................................................................... 53Transformation Process: The City of Johannesburg ................................................ 53Transformation Process: Johannesburg Water ........................................................ 55Accessing Domestic Finance Using Bonds .............................................................. 60Bibliography .............................................................................................................. 62

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5. Office National d’Eau et d’Assainissement (ONEA), Burkina Faso ............................. 63Summary ................................................................................................................... 63Introduction ............................................................................................................... 64Transformation Process ............................................................................................ 64Financing Transactions and Environment ................................................................ 75Bibliography .............................................................................................................. 75

6. Société Nationale des Eaux du Sénégal (SONES) andSénégalaise des Eaux (SDE), Senegal ............................................................................ 82

Summary ................................................................................................................... 82Introduction ............................................................................................................... 83Transformation Process ............................................................................................ 84Financing Transactions and Environment ................................................................ 95Bibliography .............................................................................................................. 95

Figures

Figure 1.1: Institutional Arrangements in Kenya’s Water Supply................................................ 14

Figure 1.2: Organogram of Nairobi Water Company .................................................................. 15

Figure 2.1: Results of the SWOT Analysis on Tunisia’s Banking Sector .................................... 31

Figure 3.1: eThekwini Municipality Structure .............................................................................. 39

Figure 3.2: Organizational Chart of eThekwini Water and Sanitation Unit ................................. 42

Figure 5.1: ONEA Organizational Structure ................................................................................ 68

Figure 6.1: SONES Organizational Structure ............................................................................. 87

Figure 6.2: SDE Organizational Structure ................................................................................... 87

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Tables

Table 1.1: Overview of Water and Sanitation Services, NWSC ................................................ 12

Table 1.2: Snapshot of Kenya.................................................................................................... 13

Table 1.3: NWSC's Board Structure .......................................................................................... 16

Table 1.4: Water and Sewer Tariffs ............................................................................................ 19

Table 2.1: Overview of Water Services, SONEDE .................................................................... 23

Table 2.2: Snapshot of Tunisia .................................................................................................. 23

Table 2.3: SONEDE Board of Directors .................................................................................... 25

Table 2.4: Key Performance Indicators for SONEDE................................................................ 29

Table 2.5: Sources of Finance ................................................................................................... 30

Table 2.6: Comparative Balance Sheets 1995, 2000, 2005 (all figures are dinars) ................. 30

Table 2.7: Operating Costs ........................................................................................................ 32

Table 2.8: Outline of Loan Program........................................................................................... 33

Table 3.1: Overview of Water and Sanitation Services,eThekwini Water and Sanitation Unit ....................................................................... 36

Table 3.2: Snapshot of South Africa .......................................................................................... 36

Table 3.3: Debt Collection Policy ............................................................................................... 40

Table 3.4: Key Performance Indicators (KPIs) for Management in Terms of Staffing .............. 43

Table 3.5: Staff Composition—Municipal Employees Only ....................................................... 43

Table 3.6: Key Performance Indicators, Customer Service ...................................................... 46

Table 3.7: Performance Improvements ..................................................................................... 47

Table 3.8: Utility Finance Worksheet ......................................................................................... 50

Table 4.1: Overview of Water and Sanitation Services,Johannesburg Water Pty (Limited) ........................................................................... 54

Table 4.2: Snapshot of South Africa .......................................................................................... 54

Table 5.1: Overview of Water and Sanitation Services in 2005, ONEA.................................... 65

Table 5.2: Snapshot of Burkina Faso ........................................................................................ 65

Table 5.3: Categories of Indicators in the ONEA/Government Contract .................................. 69

Table 5.4: Tariff Structure at ONEA, Effective 2002-2005 (tax excluded) ................................. 73

Table 5.5: Recovery Rates (accounts receivable measured in number of day)Against Targets for Private and Public Customers ................................................... 73

Table 6.1: Overview of Water and Sanitation Services, SONES and SDE............................... 83

Table 6.2: Snapshot of Senegal ................................................................................................. 84

Table 6.3: Categories of Indicators in the ONEA/Government Contract .................................. 88

Table 6.4: Tariff Structure in Senegal ......................................................................................... 92


Introduction

It is widely acknowledged that achievement ofthe urban Water Supply and Sanitation (WSS)Millennium Development targets will requirebetter access by utilities in Africa to finance, inparticular from domestic financial markets. Inmany African countries, utility reform has focusedon creating autonomous governance structuresto improve service delivery to an expandingcustomer base. However, implementation ofreforms has, to date, been uneven, constrainedby the absence of appropriate incentives toreform, and hampered by limited access tocapital investment funding. In some countries, forexample, South Africa, Senegal, and Namibia,utilities have successfully sourced capitalinvestment from domestic financial markets.Others, including utilities in Kenya, Uganda, andTunisia, regularly access commercial finance forworking capital or minor investments.

Data provided by utilities and financial providerssuggests that one way forward might be to linkutility reform with improved access to much-needed capital funds from domestic financialmarkets. Ideally, this strategy would create avirtuous cycle premised on sound servicedelivery performance, including operating andfinancial efficiency as well as transparency andaccountability. Concurrently, expansion andreform of financial markets is under way inseveral African countries. While domestic financehas a key role to play in enhancing sustainableservice delivery, investment in WSS can alsohelp strengthen domestic financial markets,which suggests there is scope for mutuallybeneficial relationships.

During 2006, the WSP, with support from Public-Private Infrastructure Advisory Facility (PPIAF)and the African Development Bank (AfDB),sought to better understand how urban waterservice providers in Africa could mobilize market-based resources. To this end, a regionalworkshop was held in Pretoria, South Africa, inAugust 2006 to explore the feasibility of “MarketFinance for Water Utilities in Africa.” Theworkshop focused on two financing challenges:to mobilize additional funding resources fordevelopment of the water sector; and to ensurethat investment results in sustainable servicedelivery.

Case studies of six water utilities were presentedat the workshop as well as a survey assessingthe readiness of 14 utilities (including the sixcase study utilities) to tap into domestic financialmarkets. This report will set out a summary of thecase studies, then go on to discuss the qualitiesand attributes that signal readiness to accesscommercial finance. The report is accompaniedby a summary and an overview of the workshopsummarizing all of the key outputs.

The case studies encompass a range of differentbusiness structures, countries, and regions inSub-Saharan Africa: Burkina Faso’s OfficeNational d’Eau et d’Assainissement (NationalOffice of Water and Sanitation, Burkina Faso)(ONEA) and Sénégalaise des Eaux (SenegaleseWater Company) (SDE) and Société Nationaledes Eaux du Sénégal (Senegalese NationalWater Corporation) (SONES) in West Africa;Nairobi Water and Sewerage Company (NWSC)

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of Kenya in East Africa; Société Nationaled’Exploitation et de Distribution des Eaux(National Cooperation for the Exploitation andDistribution of Water, Tunisia) (SONEDE) ofTunisia in North Africa; and Johannesburg Waterand eThekwini (Durban) Water Department inSouth Africa. The utilities also reflect a variety ofownership and management models, from fullypublic service delivery to public/privatepartnership, as well as management contract(now terminated). Despite the lack of uniformity

across the six cases, similarities were apparentamong highly performing utilities that alreadysuccessfully access—or are close to accessing—commercial finance. These include: Thetransformative implementation of reforms,institutional structures and internal managementprocesses to achieve performanceimprovements. Each case study includes anassessment of the local financial marketenvironment and the attempts undertaken by theutility to access those markets.

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Acronyms and Abbreviations

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AFD Agence Française de Développement(French Development Agency)

AfDB African Development Bank

AWF African Water Facility

AWSB Athi Water Services Board

BCEAO Banque Centrale des Etats del’Afrique de l’Ouest (Central Bank ofWest African States)

BEE Black Economic EmpowermentBusiness

BOAD Banque Ouest Africaine deDéveloppement

BOO Build Own Operate

BOT Build Operate Transfer

CBAO Compagnie Bancaire d’AfriqueOccidentale (Bank of West Africa)

CJ City of Johannesburg

CMU Contract Management Unit

CPI Consumer Price Index

CSAs Community Service Agents

DBSA Development Bank of South Africa

DPLG Department of Provincial andLocal Government

DWAF Department of Water Affairs andForestry, South Africa

DWR Directorate of Water Resources

ECOWAS Economic Community of West AfricanStates

EIB European Investment Bank

EM eThekwini Municipality

EMUWA Economic and Monetary Union ofWest Africa

ES Equitable Share

EU European Union

FI Financial Institution

GASCs General Assembly of StateCorporations

GDP Gross Domestic Product

GIS Geographic Information System

IDP Integrated Development Plan

INCA Infrastructure Finance CorporationLimited

JOWAM Johannesburg Water ManagementCompany

JSE Johannesburg Stock Exchange

JW Johannesburg Water

KfW Kreditanstalt für Wiederaufbau(Reconstruction Credit Institute)

KPIs Key Performance Indicators

LTWP Long Term Water Project

MAHRH Ministere de l’Agriculture, del’Hydraulique et des RessourcesHalieutiques (Ministry of Agriculture,Water Supply and Fishery Resources,Burkina Faso)

MARH Ministere de l’Agriculture et desRessource Hydrauliques (Ministry ofAgriculture and Water Resources,Tunisia)

MDGs Millennium Development Goals

MFMA Municipal Finance Management Act

MIG Municipal Infrastructure Grant

MIGA Multilateral Investment GuaranteeAgency

MIS Management Information System

MWRMD Ministry of Water ResourceManagement and Development

NCC Nairobi City Council

NGO Nongovernmental Organization

NWSB Nairobi Water Services Board

NWSC Nairobi Water and SewerageCompany

ONAS Office National de l’Assainissementdu Sénégal (Senegalese NationalSanitation Office)

ONE Office National de l’Eau (NationalOffice of Water, Burkina Faso)

ONEA Office National d’Eau etd’Assainissement (National Office ofWater and Sanitation, Burkina Faso)

PPIAF Public-Private Infrastructure AdvisoryFacility

SAUR Société d’Aménagement Urbain etRural (private French water company)

SDE Sénégalaise des Eaux (SenegaleseWater Company)

SONEDE Société Nationale d’Exploitation et deDistribution des Eaux (NationalCooperation for the Exploitation andDistribution of Water, Tunisia)

SONEES Société Nationale d’Exploitation desEaux du Senegal (SenegaleseNational Corporation for WaterUtilization)

SONES Société Nationale des Eaux duSénégal (Senegalese National WaterCorporation)

SPA Service Provider Agreement

STEG Société Tunisienne de l’Electricite etdu Gaz (Electric and Gas Company ofTunisia)

SWOT Strengths, Weaknesses,Opportunities, and Threats

SYNTEA Syndicat National des Travailleurs del’Eau et de l’Assainissement (NationalUnion of Workers in the Water andSanitation Sector, Burkina Faso)

UACs Utilities, Agencies and CorporateDepartments

UFW Unaccounted-for Water

WB World Bank

WRMA Water Resources ManagementAuthority

WSAs Water Service Authorities

WSP Water Sectoral Project

WSP-Af Water and Sanitation Program, Africa

WSPs Water Services Providers

WSRB Water Services Regulatory Board

WSS Water Supply and Sanitation

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1. Nairobi Water and SewerageCompany (NWSC), Kenya

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Summary and Lessons Learnt

The rapid reforms undertaken by NWSC since2004 offer an example of what can be achievedthrough implementation of greater managementefficiency, when funding is available to mobilizereform. Kenya’s Water Act of 2002 created afavorable framework for improved WSS servicesin Nairobi, and this was followed by a series ofreforms that enhanced the company’s viability.The key lessons from this case are:

■ Although institutional reform is a gradualprocess, considerable change can beeffected in a matter of months, contingent onthe right mixture of leadership andcommitment to a common goal. In 2003, theWater and Sewerage Department of theNairobi City Council was characterized byinefficiency, corruption, and inability toprovide consistently high quality waterservices. Yet, by 2005, the Kenya Associationof Insurance Brokers ranked the NWSCsecond in a survey of public companies.

■ External factors have clearly played a role inspurring a turnaround in the utility’sperformance. Although NWSC remains 100%publicly-owned, its mandate and focus havebeen set out more clearly than previously.The NWSC’s long-term vision has beencommunicated throughout the company, andis reflected in its benchmarks for success andoverall performance. With performancetargets, clear delineations of responsibilityand rules for accountability in place, NWSC’smanagement can more effectively monitor,

manage and budget the company’soperations.

■ The reform process has also spurred a shiftin the utility’s operating culture. Themanagement and Board of Directors appearcommitted to improving the utility’sperformance. For management, theestablishment of performance targets hasprovided further incentive for strongperformance.

■ The clear delineation of roles andresponsibilities within the water sector’sinstitutional and organizational framework hasalso helped transform the NWSC. However,communication channels among the variousinstitutions of the water sector may requirestrengthening, particularly in instances inwhich one relies on another’s decision-making. For instance, between NWSC andAWSB with regard to budgeting andinvestment decisions.

■ NWSC has undertaken serious efforts toextend service coverage into informalsettlements through partnerships with a widerange of stakeholders, including communitiesthemselves. These initiatives can beexpected to boost NWSC’s longer-termviability and growth, and to improve its imagein the eyes of the wider public.

Introduction

Kenya straddles the equator, and encompassesseveral different climates. A majority of thecountry’s population (64%) lives in rural areas,1

1 Data as of 2003. http://www.ruralpovertyportal.org/english/regions/africa/ken/statistics.htm

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and 75% of the workforce is engaged inagricultural activities. Fifty-six percent live belowKenya’s poverty line.

In 2002, after free elections, a new governmenttook office, led by Mwai Kibaki and the NationalRainbow Coalition (NARC). Elected on a platformof reduced government corruption, the newadministration was expected to usher in a new,more democratic era. In 2005, the governmentannounced that it would mainstream theMillennium Development Goals (MDGs) into itsnational budgeting and planning.

As part of a broad reform, the new governmentpassed the Water Act of 2002, which reorganizedKenya’s water sector. This case will examine theNairobi Water and Sewerage Corporation(NWSC) in the context of this reform, withparticular reference to improvements ingovernance and management, and how the reformprogram has influenced the utility’s prospects formobilizing domestic financial resources.

Transformation Process

Prior to the most recent reform, Kenya’s waterand sanitation sector was financially unviableand debt-ridden. Poor management, inadequatemaintenance of existing infrastructure, artificiallylow tariffs, and increasing debt loads allcontributed to poor service delivery. In Nairobi,services provided by the Water and SewerageDepartment of the Nairobi City Council (NCC)were characterized by low coverage andunreliable service, high levels of Unaccounted-forWater (UFW), considerable accounts receivable,tariffs set below cost recovery levels (and evenfor operations and maintenance costs), and weakand ineffective management. Consequently,households that could afford to do so, dug theirown wells. While groundwater abstractionlicenses were required by the Ministry of WaterResource Management and Development(MWRMD), the system was neither controlled norcoordinated.

2 UFW is based on water produced and water billed. Notably, 81% of bills are actually paid, yielding 48.4% of net revenuecollected relative to water produced.

Table 1.1: Overview of Water and Sanitation Services, NWSC

Area served 208 km2

Size/population of service area 2.0 million

Volume of water produced (in m3) 160 million

Water consumers served 1.6 million

Number of connections 220,000

Number of metered connections 211,765

Number of consumers provided with waterborne sewerage,pit latrines or septic tanks 1.2 million

Unaccounted-for Water2 35%

Credit rating (for the municipality)- Short-term- Long-term NA

Source: NWSC.

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In 2002, the water sector was a key target forreform by the newly elected government.The 2002 Water Act restructured the sector withfour key policy objectives: water resourcesmanagement, water and sewerage development,reforms to the institutional framework, andimproving finance mechanisms for water sectorinvestment.

In Nairobi, the reform process led to the creationof the Nairobi Water and Sewerage Company(NWSC), a corporatized, ring-fenced utility.In 2004, shortly after its creation, NWSCannounced a goal to be a fully viable watercompany within five years. In 2005, an auditrevealed the company was eight months aheadof schedule.

The Utility and its External Environment

Several external factors spurred the creation ofNWSC. In 2003, to expedite implementation ofthe Water Act in urban areas, incentives weredrawn up to encourage local councils to createwater companies out of existing water andsewerage departments. In Nairobi, the NCC

created NWSC from the previous utility, whichserviced the bulk of the city’s formal areas.However, the NWSC’s capacity to manageoperations, improve service delivery, andservice its inherited debt was virtually nil withoutexternal funding. With support from the WorldBank, NWSC is currently in the midst of afive-year transition to commercial viability.The Kshs1.6 billion (approximately US$21.5million) project was funded jointly: The WorldBank provided a Ksh1.2 billion grant, and theutility self-financed the remainder. The effects ofthis project, within the context of broader reformefforts, are examined below:

Overall Sector Strategy

Under the prereform institutional framework,the government performed the roles of waterresources manager, regulator, and waterservices provider. This model was ineffective andresulted in weak service delivery and poorfinancial performance throughout the country.In response, the 2002 policy reduced thegovernment’s role in policy formulation,regulation and supervision, at the same time

Table 1.2: Snapshot of Kenya3

Kenya

Total population 33.5 million4

GDP US$20.2 billion

GDP growth (average, 2002-2005) 3.76%

GDP/capita (p.a.) US$481

Prime rate 6.34 (REPO)

Inflation 14.6%5

Unemployment rate 40%

Poverty rate 52%

Source: Human Development Report 2006, http://www.indexmundi.com/kenya/gdp_real_growth_rate.html; Central Bureau ofStatistics, Kenya; Kenya Facts and Figures 2006 Edition, CIA Word Factbook Web site, Central Bank of Kenya Web site.

3 Data as of 2004. http://hdr.undp.org/hdr2006/statistics/countries/data_sheets/cty_ds_KEN.html4 Data as of 2005.5 Data as of November 2006.

Nairobi Water and Sewerage Company (NWSC), Kenya

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inviting stakeholders and target communities toparticipate in the implementation, financing,operations and maintenance of water resourcesand supply facilities.

The Government of Kenya’s National WaterPolicy 1999 and a Government Action Plan forimplementing the Poverty Reduction StrategyPaper set targets for universal access to watersupply, with a coverage expansion of at minimumthe MDG target of 70% coverage by 2015. Forsanitation, the target is 93% coverage by 2015.To achieve these targets, the Governmentdeveloped a Sector Wide Approach (SWAP),which was formally adopted in late October 2006.Launch of the SWAP was conditional onsatisfying nine prerequisite conditions, whichinclude: government leadership; involvement bythe Ministry of Finance; formulation of an interimsector investment plan; annual sector reviews;the setting of prerequisite funding modalities; andtraining in anticorruption, enforcement, andaccountability. The government has completedmost of these, and has begun efforts to meetgoals for anticorruption and staff transfers fromthe Ministry of Water and Irrigation.

Institutional Arrangements

The Water Act defines three main levels of watermanagement, as outlined in Figure 1.1. At thenational level, the Water Resources ManagementAuthority (WRMA) provides licensing andregulation functions; Water Services Boards(WSBs), are responsible for investment in waterresources; and the Water and Sanitation TrustFund (WSTF) mobilizes financial resourcesfor the sector. All of these organizations arestate-owned corporations, and operate in bothurban and rural areas.

At the regional level, there are seven waterbasins. Each basin has a Water Service Boardand a resource management authority. Theresource management authorities’ role is toensure effective management and maintenanceof catchment areas. Each catchment also has aCatchment Area Management Committee(CAMC) to ensure community involvement inwater management. The CAMCs report directlyto the WRMA. Water Service Boards have amandate to provide water, and are authorized toprovide licenses to service providers for service

Figure 1.1: Institutional Arrangements in Kenya’s Water Supply

Water AppealBoardWAB

MWI

Water ResourcesManagement Authority

WRMA

Water ServicesRegulatory BoardWSRB

Catchment Areas AdvisoryCommittees

CAACs

Water ServicesBoardsWSBs

Water Resources User AssociationsWRUAs

Water Services ProvidersWSPs

Water Resources Management Water and Sewerage Service

Consumers, Users

Nat

iona

l Lev

elR

egio

nal

Leve

lLo

cal L

evel

Pol

icy

For

mul

atio

nR

egul

atio

nS

ervi

ces

Pro

visi

onC

onsu

mpt

ion,

Use

Water ServicesTrust Fund

WSTF

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provision. To provide a system of checks andbalances, Kenyan legislation does not permitwater Boards to be service providers; they mustappoint agents to do that. For example, the AthiWater Services Board is the asset owner and isresponsible for overall service provision inNairobi as well as western Kenya, while NWSCis the actual service provider.

Relationship between NWSC and AWSB

NWSC was created to provide water and sewerageservices in the greater Nairobi area. Therelationship between NWSC, the WSRB, theAWSB, the Nairobi City Council, and customers isdefined in a Tripartite Agreement that constitutesthe overall framework for the water and sewerageservices in the city. The legislation specifically setsout: transparency in roles and responsibilities;separation of asset ownership and control andoperation; and autonomy of service deliveryinstitutions. AWSB operates under a license issuedby the WSRB, which enables it to facilitate theprovision of WSS services to customers andinstitutions within its jurisdiction. The AWSB, in turn,signed a five-year service provision contract with

NWSC. This contract specifies terms andconditions defining NWSC’s services, metering andbilling functions, and bill collection.

Company Structure

NWSC was incorporated in December 2003 underthe Companies Act CAP 486 as a wholly-ownedsubsidiary of the Nairobi City Council (NCC), andbecame operational on May 17, 2004. Itsheadquarters are in Nairobi, with divisional centersin five city suburbs (Karen, Nairobi Dam,Eastleigh, Kariobangi and Gatundu).

The company’s chief executive is the ManagingDirector, who is appointed by the Board and isresponsible for the performance of theManagement Team, which is organized as follows:

■ Directorate of Technical Services

■ Directorate of Commercial Services

■ Directorate of Financial Services

■ Directorate of Human ResourcesManagement and Administrative Services

Director HR andAdministration

Figure 1.2: Organogram of Nairobi Water Company

Managing Director

CompanySecretary

DirectorCommercial

DirectorFinance

Director TechnicalServices

HumanResource

Security

Administration

BusinessDevelopmentand Customer

Relations

Billing

Finance

InformationTechnology

Engineering

Production

Operations andMaintenance

QualityAssurance

Donor Projects

Regions

CorporateAffairs

Procurement

Internal Audit


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Governance

The Boards of Directors for commercializedutilities are frequently drawn from the publicsector, and often from the government agencypreviously responsible for service delivery.NWSC used a public-private partnershipapproach to staff its board, intending to tap theskills and experience of a range of Nairobi’sleading private and public organizations. Overthe course of 2003, discussions took placeamong NWSC, the Ministry of Finance, theMinistry of Water, and the Ministry of LocalGovernment. Despite resistance to the idea ofcommercializing a water utility and ceding somecontrol over management, a new board structureemerged that would feature six directors from thepublic sector and six from outside institutions.The latter six outside were selected fromreputable institutions in Kenya to meet specificneeds of the utility. For example, the boardmember representing the Institute of CertifiedPublic Accountants offers financial andaccounting expertise, while the African MedicalResearch Foundation (AMREF) boardrepresentative provides a voice for hygieneaspects of water and sewerage. All of the board’scommittees are chaired by relevant private andNGO organizations (for example, the AuditingCommittee is chaired by the Institute of CertifiedPublic Accountants).

Despite board diversity, the utility remains 100%owned by the NCC, and there is significant publicsector representation: three elected civil servants

(the Mayor, Treasurer, and Clerk of Nairobi City)and two technocrats (representing NCC’s WaterCommittee and Finance Committee). Despitehaving no shareholding, directors from external(private and NGO) agencies are expected toprovide capacity building and expertise tostrengthen NWSC’s competence, and occupy theChair and Vice Chair of the board. Chairs ofdifferent board committees are also occupied byexternal agency directors.

The board is responsible for formulating thecompany’s strategic plan and guiding itsimplementation. This includes: approvingperformance targets for senior management;guiding budgets and expenditures; ensuring thatfinancial statements comply with InternationalFinancial Reporting Standards; and identifyingand mitigating risk. Further, the board overseesimplementation of governance procedures aimedat promoting compliance with legislation,professional standards and the best corporategovernance practices promulgated by relevantauthorities.

The Utility and its Internal Environment

Since 2004, when NWSC assumed responsibilityfor operations, the company has implementedseveral changes, including an upgrade andmodernization of its accounting and billingsystem, overhaul of customer service functions,and repair of the water distribution network. Theutility has also made significant progress inestablishing company-wide management

Table 1.3: NWSC’s Board Structure

Public Sector Representation Private Sector Representation

Mayor of Nairobi NGO Council

Town Clerk Kenya National Chamber of Commerce and Industry

City Treasurer Institute of Certified Public Accountants

Chair, Water Committee, NCC AMREF

Chair, Finance Committee, NCC – Association of Hotelkeepers and Caterers

– Plan International

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systems and procedures, and also in orienting itsstaff, many of whom were previously employedby the NCC, to a new and more efficientmanagement and operations paradigm.

Background

Although created in May 2004, NWSC did notbecome fully autonomous (legally and financially)until August 2004. Once the transition wascomplete, the utility radically changed itsmanagement structure through two stages ofmanagement reform. In the first, a newmanagement team was recruited (for the posts ofManaging Director, Commercial Director,Technical Director, Financial Director,Administrative Director, and CompanySecretary). Positions were advertisedinternationally and regionally, and an externalfirm hired to ensure the recruitment processremained free of political interference.Subsequently, all administrative staff positionswere also advertised, with the aim of creating anew operating culture.

In 2005, a second management reform, nowaimed at mid-level managers, began. With newsenior and junior management teams in place,the utility began to engage in far-reachingorganization-wide reforms.

Strategic Planning and Budgeting

Reforms are being implemented according to athree-year planning cycle. The current (and first)three-year plan ended in June 2007, while a newone was expected to gain Board approval inearly 2007. Strategic plans include commercial,operational and financial goals, and also set outtargets and indicators for success. Budgets areset on an annual basis, within the framework ofthe three-year cycle. Although revised to reflectactual costs, budgets are aligned with theoverall strategy. Budgets and strategies are sentto the AWSB for comment, but no approval isneeded.

Human Resources

When NWSC was created, it was agreed thatexisting staff would not be downsized (except incases of attrition, or dismissal due to corruption).However, the decision was taken to open seniorand mid-level management positions forcompetitive hiring. NWSC has roughly 2,200 staffmembers, which it considers high for the utility’ssize and customer base at 10 staff per 1,000connections. As the new management teamassumed its responsibilities, it became apparentthat a considerable proportion of staff wereunderqualified for their positions. To address this,the utility developed a tightly focused programwith an emphasis on retraining workers, andadopted the mindset that extra staff constitutesan asset rather than a constraint. Some of theways in which staff skills and time have beenapplied include extending metering, improvingthe collection rate, and raising confidenceamongst NWSC’s customers, who were initiallyskeptical that the utility would provide betterservice delivery than the NCC’s WaterDepartment.

Concurrently, an operations manual on humanresources policies has been developed, as wellas procedures and financial policy manuals.The company developed a transition businessplan, which was approved by the Board ofDirectors, and also launched a stakeholdercommunications program to increase publicawareness about the company and its services.These efforts have influenced human resourcesskills, according to a recent study.6 Also,according to a 2005 survey, 79.6% of customershave noticed positive changes in themanagement and delivery of water servicessince 2004.

Although the relationship between NWSC andunions was tenuous when the company was firstcreated, improved working conditions and highersalaries at the utility have gone some way toimproving this.

6 A study was conducted by the World Bank and the Government of Kenya with the African Center for Economic Growth,which audited NWSC in 2005 and found that HR skills were improved.


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Operating Performance

The reform program has led to a rapid improvedoperating performance. NWSC initially focusedon improving billing and collection, at the sametime recognizing that billing improvements mustbe matched by improvements in service delivery.To address service delivery issues, overall waterproduction was increased between June 2004and July 2006 from 320,000 m3 to 400,000 m3,while Unaccounted-for Water declined in thesame period, from 58% to 35%. These, and otherimprovements enhanced cost recovery fromKsh80 million per month in May 2003, toKsh100 million just four months later, andKsh220 million by August 2004. Similarly, theutility’s overall financial performance hasimproved: in its first full financial report, NWSCreported a net profit of Ksh48 million(approximately US$650,000), based on anexternally audited assessment. This rapidincrease allowed the utility to increase all staffsalaries by 70% between August 2004 andDecember 2005.

Internally, management continues to strive toimprove staff performance. Between 5 and 10%of management are on performance-basedcontracts and can be fired, while the rest of thestaff are on lifelong contracts, a holdover fromthe precorporatization process. The current planis to reduce staff numbers from roughly 2,700 to1,750. To achieve this without violatingemployment law, the utility has worked with theunions to develop early retirement packages, andsupports natural attrition. For example, 56 staffmembers retired in 2007.

NWSC has also sought to increase, wherepossible, private sector participation insmall-scale projects. In late 2004, the utilityfloated a tender for installing billing, financial, andpersonnel systems. Due to political concerns, thetendering process took over nine months. TheKampala Water Corporation, the World Bank,and external consultants participated in thebidding process, auditing and receivingpresentations and assessing the capacity of thebidders. Three companies were selected. NWSC

also tenders to the private sector for billingand other activities, including installation andmeter-reading. There are also plans to hire aprivate firm to execute an infrastructure auditaimed at strengthening asset management.

Still, to achieve its goals, NWSC requiresadditional funding beyond what it can raise byitself, or through donor grants. As a result, theutility is keen to tap private capital to bridge itsfinancing gaps.

Customer Base/Customer Service

Ninety percent of NWSC’s customer base isresidential, although it also services industrialand commercial users. The utility provides arange of services, including networked service towealthier customers, and tanker services in lowerincome areas that lack the necessary physicalinfrastructure for piped service. A large proportionof Nairobi’s population lives in informal areas, ofwhich some 60% live below the poverty line. Dueto the nature of informal areas and land tenureissues, informal settlements are not officiallyeligible to receive public services, although mostresidents receive water, whether directly orindirectly, from the utility’s network. Widespreadwater vending and illegal connection account formuch of the NWSC’s high rate of UFW and poorrevenue collection.

The NWSC is keen to extend its services intoinformal and poor areas, and is working—through partnerships with communities,communications campaigns, subsidized billingand health awareness outreach—to close theservice gap, particularly for the poorest cityresidents. These outreach activities havefinancial objectives: to reduce UFW and developmore efficient billing practices so as to rationalizethe utility’s books and, over time, increaserevenues. NWSC has the latitude to impose strictmeasures to meet its goals. For example, in lateJanuary 2007, it disconnected for two weeksthousands of customers—including governmentdepartments—to prompt them into paying theirarrears, and to make some gains againstKsh1.2 billion (US$17 million) in outstanding bills.

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NWSC has also implemented severalimprovements in customer service, in parallelwith its financial reforms, although the value ofthese to the poor is unknown. For example, theutility developed a comprehensive Web site thatprovides options for users to report corruption,water leaks, billing problems, and generalcustomer complaints. Overall, the utility hasfocused on streamlining and improving the billcollection process, in part by allowing customersgreater flexibility in making payments. Bills canbe paid: at company headquarters; at any branchof the Coop Bank (a cooperative bank thatoperates throughout Kenya); at select branchesof K-Rep Bank (a microfinance bank); at the postoffice, and some other government offices.As weak revenue management was identified asa major constraint to effective operation, theutility switched to a system of monthly billingsbased on meter readings, issues disconnectionnotices for nonpayment, and is committed toreconnecting service within 24 hours of payment.

Tariff Structure

Kenya’s tariff structure for water and sanitation isbroadly outlined in the Water Act. For NWSC,specific tariff arrangements were established inthe Tripartite Arrangement. Generally, waterproviders set tariffs based on the services theyprovide and local costs, but these must beapproved by the relevant Water Services Board.For example, if NWSC determines that a tariffreview is necessary, it must submit a proposal to

the Athi Water Services Board (the asset holder),which, following review, may send it to the WaterRegulatory Board to make a final decision.Because the water companies (including NWSC)are so new, the notion of tariff boards andadapting tariffs to meet local needs is a relativelynew concept. In Nairobi, tariffs have remainedunchanged since 1996, despite increasinginflation.

NWSC charges users based on consumption,and provides meters free of charge to users.Customers can estimate their water chargesusing NWSC’s website, or by reading theirmeters. The tariff structure is based on agraduated tariff, summarized in Table 1.4.

Billing

Soon after it came into existence, NWSC beganto focus on improving revenue managementthrough bill collection, and understanding andsettling old debts, whether through repaymentplans or write-offs. The utility’s billing is oftenincomprehensible and inaccurate, even asinadequate revenue collection is one of thebiggest challenges faced by the utility. In 2005,NWSC conducted a far-reaching seven-weekmultimedia marketing and branding campaign toimpress the utility’s new corporate entity intoconsumers’ minds, as well as resolve billingissues and increase collection efficiency. Duringthe campaign, one day each week was devotedto a campaign called Bill bila balaa (Kiswahili for

Table 1.4: Water and Sewer Tariffs

Consumption (liters) Water per m3 (in Ksh) Sewer per m3 (in Ksh)

0-10,000 12.00 8.95

10-30,000 18.00 8.95

30-60,000 27.50 11.62

Over 60,000 34.50 14.20

Subsidized rate in informal areas 10.00

Source: NWSC Website http://www.nairobiwater.co.ke/content/?contentid=53


20


“bill without problems”). The campaign focusedon four areas: strategic issue advertising,community mobilization, special events, andmedia relations. NWSC staff went door-to-door,introducing the new company to customers,responding to questions and concerns, andtracking down customers with poor paymenthistories to settle their accounts. For NWSC, thiscampaign had the added benefit of generatingcurrent data on consumer addresses; forconsumers, the outreach exercise put a “face” onthe city’s new water service provider.

The campaign set targets of reaching 30,000customers, and hiking revenue collection by10%. In reality, the company exceeded this,increasing revenue collection to 54%. Further,NWSC resolved more than 90,000 outstandingbilling problems and increased collectionefficiency to 98%. Increased revenues haveallowed NWSC to pay off half its inherited debt,or Kshs750 million as well as to reinvest in corebusiness functions.

Financing Transactions andEnvironment

Under the current institutional arrangements,ownership and control of fixed assets used byNWSC are vested in the Athi Water ServicesBoard. This means that all investment-relateddecisions rest with the AWSB, and not withNWSC’s Board of Directors. In practice, therelationship between NWSC as the serviceprovider, and the AWSB as the asset holder, isset out in a Service Provision Agreement (SPA).The SPA explicitly states that while the utility mayengage in operational investments, alldevelopment investments must be borne by theAWSB. Consequently, the NWSC can directlymobilize financial resources only for workingcapital and relatively small-scale investments. Inthese cases, the utility must notify the AWSB,which only has decision-making authority for thedevelopment of fixed assets. Whereinfrastructure investments are deemed

necessary, NWSC and AWSB cooperate throughmeetings of technical experts.

Due to the reform process implemented over thelast few years, NWSC has gradually begun toseek increased levels of commercial finance.At the same time, Kenya’s financial sector isincreasingly looking for domestic investmentopportunities. In 2006, the utility sought andreceived approval from AWSB to borrow from alocal bank to acquire a fleet of vehicles and otheroperating assets. The loan value wasapproximately US$460,000 and it was securedby the purchased assets. Recently, the utilitysubmitted an application for a commercial loanworth US$2.8 million, for operational equipment.A response was expected early in 2007.

The AWSB has also developed a five-year planfor infrastructure investments worth Ksh3 billion.To finance this, the AWSB has arrangedconcessionary financing from the World Bankand the French Development Agency for the totalamount (about US$120 million). So that theAWSB assumes at least some of the risk oncommercial terms, it will be exposed to a loan ofKsh1.3 billion (US$40 million), at between2-2.5% interest, over five years. For the balanceof the debt (Ksh1.7 billion), the Kenyangovernment agreed to shield the AWSB fromforeign exchange risk.

Bibliography

People Met:

■ Mr. F. K. Mugo, Managing Director, NWSC

■ Mr. Patrick Omutia, Financial Director, NWSC

■ Mr. J. P. Kimani, Technical Director, NWSC

■ Mr. Joseph Ndegeya, Principal Engineer, NWSC

■ Eng. Lawrence W. Mwangi, CEO Athi WaterServices Board

■ Ms. Elizabeth Mwangi, Manager, CorporatePlanning

21

Literature

1. Transition Business Plan—2004-2005—2006-2007

2. Human Resources Policies and ProceduresManual

3. Report and Financial Statement (Unaudited)—June 30, 2003

4. Audited Financial Statements for May 2005

5. The Water Consumer Perception Survey inNairobi—Final Report

6. Bomba—Athi Water Services BoardNewsletter Vol. 1 Issues 1 & 2, 2006

7. PRINWASS Final Project Report

8. Nairobi Water and Sewerage InstitutionalRestructuring Project (WB)

9. Sector Finance and Resource Flows forWater Supply—A Pilot Application forKenya (WB)

10. Characteristics of Well Performing PublicWater Utilities (WB Working Notes)

11. Case Studies of Bankable Water andSewerage Utilities (USAID)

12. PRINWASS Report—“Barriers to andConditions for the Involvement of PrivateCapital and Enterprise in Water Supply andSanitation in Latin America and Africa:Seeking Economic, Social, andEnvironmental Sustainability”

13. Water Privatization in Kenya, By SammyWambua, Global Issue Papers, No. 8:Published by the Heinrich Böll Foundation,2004

14. “Water Privatization in Africa” By David Hall,Kate Bayliss, and Emanuele Lobina. PublicServices International Research Unit,University of Greenwich, U.K.


22

2. Société Nationale d’Exploitation etde Distribution des Eaux (SONEDE), Tunisia

Summary

Some of the key points arising from this casewere:

■ A utility’s strong commitment to quality andmanagement is critical for accessingcommercial finance. In the case of SociétéNationale d’Exploitation et de Distribution desEaux (SONEDE), the absence of a viableprivate sector to assume noncore businessactivities led to the utility focusing on coreand noncore business, which has costimplications. Despite this, SONEDE’ssuccess is attributable in part to the utility’sgovernance structure and managementexpertise.

■ Water sector reform is an ongoing andgradual process. SONEDE has beenoperating in Tunisia for over 30 years, overwhich time it has striven to improveoperations through short-, medium-, andlong-term strategies, coupled with budgetsthat match planned programs. Overall, theutility has adopted a staged, conservativeapproach, with a long-term view thataccommodates new ideas.

■ Water sector reform, implemented in tandemwith broader sector reforms, can create achain reaction and spur synergies. Forexample, financial sector reform enhancesscope for a water utility to access funding.One challenge is to ensure that legal andregulatory frameworks are conducive toevolving water sector and financial servicessectors.

Introduction

Tunisia is located in a semiarid climatic zonecharacterized by irregular rainfall, and is not wellendowed with renewable natural waterresources; there is an estimated 450 m3 perperson annually. In light of population growth andrising demand for water from agriculture andindustry, sustainable supply and water serviceprovision are key concerns. As a result, aplatform of water sector reform combiningstructural and societal reforms has sought toaddress some of Tunisia’s water challenges, andhas achieved some successes: a rising standardof living, expansion of the middle-class,economic diversification, and a more flexibleeconomy and society.

SONEDE is a state-owned commercial andindustrial company that provides water todomestic, public and industrial users, as well asthe growing service economy. Annualinvestment, estimated at 85 million Tunisiandinars (US$70 million), is used for developingnew water supply projects (70%) and for theupgrade and maintenance of existing systems(30%). The company raises money through userfees, which vary according to user type. From itsrevenues, the utility is able to cover operationsand maintenance costs, as well as finance up to40% of new projects. The balance is financed bythird-party donors, including public and privatesources, such as housing developers, as well asthe tourism and industrial sectors. Long-termloans are provided by international agencies,including the World Bank, the AfricanDevelopment Bank, the European Investment

23

Bank, the French Development Agency, theIslamic Development Bank, and others. Thiscase study examines SONEDE in the context of

growing water demand and a changing economy,and explains some of the internal and externalfactors that have contributed to its success.

Table 2.2: Snapshot of Tunisia

Tunisia

Population (2005) 10.1 million

GDP (Tunisian dinar: constant prices 1990 ) 21.4 billion

GDP growth (average five-year) 5%

GDP/capita (p.a.) 3,530 dinars7

Prime overdraft rate 11%

Inflation 2.1%8

Unemployment rate 14.2%

Source: I.N.S. (Institut National de la Statistique, Tunisie: www.ins.nat.tn).

7 Data for 2005. 1 Dinar = US$0.70.8 Data for 2005.

Table 2.1: Overview of Water Services, SONEDE

Area served 160,000 km2

Size/population of service area 8.17 million

Volume of water produced 420 million m3/year

Water consumers served NA

Number of connections 1,920 million

Water coverage (% population with a connection or 99% in urban areaswithin 200 m of a standpipe or other source of water) 89% in rural areas

Number of metered connections 100%

Number of consumers provided with waterborne sewerage,pit latrines or septic tanks NA

Unaccounted-for Water 20%


Source: SONEDE, 2005.

Société Nationale d’Exploitation et de Distribution des Eaux (SONEDE), Tunisia

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SONEDE was created in 19689 during a time ofrapid demand growth for water in Tunisia, inresponse to the need for a national body tomanage all areas related to the provision of safedrinking water throughout the country (i.e.,production, transportation, and distribution).Institutionally, SONEDE sits under the Ministerede l’Agriculture et des Ressource Hydrauliques(Ministry of Agriculture and Water Resources,Tunisia) (MARH). By law, SONEDE is a publicmonopoly provider. The law does not permitprivate-sector participation in the form of leasing,BOT, or disposition of financial assets, althoughSONEDE has introduced elements of the privatesector over time, and as necessary. The Tunisiangovernment is responsible for mobilizing financialresources beyond what SONEDE can recoverthrough its user fees. In urban areas, whichrepresent 65% of the country’s population,SONEDE provides water services to 99% of thepopulation. In rural areas, access to waterservices is at 89%; half of this population isserviced by SONEDE and the rest by the RuralEngineering Department of the Ministry ofAgriculture and Water Resources, whichoperates in dispersed rural settlements.


As a public corporation, the government directlyowns all of the utility’s capital and financial assets,although SONEDE is responsible for managementof financial assets, operations and maintenance,rehabilitation, renewal and installation ofequipment. Thus, SONEDE keeps both accountingand financial records, which are audited andcertified by an external company. These recordsappear annually on the balance sheet and in theOfficial Gazette of the Republic of Tunisia.

Governance

SONEDE is a publicly-owned and operatedmonopoly service provider. The state is

responsible for trusteeship through the lineministry responsible for SONEDE (MAHR), with agoal to maintain the management and functioningof its corporations, with respect to abiding byregulations, ensuring uniformity betweenmanagement and the broader direction of thegovernment, as well as guaranteeing goodgovernance principles. Further, in the absence ofan independent regulator, MAHR supervisesSONEDE to ensure that operations andmanagement adheres to legislation governingthe relationship between the utility and the State.

SONEDE’s Board of Directors has 12 members,chosen based on experience and profile. Theyare state agents or other government employeescharged to protect the interests of variousstakeholders to the drinking water sector, as wellas representatives respectively of government,the private sector, and consumers. The Board ofDirectors meets at least once each quarter. SeeTable 2.3 for an outline of SONEDE’s Board ofDirectors.

The Board of Directors is responsible forreviewing and approving SONEDE’s budgetestimates and related documents. SONEDEmust also submit its contract program, budgetestimates, financial statements, reports on legalcertification of accounts and management letters,minutes of board meetings, and annual activityreports to the line ministry, the Ministry ofFinance and Development, and the Ministry ofInternational Cooperation. The line ministry willthen submit budgetary and related documents toTunisia’s parliament during annual deliberationsover government budgets.


A utility’s internal functioning is of considerableinterest to credit analysts, and strongly influencesa financier’s willingness to provide financing.SONEDE’s internal environment appears stable,with strong management and systems fornegotiating with staff on human resources issues,

9 Law No. 68-22 of July 2, 1968, JORT July 2, 1968, p.743.

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and strong linkages between strategic planningand budgeting departments to fund policies andprograms. However, the utility lacks a customer-oriented perspective, although this seems to bechanging. Lately, SONEDE has focused onimproving its billing systems. See below for aprofile of the utility’s internal environment.

Human Resources

SONEDE employs 7,000 staffers (8% seniorstaff, 22% first-line supervisors, and 70%executing staff). During the 10th Five Year Plan(2002-2006), the number of permanent staff atSONEDE rose from 5,825 at the end of 2001 to6,017 in 2006, representing an annual averageincrease of 0.7%, compared to an increase inratepayers of 4.1% per year. In other words,the staff ratio is 3 per 1,000 connections in2006, compared with 3.4 per 1,000 connectionsin 2002.

As a SONEDE partner, the government and theNational Trade Union participate in staff salarynegotiations every three years. Thesenegotiations focus on salary review andoperations, taking into account economicconditions in Tunisia and the financial and social

state of the utility, as well as consumerinterests. The average salary rises about6% every three years.

In addition to the union, SONEDE employees arealso represented by joint regional commissions,appointed by the Managing Director, and by apanel of the company’s administrativerepresentatives, who are appointed by staffmembers. These commissions aim to representthe professional and social interests of staff onone hand, and to participate in the company’smanagement in such matters as recruitment,promotion, training, discipline, health andsecurity in the workplace, the management ofsocial projects of the company, and proposals onall areas aimed at increasing production andimprovement of staff performance.

Donors and Technical Assistance

SONEDE has established partnerships with arange of donors that finance long-terminvestments for development and upgrade ofexisting assets, as well as the strengthening ofmanagement and technical capacity. Forexample, SONEDE has a long-standingrelationship with the World Bank, which is

Table 2.3: SONEDE Board of Directors

Role Where From

Chairperson (1) Managing Director, SONEDE

Members (11) MARH (2)

Ministry of Interior and Local Development (1)

Ministry of Public Health (1)

Ministry of Industry and Energy (1)

Ministry of Tourism, Commerce and Craft (1)

Ministry of Development and International Cooperation (1)

National Board for Water Supply (ONAS*) (1)

Federation of Employers and Consumers (1)

Trade Union (1)

State Controller: 1st Ministry (1)

*Office National de l’Assainissement du Sénégal.


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currently financing its ninth project. This projectcomprised three initial components:

■ Studies of water demand to improveplanning for better safe drinking water supplyprojects. In collaboration with the WorldBank’s Institute of Economic Development,SONEDE undertook a study on thedevelopment of the economic aspects ofpredicting demand for water on a theoreticalbasis, which includes a mathematical modelfor predicting demand.

■ A study of the cost of water to strengthenSONEDE’s capacity to develop better projectsfor supplying safe drinking water, and, morespecifically, to determine the long-termmarginal cost of water as well as to determinea feasible model for select rural areas.

■ Study of the development of pro-poorservices in water supply, aimed atdeveloping partnerships between public andprivate sectors, with a view to reducing costsassociated with water supply.

The World Bank has extended this projectthrough 2011 to extend capacity-buildingactivities, as well as ensure a supply of safedrinking water. The extension includesformulation of a corporate plan for the companyand undertaking an organizational audit,establishing a commercial system and aGeographic Information System (GIS), drawingup a physical-financial model, and acquiring asoftware package for human resourcemanagement.


Tunisia’s water policy is based on public controlover water resources, with the goal of meetingfuture demand in a sustainable manner. The firststrategic plan (1990-2011), which set out short-and long-term objectives, aims to establish andimplement a strategy for water sector regulationand mobilization, whether through dams,catchment ponds, spreading of flood waters,treated wastewater, artificial refilling of layers,borehole drilling, surface wells, and desalting.

Through this plan, the rate of water resourcemobilization increased to 88% in 2004, from 67%in 1996, and is expected to increase to 95% by2011. A second strategic plan is currently indevelopment, and will cover strategy andprojections through 2030. The second plan willfocus on nonconventional water resources, withthe following features:

■ Desalination and recycling treatedwastewater.

■ Protection of water resources againstpollution.

■ Avoiding overexploitation of water tables.

■ Increasing water efficiency.

■ Demand management of water resources.

Planning for the drinking water sector isintegrated at the national level through Five YearPlans. These are developed by SONEDE, withapproval from its board, the line ministry and theMinistry of Development and InternationalCooperation partners. Planning is followed by thecreation of an annual budget for operations anddevelopment, which is coordinated with theplan’s policies and programs. SONEDE has justcompleted its 10th plan (2002-2006), andembarked on its 11th (2007-2011).

Utilizing the Private Sector

Private sector participation is currently limited tosubcontracting technical services for theextension of water networks and installment ofconnections, although there is capacity in Tunisiafor a wide range of private sector involvement byboth domestic and international companies.Examples of possible activity include: buildingtreatment centers, desalination works,constructing water pumping stations, buildingstorage tanks for safe drinking water, and layingpipes. Maintenance, discovering leakages andengineering studies are currently partlysubcontracted.

In 1999, SONEDE conducted a study of thepotential role of the private sector in supplying

27

safe drinking water. As part of the study,SONEDE was granted permission to develop alist of activities for which subcontracting could bepossible, as well as analyze constraints to thedevelopment of contracts. One area identifiedwas in desalination capacity. SONEDE recentlycompleted a more detailed study for theconstruction of a desalination facility on theisland of Jerba with a total capacity of 50,000 m3

per day, scheduled to begin in 2008. Investmentfor this facility is expected to take the form of aBuild Own Transfer (BOT) or Build Own Operate(BOO).

Billing and Customer Service

In its first decade of operation, SONEDE focusedon meeting increased domestic, industrial andtourist demand for water in large urban centers,particularly in Tunisia’s coastal regions. In itssecond decade, SONEDE concentrated onmeeting the need for safe drinking water in urbanand rural areas. The third decade saw theestablishment of water desalination facilitiesaimed at improving the chemical composition ofwater destined for large urban centers in thecountry’s south. To date, SONEDE has achieveda commendable level of service; its connectionrate in urban areas is nearly 100%, and in ruralareas, 52%. Service levels tend to be consistentand without frequent systemic interruptions.Moreover, the network for distributing safedrinking water operates at 85% efficiency.

SONEDE’s strong technical performance is notmatched by its customer service. Each regionaloffice has a counter receptionist who answerscustomers’ complaints or refers them to theappropriate department. In terms of installingnew connections, SONEDE sets a deadline of15 days, although this deadline is rarely met.

Perhaps, most importantly, SONEDE is striving toimprove its billing systems. Billing is done on aquarterly basis for 98% of customers, and thisaccounts for 70% of SONEDE’s earnings. Mostcustomers’ bills are calculated on the basis ofmeter readings. The remaining 2% of billings,which account for 30% of revenues, are done

on a monthly basis. Billing is on a 90-daybasis for the central government and publicestablishments. Customers can pay their bills ina number of ways: SONEDE’s agencies (at acashier’s desk); at the post office; via bankpayment; or via the Internet (using a bank card).SONEDE recently signed an agreement withSociété Tunisienne de l’Electricite et du Gaz(Electric and Gas Company of Tunisia) (STEG)to allow customers of both companies to paytheir water and electricity bills to either of thecompanies’ cashiers.

Currently, the overall payment rate is about 95%.The average bill payment rate for privateindividuals does not exceed 40 days, and this isconsidered acceptable by the utility. On the otherhand, State and local administrations have poorpayment records, equivalent to one year’sconsumption for the state administration, and twoyears’ consumption for local administrations. Thestate administration is in arrears because theannual water budget always falls short of actualexpenditure. To address this, the governmentintervened in 2000 and 2005 to reconcile theadministration’s water bills and the redemptiondates of outstanding loans (24.4 million and14.4 million dinars, respectively—approximatelyUS$17.1 million and US$10.1 million). Toaddress the arrears of local administrations, thestate implemented a debt rescheduling contractfor a total of 10.9 million dinars over five years,beginning in 2006.

Over the last 10 years, SONEDE has installed anaverage of 70,000 new connections each year, atan average unit cost of 300 dinars. Through1998, new customers were able to pay cash fornew connections, or pay the cost of theconnection on a quarterly basis over five years.Since 1998, new customers, who opted for acredit connection, receives a bill each quarterthat includes the tariff for consumption during theprevious quarter, and a loan repaymentinstallment. The bill must be paid in full or theconnection will be cut.

SONEDE is carrying out a study to measurecustomer satisfaction, with the aim of improving


28


customer service levels over time. The studyincludes qualitative data on customerexpectations and needs, as well as quantitativeinformation from questionnaires developed in thefirst stage.

Affordable Services and the Poor

Tunisia has several national social programsrelating to water supply and sanitation for thepoor, including Presidential Programs and aNational Solidarity Fund (FSN), which aim,among other things, to increase public servicedelivery in underprivileged urban and rural areas.These programs are financed from the Statebudget, external loans, and through donations.

Tunisia’s tariff policy also includes a subsidy forthe poor, through a progressive tariff structurethat varies according to use and waterconsumption. The first bracket is targetedexclusively toward low-income householdswhose quarterly water consumption does notexceed 20m3, or the equivalent of 40 liters perday per person. The social tariff results in asubsidy of over 30% of the cost to supply water,and 1% of the total expenses of low-incomefamilies. This tariff structure has resulted inimproved coverage and connection rates in poorareas. SONEDE affords this by implementingcross-subsidies across different categories ofuser, as well as by offering flexible options forpayment, especially for the poor. For example,water connection loans are offered directly bySONEDE and are repayable over a period ofbetween five and eight years (at 11% interest), asa surcharge to the quarterly water bill.


Almost all infrastructure projects in Tunisia havebeen developed and financed by the publicsector. In the case of SONEDE, surpluses fromuser fees enable the utility to cover all operationand maintenance costs, as well as contribute anaverage 40% of financing for new projects, withthe rest coming from medium- and long-term

loans. As noted above, there are also nationalprograms and funds to support pro-poorinitiatives.

Between 1995 and 2005, SONEDE’s annualinvestment program demonstrated increasingambition, with a focus on new development.For example, its ratio of renewal investment toproduction growth was 10% in that time period,while the ratio of development investment toproduction growth was 90%. The focus ondevelopment resulted in an increased debtprofile, with incremental increases nearly everyyear, yet the utility’s debt service ratio is wellabove the minimum allowed, and the utility is stillable to self-finance considerable portions of itsdebt (the minimum is set at 30%).

SONEDE borrows mostly on domestic markets,due to exchange rate risks, and because unlikethe state, SONEDE does not need hard currencyresources. Still, SONEDE’s ability to borrowcommercially hinges on tariff increases, which havenot kept pace with inflation. While this seems notto have been a constraint in recent years, it doescarry risk. See Table 2.5 for a list of the sourcesof finance for SONEDE’s annual financialinvestment plan and debt repayment program.

SONEDE seeks concessionary loans to financelarger infrastructure projects, and has obtainedloans from numerous donors. For items financedpartially by donors or third parties, the remainderof the financing is provided from the company’sresources.

Overview of the Banking Sector in Tunisia

Over the last decade, a series of reforms wereimplemented in all sectors of the country’seconomy. These include: liberalization ofinvestments, prices and foreign exchange;administrative reforms; modernization of thebanking sector; and reform of the financialmarket and restructuring of public corporations.These initiatives have strengthened thecountry’s market infrastructure, and facilitatedentrepreneurship and the private sector, resulting

29

Table 2.4: Key Performance Indicators for SONEDE

Description Unit Indicators

1 Operating Indicators

1.1 Rate of coverage % 96.0

1.2 Connection rate10 % 80.6

1.3 Number of subscribers Thousand 1918

1.4 Water production l/c/d 140

1.5 Water consumption l/c/d 110

1.6 Water consumption measured by meters % 100

1.7 Continuity of service h/j 24/24

1.8 Potable water tariffs (excluding fixed costs) US$ /m3

– Average 0.450– Minimum 0.120– Maximum 0.740

1.9 Network yield % 84%

2 Financial Indicators

2.1 Connection cost US$ 260

2.2 Personnel cost per connection % 20

2.3 Gross operating coefficient after depreciation =operating costs/operating products Ratio 0.97

2.4 Collection/billing Ratio 0.95

2.5 Solvency = total debts/total assets % 34%

2.6 Operating result/operating costs % 2.7%

2.7 Equipment/investment subsidy % 15%

2.8 Maintenance/operating costs % 3%

2.9 Salary costs/operating costs for water % 47%

2.10 Debt service: Operating result + subscribercontribution/debt service Ratio 2.34

2.11 Capital investment/EBIT Ratio 2.2

2.12 Average income per connection/connection costs Ratio 1.2

2.13 Average payment time for private clientsActive debts/income x 365 Days 40

Performance Measures

10 Per individual connection.


30


Table 2.5: Sources of Finance

Uses Resources Average Investment % of Financing (millions of dinar)

Loan principal repayment Own resources 15 100%

Renewal investment Own resources 10 100%

Large projects Donors 50 70-95%

Urban WSP program Own resources 10 100%

Rural WSP program State 15 100%

Network extension program Third parties 15 90%

Total in millions of dinar 115

in a more competitive economy and closerintegration into the global economy.In March 2004, SIGMA Conseil conducted amarket study on Tunisia’s banking sector. As partof the study (see Figure 2.1), a Strengths/Weaknesses/Opportunities/Threats (SWOT)analysis was undertaken.

Standard Financial Information

See Table 2.6 for a breakdown of the balancesheets for fiscal 1995, 2000 and 2005. The Tablesuggests that SONEDE’s assets are illiquid,given that they are comprised mostly ofimmobilizations. Still, the utility’s rate of

1995 2000 2005

Net immobilizations 636.952 88% 767.782 88% 1,027.903 83%

Current assets 86.039 12% 103.497 12% 204.537 17%

Total assets 722.991 100% 871.279 100% 1,232.44 100%

Own capital 548.463 76% 653.265 75% 812.418 66%

Long-term debts 94.573 13% 112.101 13% 234.419 19%

Short-term debts 79.955 11% 105.913 12% 185.603 15%

Total liabilities 722.991 100% 871.279 100% 1232.44 100%

Control 0 0 0 0 0

Liquidity ratio 1.08 0.98 1.10

Debts/total assets 24% 25% 34%

Financial leverage:Debts/own capital 32% 33% 52%

Permanent capital/immobilizations 1.01 1.00 1.02

Table 2.6: Comparative Balance Sheets 1995, 2000, 2005 (all figures are dinars)

31

Opportunities■ Attention and support from the authorities

for the banking sector■ Tunisia’s increasing ties to the global

economy■ The country’s internal development policy■ Legislation has been improving continually,

which encourages banks■ The rising living standards of the

population and the increasing strength ofthe middle class

■ Progress in telecommunications andinformatics, which favors the developmentof distance services

Threats■ Opening of the banking market to Europe

in 2006■ Consequences of September 11, 2001,

and other related events■ The accounting practices and knowledge

of many firms is inadequate, which makesit difficult to interpret accounting reportingmade to banks during credit-risk estimates

■ Weakness of enterprises’ own funds,which increases the credit risk

Figure 2.1: Results of the SWOT Analysis on Tunisia’s Banking Sector

Strengths■ A sound regulatory and legal structure■ The interest margin remains relatively high

by international standards■ Good coverage of the country by the

network of agencies■ Satisfactory knowledge of international

operations

Weaknesses■ Weak financial structure■ Banks lack commercial sophistication■ Reduced interest margins■ Commissions are relatively low compared

to interest margins

indebtedness is relatively low compared withindustry standards in Africa even though theutility’s financial leveraging is increasing. It isimportant to note that although the company’sdebt ratio is increasing, it is not clear what anappropriate ratio should be.

Operating Costs

SONEDE’s operating costs are mainly staffcosts, energy and debt repayments. A breakdownis provided in Table 2.7.

Since its creation, the state has grantedSONEDE certain incentives. These include:

■ Corporate tax exemption for 20 years,covering the period from 1968-1988. Since1989, SONEDE is liable for corporate tax at arate of 35% of its pretax income (all net post-

tax profits are regularly deposited into thecompany’s reserve account for reinvestment).

■ From its inception in 1968 through 1990,SONEDE received an equipment subsidy forinvestments and loan reimbursements. Since1991, the subsidy has been reservedexclusively for the financing of low-profitprojects, such as rural water and sanitationprograms and desalination projects.

■ Since 2000, the state only finances food andpotable water supply projects in rural areas ofTunisia.

■ SONEDE has never received an operatingsubsidy, since it generates sufficient revenueto cover the totality of its operatingexpenditure, debt service, and the bulk ofrequired capital expenditure. Any remainingcapital expenditures are financed by theState.


32


Characteristics of SONEDE Loans

Given the utility’s high repayment rates (95% ofissued bills are paid), repayments on Year A areused to finance loans issued in Year A+1.Annually, about 10 million dinars is loaned to newcustomers to finance connections. From 1999on, loan tenors have been extended from fiveyears to between five and eight years toaccommodate lower-income customers (interestis 11% per year). To facilitate offering thisextension to customers, SONEDE secured amedium-term loan from the Banque du Sud,Tunisia, for 5 million dinars.

Between 1993 and 1996, SONEDE’s borrowingincluded some medium-term loans from localbanks to complete its financing for the renewal ofits rolling stock, which was more than 12 yearsold, and for which maintenance costs wereconsidered too high. The utility needed anenvelope of 12 million dinars over a period offour years and, through a series of loans, wasable to borrow the full amount.

According to the above, SONEDE was able toobtain medium-term loans from local banks withthe following conditions:

■ The maximum loan repayment period is sevenyears, including a one-year grace period.

■ The loan amount may not exceed 5 millionTunisian dinars.

■ A variable interest rate (TMM + 1.5).

This loan program provided a new source offinancing for SONEDE, and, by using localfinancing, the utility was able to avoid exchangerate risks.

Bibliography

Literature

1. “Economics of Urban Water Supply: Theoryand Case Study” The EconomicDevelopment Institute—Fritz Rodriguez andEduardo Beteta—Washington, D.C., 1991

2. La valeur économique de l’eau ; cas de laTunisie/water evaluation. A. LimamInternational Development Research Center—Canada/IDRC/WDM/Beyruth Forum/Juin2002. (www.idrc.ca/waterdemand)

3. Financement des infrastructures et desservices collectifs. Republic of France,Ministry of Equipement, Transport etHousing, Directorate of Economic andInternational Affairs. Edition Presses del’école nationale des ponts et chaussées,2000.

Table 2.7: Operating Costs

1995 2000 2005

Consumables 14.1 13% 20.0 13% 21.9 11%

Staff costs 45.9 42% 67.6 45% 95.3 47%

Energy and fuel 9.6 9% 12.2 8% 18.7 9%

Chemical products 3.3 3% 3.1 2% 4.3 2%

Other costs 8.7 8% 12.9 9% 22.7 11%

Works done by the company for itself -7.5 -7% -8.1 -5% -0.8 0%

EBIDAT 109.2 100% 149.1 100% 203.7 100%

Repayments and provisions 35.0 32% 41.3 28% 41.5 20%

EBIT 74.2 68% 107.7 72% 162.2 80%

33

4. Eau 21—Stratégie à long terme du secteurde l’eau en Tunisie. Edition 2000. Republicof Tunisia, Ministry of Agriculture andHydraulics. (www.ministeres.tn/html/ministeres/agriculture.html)

5. Etude sur la participation privée dans lesinfrastructures en Tunisie. Republic ofTunisia, Ministry of Development andInternational Cooperation, and the WorldBank (Private Participation in MediterraneanInfrastructure Program) Novembre 2003.(www.ppmi.org)

6. Annual Report 2005. SONEDE.www.sonede.com.tn

7. Etude économique sur l’eau potable enTunisie. SONEDE. [Economic Study on

potable water in Tunisia] December [email protected]

8. « Etude sur le développement de lasous-triatance dans les servicesd’approvisionnement en eau potable »[Study on the Development ofSubcontracting in Potable Water SupplyServices]. SONEDE. September [email protected]

9. Etude sur la réforme institutionnelle dans lesecteur urbain de la distribution d’eau et del’assainissement en Afrique. Cas de laTunisie—[Study on Institutional Reform inthe Urban Sector of the Distribution of Waterand Sanitation in Africa] LIMAM. WaterUtility Partnership (WUP). November [email protected]

Table 2.8: Outline of Loan Program

Local Bank Amount in Grace Period Repayment TMM at Interest Periodmillions of (years) Years Signature Ratedinars

Banque de 2.0 1 6 8.8125 Variable 1993-l’Habitat 1 TMM + 1.5 2000(Habitat Bank 1)



BNA 1 2.25 1 6 8.8125 Variable 1995-TMM + 1.5 2001


BNA 2 1.5 1 6 8.8125 Variable 1996-TMM + 1.5 2002

UIB 1.5 1 6 8.8125 Variable 1996-TMM + 1.5 2002

Total 12.0

Note: TMM is taux moyen mensuel du marché monétaire or average monthly money market rate as posted by the CentralBank of Tunisia.


34

10. Study of the Tunisian Banking MarketSIGMA CONSEIL, March [email protected]

11. Renforcement des capacités, PartenariatEau et Assainissement en Afrique. [Capacitybuilding, Water and Sanitation Partnership inAfrica]. WUP. www.wupafrica.org

12. Réforme du secteur de l’eau et del’assainissement en Afrique—Défis etperspectives. [Reform of the Water andSanitation Sector in Africa—Challenges andProspects.] WUP. November 2001.www.wupafrica.org

13. MAGHREB RATING. Web site:http://www.fitchratings.com.tn)

14. Caisse des Prêts et de Soutien desCollectivités locales: Prospectus d’émissionet d’admission au marché obligataire de lacote de la bourse emprunt obligataireCPSCL 2001 de 30 millions TND [CPSCL—Fund for Loans and Support to LocalCollectivities, CPSCL, Prospectus on theIssuance and Admission into the BondsMarket of the Stock Exchange List of theCPSCL 2001 bond of 30 million TND.Maghreb Rating. www.fitchratings.com.tn


3. eThekwini Municipality Waterand Sanitation Unit, South Africa

35

Summary

The eThekwini Water Department in Durban,South Africa, is one of the strongest inSub-Saharan Africa. Since 1992, the utility hasundergone a broad transformation, including itsmanagement philosophy, customer base, andoperational and financial performance. However,the utility’s management performance owesmuch of its success to the considerable financialsupport of national programs (specifically, theMunicipal Infrastructure Grant and EquitableShare), as well as strong financial support fromthe municipality. The key lessons learnt from thetransformation of eThekwini Municipality Waterand Sanitation Unit are:

■ Throughout the transformation process,strong leadership is critical to keep the focusof the organization on service delivery,despite the tendency of the staff to focus oninternal change processes. Likewise,leadership and political maturation by thelocal government is imperative in allowing theutility to function as a ring-fenced departmentwithin a municipal governance structure.

■ Available and accurate data is critical inunderstanding the service area and customerneeds, identifying and improving certainfunctions (e.g., capital budgets), buildingand maintaining strong customer relations(e.g., community outreach/education), andtracking progress over time.

■ In a business-oriented organization, staffempowerment, creativity and innovationshould be encouraged to foster change and

challenge a “business as usual” approach.The management, at all levels, should beencouraged to think about the big picture andpropose new ideas.

■ Community education and outreach shouldbe considered a part of institutional capacity-building, and should be led by specialists whocan apply appropriate approaches toaddressing sanitation, water conservation,cost recovery, and other core concerns withconsumers. As part of an integrated effort tostrengthen the business, GIS and othertechnologies should be used to understandand address constraints.

■ Partnerships and relationships with researchinstitutes, universities, and the privatesector offer a conduit to the development ofnew ideas and solutions to problems.For example, eThekwini Water providesR1 million to local universities to conductapplied research on a range of issues fromwater pricing to social issues, as well astechnical and chemical research.

Introduction

The city of Durban, South Africa, is located onthe country’s east coast, and is part of eThekwiniMunicipality. The municipality covers 2,297 km2,and has a population of 3.1 million, and anaverage annual population growth rate of1.56%11 (by 2010, the population is estimated toexceed four million). The city is one of SouthAfrica’s largest, and has a diverse economy, withstrong industry and manufacturing, commerce,finance, and tourism, boosted by its international

11 http://www.sacities.net/cities/ethekwini.stm

36


port, the country’s largest. All told, Durbancontributes over 7% to South Africa’s GDP.

The eThekwini Municipality Water and SanitationUnit is a ring-fenced municipal department with amandate to provide water and sanitationservices. It raises money from domestic financial

markets through the municipality, which borrowsin bulk for all municipal functions. This case studyexamines the utility and municipality and thetransformation to provide services to a growingand changing population base, along with someof the internal and external factors that haveinfluenced its success.

Table 3.1: Overview of Water and Sanitation Services, eThekwini Water and Sanitation Unit

Area Served 2,297 km2

Size/population of service area 3.1 million people

Volume of water produced 28,800,000,000 m3/year

Water consumers served 977,000


Water coverage (% population with a connection orwithin 200 m of a standpipe or other source of water) 50%


Number of consumers provided with waterborne sewerage,pit latrines or septic tanks 510,534

Credit rating (for the municipality)- Short-term A1- Long-term AA

Source: eThekwini Water and Sanitation Unit.

Table 3.2: Snapshot of South Africa

South Africa

Population 46.9 million

GDP (p.a.) R1,350 billion

GDP growth (average five-year) 4.2%

GDP/Capita (p.a.) R17,756

Prime overdraft rate 10.5% p.a.

Inflation 3.9%


Source: http://www.statssa.gov.za for South Africa figures, and eThekwini Municipality credit rating brief, GCR, for data onDurban.

37


In 1992, prior to South Africa’s democratictransition, Durban Metro Water was a departmentof the Durban Metropolitan Area that providedpiped water supplies and waterborne sewerageto Durban’s population of about a million,comprised mostly of White, affluent citizens.While the utility was well-run and functional, thedepartment’s financial management andoperations were uncoordinated, informationmanagement was poor, and there was littleaccountability. For the most part, finances werenot a concern; most costs were recovered eitherfrom users, or via support from the Apartheidgovernment. Thus, the utility was not in a positionto raise money.

In the Black townships surrounding Durban,water services for the roughly two million peoplewere provided by separate administrative boards.Service coverage and quality was extremelypoor: dysfunctional piped water systemscharacterized by high leakage rates andineffective cost recovery, while the other half hadno piped water at all. Outlying rural areas largelydepended on grants from the nationalgovernment for services.

In 1992, a transformation process began as partof strategic planning and restructuring ahead ofthe 1994 elections. Through the demarcationprocess outlined in the Municipal Structures Act,Durban Metropolitan became the eThekwiniMunicipality with extended boundaries thatincluded the administrative boards and,eventually, rural areas. New business units werecreated from the municipal departments toencourage a shift toward fiscal accountabilityand orientation toward customer service.Through this process, eventually 38 separate

entities were amalgamated into theeThekwini Municipality.

In the process, the new eThekwini Water andSanitation Unit shifted its approach from that ofan engineering unit working in a largelydeveloped context to that of a utility working in adeveloping country context. Whereas DurbanMetro Water previously serviced a majoritycommercial base (60%), it now servesmostly poor, residential customers (60%).The utility’s core values are customer focus,cost consciousness, and attention to staffwell-being and a target of universal coverage hasbeen set for 2010. According to its most recentbusiness plan, the utility’s key priorities are to12:

■ Eliminate the backlog of water and sanitationservices; the water backlog is now 15% ofwhat it was in 1996, the sewerage backlogremains at 50% of what it was in 1996.

■ Reduce Unaccounted-for Water from 30% to25% by 2010.

■ Improve asset management systems.

■ Provide training to address skills gap inengineering and other professional posts.

■ Improve performance management systems.

■ Improve customer services and servicespayment levels (currently just over 90%).

To achieve these targets, a Basic Waterand Sanitation Program (BWSP) was developedto create a single platform for rural andperiurban areas.

The Water and Sanitation Unit’s transformationlargely hinged on how the utility adapted tochanging conditions, both at the national leveland internally. This section examines some of the

12 eThekwini Municipality business plan. Internet: http://www.durban.gov.za/eThekwini/Services/water_and_sanitation/policies_and_guidelines/business_plan/executive_summary

eThekwini Municipality Water and Sanitation Unit, South Africa

38


key factors that have led to the utility’sperformance and its maintenance of bankabilityover time.


Policy formation and implementation within theeThekwini municipality is influenced by policiesat the national level and the regional IntegratedDevelopment Plan (IDP), which projects themunicipality’s vision for 2020. Governance for thewater sector is determined by a few pieces oflegislation, including:

■ The Water Services Act (1997) and the WaterServices Amendment Act (2004), which setforth a vision for local governments toassume responsibility for water services, anddistinguished between Water ServiceAuthorities (WSAs)—local government—andWater Services Providers (WSPs). The Actrequires all WSAs to prepare a WaterServices Development Plan as part of themunicipality’s overall Integrated DevelopmentPlan (IDP).

■ The Municipal Services Act (2000) whichdesignated three spheres of governance:federal, provincial, and local. Under the Act,municipalities are designated as WaterServices Providers (WSPs) with theresponsibility for water and sanitationservices provision. The municipality has thechoice to either provide such services itself,or to contract out service provision functions.

■ Further, South Africa’s Strategic Frameworkfor Water Services sets national coveragetargets for water and sanitation, includinguniversal provision of access to a functioningbasic water supply facility by 2008 anduniversal access to a functioning, basicsanitation facility by 2010.

Governance

In Durban, the implementation of the MunicipalServices Act led to the amalgamation of waterand sewerage functions into one department

under the auspices of the local government. Theutility’s Board of Directors is in effect Durban’sCity Council, which has over 200 members, andfixes annual budgets and sets the municipality’spolicy. The utility’s Managing Director reports tothe City Manager, who is in effect its CEO. TheCity Manager reports to the city council, whichreviews the utility’s performance quarterly,through a Performance Monitoring Unit, which isbased in the City Manager’s office. Despite thisgovernance structure, the utility has a highdegree of autonomy to operate as a business.Figure 3.1 shows the structure of the council.The water unit is a component of theprocurement and infrastructure cluster.

As a ring-fenced unit, the utility pays propertytaxes and is expected to operate as a business.However, the unit operates as a cash business,which limits its ability to develop and implement arealistic capital budget. Under this arrangement,capital expenditure investments are bookedupfront rather than amortized, and the utilityfunctions by working on an overdraft with themunicipal treasury.

Drivers of Change

Durban’s transformation has largely been drivenby economic and political factors related to theswitch to democracy in the early 1990s.Recognizing that business as usual would not befinancially viable given the stark socioeconomicdisparities in its new customer base, the citycouncil shifted its practices such that the utilityand all municipal departments would have tooperate as businesses, with strict treasurycontrols. Aggregation of different administrativeunits allowed for harmonization of costs andtariffs, which helped focus the new utility onproviding services to customers, not just citizens.

Tariffs, Regulation, and Credit Control

Because the utility remains a municipaldepartment, the city council has authority to settariffs. Still, the utility sets an internal rate forwater supply using the principles of full cost

39

recovery, meaning operations and maintenanceas well as all capital works, including for newdevelopment,13 and submits this to the councilfor consideration, as well as the treasury. Thetreasury assesses the proposed tariffsadjustments based on broader affordabilityconcerns and advises the council, whichultimately sets the tariff. Consequently, althoughfull cost-recovery rates determined by the utilityare often not actualized, they are used forbudgetary purposes.14 At the end of each year,the municipality balances its books,acknowledging the difference between revenuescollected at the given tariff rate and the full costrecovery tariff, and essentially writes off the debt.

In the absence of an independent regulator,public debate over tariffs often follows electioncycles, and the utility’s planning and budgeting

processes are never entirely free of politicalconsiderations. That said, the city council hasdemonstrated considerable political maturitythroughout the initial transition and into thepresent, and largely avoids interference in theutility’s internal affairs. For example, themunicipality recently adopted a credit control anddebt collection policy, in accordance with theMunicipal Systems Act of 2000. Specifically, thewater utility’s bills are sent to consumers as partof a broader municipal bill that includeselectricity, solid waste, and other charges. Ifpayments received amount to less than what isbilled, the water department receives its sharefirst.15 Highlights from the credit control policy areillustrated in Table 3.3.

Despite these credit controls, the utilityexperiences a high percentage (30%) of

13 In many new cities, a developer pays for water mains, which often results in underinvestment. In Durban, the utility pays forthe water mains as a means to promote development as well as to encourage development that includes access to services.14 Durban’s residential water tariffs were increased by 7.5% in July 2006, which the council believes will provide sufficientincome to the utility to cover the cost of service provision. The high percentage of Unaccounted-for Water (30%, againsta target of 2%) due to illegal connections and aging infrastructure, is of particular concern to the municipality,against rising debts and rising unemployment, although it is noted that the tariff increases are in line with inflation.Source: http://www.iol.co.za/index.php?set_id=1&click_id=13&art_id=vn20060324092606802C60522115 eThekwini Municipality Credit Control & Debt Collection Policy, 2006.


Figure 3.1: eThekwini Municipality Structure

Political Component

Municipal Manager(incorporating four offices)

Six Deputy City Managers

eThekwini Council200 Councilors

Chairman: the Mayor

Service Clusters:■ Sustainable Development and

City Enterprises■ Health, Safety and Social

Services■ Governance■ Procurement and Infrastructure■ Treasury■ Corporate and Human Resources

Administrative Component

Six Standing/Support CommitteesChaired by Executive Committee

Members

Executive CommitteeNine Members Chairman: the Mayor

40


Table 3.3: Debt Collection Policy

Commercial Users Domestic Users

Core policies for nonpayment ■ Users subject to disconnection ■ First notice: a warning on theif arrears surpass a set amount monthly bill(deemed by the CFO) ■ Second notice: a letter noting

the risk of disconnection■ If no response, restriction of

water supply, allowing for adaily consumption of 500liters per six-hour period, butat an extremely low flow rate.Charges continue to accrue

Options ■ Pay outstanding arrears ■ Pay outstanding arrears■ Conclude a credit agreement (plus the cost of a new

(on approval by management) connection, if disconnectionand pay relevant charges has occurred)over time ■ Apply for a flow limiter and

sign an acknowledgmentof debt

If not heeded? ■ Total disconnection, user ■ If tampering with the flowcharged for disconnection cost. restrictor occurs on moreService reinstated on payment than three occasions, theof the entire debt plus the cost customer may lose the entireof a new connection, and a connectionrevised deposit

Unaccounted-for Water (UFW) mainly due theleaks attributable to aging infrastructure. As theutility purchases its water in bulk,16 the UFW rateadversely impacts its budget. Given themunicipality’s emphasis on the need fortransparent, equitable, and sensitive approachesto recovering costs for basic services, a numberof arrangements have been devised to balanceservice levels with affordable tariffs in an attemptto reduce illegal connections. For example, theutility championed the free basic water policy,which is a national policy, and provides the first200 liters of water per day to customers free ofcharge. eThekwini Water and Sanitation Unit

offers three service levels to domestic users17:

■ A ground tank service that provides amaximum of 200 liters of water per dayfor free.

■ A semipressure service which offers areduced consumption tariff between 200 litersand 1,000 liters a day, with no fixed chargesregardless of consumption.

■ Full pressure service, for customers whoreside in residential properties with aspecified rateable value, presently R40,000or less; no fixed fees are charged.

16 eThekwini’s Water And Sanitation Unit purchases the bulk of its water from Umgeni water. Bulk water tariffs were increasedby 4.9% in 2006.17 eThekwini Municipality Credit Control & Debt Collection Policy, 2006, page 17-19.

41

Subsidies for CAPEX and OPEX

The national free basic water policy states that allSouth Africans are entitled to free basic waterand sanitation, provided by local authorities.Two key programs were created to implementthis policy:

■ The Municipal Infrastructure Grant, operatedby the Department of Provincial and LocalGovernment (DPLG), consolidated funds tosupport capital expenditures for basicinfrastructure services. The MIG’s approachsimplifies transfers to municipalities bysupporting municipal capital budgets,promoting integrated development planning,and allowing flexibility in budget programming—meaning that the municipalities candetermine how they will spend the funds,provided they are used in accordance withthe MIG’s principles.

■ Equitable Share, as set out in South Africa’sconstitution, reflects the desire of therelatively young democracy to allocatenational tax revenues equitably amongnational, provincial, and local spheres ofgovernment. In eThekwini, funds receivedthrough the Equitable Share program areused to subsidize operating costs for basicservices.

Currently, MIG grants are used to fund householdlatrines18 and basic water supply connections.Equitable share funds are used as operatingsubsidies. In 2005, MIG grants totaledR106 million, compared with R279 million spentin 2004-2005. In 2005, equitable share fundstotaled R90.6 million; these were increased toR120 million in 2006. However, given the rise intotal expenditures, the percentage of equitableshare relative to expenditures declined by 4%.

The predictability of these government transfers ishigh, although they are not always equal todemand, largely because the MIG and Equitable

Share are highly linked in practice, though not inplanning. For example, MIG funds are used inpoor areas to provide free basic services, wherethe ability to recover even operations andmaintenance (O&M) costs has proven limited.However, while the utility applies annually for MIGgrants based on its projections of providing capitalworks for basic infrastructure in poor areas,Equitable Share subsidies rely on data from thenational census, which is conducted every 10years, and do not vary much from year to year.Therefore, the more MIG money is spent rollingout service provision, the greater the need foroperating subsidies for O&M, or new programs topromote a payment culture, in order for the utilityto maintain its strong financial position.

Management Structure

The Water and Sanitation Unit’s managementstructure is relatively flat, and, due to closerelations with the City Manager, seniormanagement has relative autonomy. The utilitydoes not have a Board of Directors; its ChiefExecutive is the City Manager. The municipalityannually audits its books via an external agency,while staff salaries are set by the council. Anorganizational chart of the Water and SanitationUnit is provided in Figure 3.2.


A utility’s internal functioning is an importantindicator for credit analysts and strongly affects afinancier’s decision to provide financing. In thecase of Durban, the municipality conducts all ofthe market borrowing for the water utility, butrecognizes that all of its units must operate likebusinesses, with an emphasis on customerservice. Consequently, early in the reformprocess, the council sought to put in place amanagement team with the requisite utilitymanagement skills, but also business training.The consequences of this shift in thinking aboutthe internal environment on bankability areoutlined below.

18 Composting, urine diversion toilets are provided in rural areas.


42


Figure 3.2: Organizational Chart of eThekwini Water and Sanitation Unit

Head, Water and Sanitation Unit

Executive Secretary

Deputy Head: Administration

Deputy Head: Operations

# Manager: Social Responsibility # ProjectExecutive (2)

Deputy Head: Technical Support

Deputy Head: Customer Services

Management Quality

The eThekwini Water and Sanitation Unitretained most of its management teamthroughout the transformation process; the teamhas demonstrated its strength and resilience overtime. The utility’s vision and goals are clearlyunderstood by all staff, and are articulated in thelong-term strategy, in accordance with themunicipality’s Integrated Development Plan(IDP). The utility has implemented a regularplanning cycle that includes a multiyear(three-year) budget, which is aligned with themunicipality’s policy goals and long-term vision.19

At the start of the transformation process,management conducted a SWOT (Strengths,Weaknesses, Opportunities, and Threats)analysis, a standard management tool used inthe private sector. Senior management operateson five-year performance contracts according toKey Performance Indicators (KPIs), which are setby the council and audited by an independent officewithin the municipality. KPI reports are measuredmonthly by the utility’s Managing Director. All juniorand administrative staff members are providedwith clear job targets and goals.

Human Resources (HR) and Staff Composition

As part of the transformation process,management was flattened from 28 levels to 6, inan effort to encourage innovation and creativity,as well as improve efficiency. Although the utilityis ring-fenced, the utility’s HR staff report to acore HR unit within the municipality, rather thanto the utility’s management. While this allows themunicipality to have standard HR policies andpractices throughout the different business units,it limits the utility’s autonomy and ability todirectly execute personnel decisions.

As of June 2006, the Water and Sanitation Unithad 2,765 staff, comprising 1,621 full-time staff,80 temporary council staff (from the municipality),and 1,304 temporary staff contracted fromoutside agencies. The high levels of temporarystaff are a consequence of the transformationprocess. From 1995 to 1997, the municipalityrequired all head counts to be agreed in theofficial organizational chart before hiring couldoccur. With the rapid change experienced as 38administrative structures aggregated to seven,and then seven into one municipality, positionsneeded to be filled quickly. The process for hiring

19 The budget is linked to the IDP via an eight-point plan that includes “sustaining the natural and built environment; economicdevelopment and job creation; quality living environment; safe, healthy and secure environment; empowering our citizens;embracing our cultural diversity; good governance; and financial viability and sustainability.”

43

temporary staff was less onerous, and wastherefore widely used. A breakdown by positionand race is provided in Table 3.5.

The utility’s staffing targets are set to reflect theeconomically active population for the province.For the utility as a whole, the racial targets have

Table 3.4: Key Performance Indicators (KPIs) for Management in Terms of Staffing

KPI Unit Measure Monthly Results

Average time taken to appoint staff from date ofrequest to date post filled Days 216 (April 2006)

Total number of days sick leave taken Days —

Total number of days staff AWOL Days —

Total number of days leave taken in all categories Days —

Total number of disciplinary cases initiated Quantity/number 5 (April 2006)

Total number of grievances lodged Quantity/number 4 (April 2006)

Percentage of appointments that comply withEmployment Equity targets Percentage (%) 63

Table 3.5: Staff Composition—Municipal Employees Only

Tier Description # Staff % Whites % Indians % Coloreds % Africans

1 Top management 3 67 33 0 0

2 Senior management 5 100 0 0 0

3 Professionally qualified andexperienced specialists andmiddle management 41 63 29 0 7

4 Skilled technical andacademically qualifiedworkers, junior management,supervisors, foremen andsuperintendents 335 25 31 5 38

5 General skilled anddiscretionary decision-making 572 6 33 2 59

6 Basic skilled and defineddecision-making 665 0 14 0 85

Total permanent staff 1,621 10 25 2 64

Temporary staff 80 4 14 4 79

Total 1,701 9 24 2 64

Target 10 18 3 69

Source: Adapted from Employment Equity Report as at end of June 2006, eThekwini Water and Sanitation Unit.


44


been relatively well met (see Table 3.5);however, the proportion of Coloreds and Africansin top management is negligible. Further, theutility has a target of 47% female and 53% malestaff. Water service provision is historically amale-dominated field, which is reflected in thecurrent staffing pattern: 8% of permanent staff,and 28% of temporary staff (or a total of 9% totalmunicipal staff in the water unit) are female.

Some core staffing challenges are:

■ A Shortage of skilled technical andprofessional staff. There are currently 46vacant posts for engineers and 77 vacantposts for technicians. In fact, there is a severeshortage of trained professionals, andespecially for engineers in South Africa as awhole. Within the middle management tier ofthe utility, emigration and competition fromthe private sector have resulted in a highlevel of attrition.20

■ Retirement. In the next five years, 65% ofstaff will be within retirement age. Amongsenior management, 75% will be withinretirement age in the next five years. Much ofthe current management team has been inplace since the start of the transformation adecade ago, and represent decades more ofinstitutional memory.

■ Friction amongst staff about professionalgrades and pay scales. While theamalgamation process for both water andsanitation was completed in principle in 2000,harmonization of human resource functions isincomplete, and this has affected staff moraleand created friction amongst staff, as payscales vary widely both within and acrossdifferent tiers.

To address these issues, eThekwini hasdeveloped several training programs. Forexample, the municipality pays for six students

per year to study engineering or technical fields,in return for a commitment to work at the utilityfor three years upon graduation. The utility alsooffers bridging courses for promising candidateswho lack the appropriate science and math skills,along with apprenticeships and trainings incollaboration with national schools anduniversities.21 Another approach is to convertsome of the currently temporary positions intofull-time ones, to encourage staff retention.

Customer Service

At the Water and Sanitation Unit, the emphasison customer focus has led to numerousinitiatives to promote service and outreach. Allwater customers receive their water bills on acombined monthly statement from themunicipality, which also includes charges forelectricity, housing, solid waste, and otherservices. To handle customer complaints as wellas general enquires and service requests, theutility created a customer call center thatreceives text messages, e-mails, and phonecalls. The center is open 24 hours a day, 365days a year. Customer service is also providedon a walk-in basis, at headquarters and fourregional offices throughout the municipality.Some highlights of this initiative include:

■ A targeted 80% of calls are answered in20 seconds or less, by a ‘live’ person.

■ All correspondence is logged into a databaseprogram that generates a work ticket, whichis routed to the appropriate department.For example, on a maintenance call, allinformation about the caller and the requestare logged, and then a service request isrouted electronically to a work team.

■ In urban areas, the utility’s target responsetime for service calls is 80% in 24 hours for allservice requests, and 100% in 48 hours.

20 Amongst the administrative/nonprofessional staffing, attrition rates are also high, and often related to HIV/AIDS factors.21 Notably, eThekwini has been identified as a training center for local government in the areas of sustainable urbanizationand environment, information-sharing, and human, social and economic development by the United Nations Institute forTraining and Research (UNITAR).

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Connections are targeted to be installedwithin 14 days of an initial request.

The development of user-friendly software forcustomer service agents, linked with technologythat allows transmission of real time updates tomaintenance and other teams, has had aconsiderable impact on the utility’s ability tomanage the call center without highly skilledworkers.

Another element of customer service is outreach.In urban areas, payment and cost recovery forwater services is minimal, particularly amongstthe poor, which represent a large—andgrowing—constituency of the customer base.To address high debt levels and nonpayment,in 2004, the utility’s Community EducationDepartment trained Community Service Agents(CSAs), and assigned them to communitieswhere nonpayment levels were high.Communities were identified through the utility’sGIS system. The CSAs made household visits todiscuss water conservation, identify water leaks,read meters, and discuss debt repaymentoptions. By providing a “human” face to the utility,customers signed acknowledgments of debt,kick-starting repayment. For customers with veryhigh debt loads and low or nonexistent propertyvalues, the utility offered a restructuring ofhousehold debt. If a household consistently paidfor current water use over a five-year period, its“old” debt was written off.

Of the 20,000 households targeted, CSAs havecurrently approached between 7,000 and 8,000,of which roughly 2,500 now make monthlypayments. Where defaults continue, the CSAsundertake additional visits and outreachactivities. The CSA approach generated aboutR7 million in revenues over 18 months since itsinception, against a total cost of R900,000 totrain and pay the CSAs.


Although the Water and Sanitation Unit ispublicly-owned and operated, it turns to the

private sector where a business case exists.For example, since 2000, the utility has workedto develop and contract local, Black-ownedbusiness for a variety of functions, includingmaking connections and disconnections, layingmains, building toilets (e.g., the urine diversiontoilets used in rural areas), unblocking sewers,reading meters, and other functions. Thisexpansion in the use of contractors was aconsequence of the expanded service area andinability to meet demand for services, given theutility’s staffing. Cost was also a significant factorin that contractors are considerably lessexpensive than full-time staff. Also, contracts withlocal private firms could include financialincentives to improve service delivery. Forexample, prior to outsourcing, the utility readabout 70% of its meters on a quarterly basis.Now, because of outsourcing, 99% of meters areread on a monthly basis.

In addition to the use of private contractors, theutility has a concession with Durban WaterRecycling (Pty) Limited, a consortium led byVivendi Water System, which was agreed in2001. The concession came about as a result ofa planning process to increase the capacity of amarine outflow pipeline to meet projectedwastewater supply, which posed high costsimplications for consumers. An alternative torecycling the bulk of marine discharge for tertiaryuse by industry was presented and selected.Given the high technical complexity andassociated costs, the utility decided to design apublic-private partnership for a 20-yearconcession contract between eThekwini WaterServices and Durban Water Recycling. Theconcession has benefited both parties: the utilitywas able to delay capital investment in new bulkwater supply infrastructure while “gaining”sufficient water to supply up to 220,000households, and did not have to undertake anynew capital investment for the constructionassociated with the project. For the privatecompanies, the cost of water was reducedconsiderably: the current clean water tariff isR5.2 per m3, Durban Water Recycling paysR2 cents per m3.


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Table 3.6: Key Performance Indicators, Customer Service

Key Performance Indicator Unit Measure Monthly Results

Customer Relations

Revenue improvement per customer service agent Currency 13,000 (May 2006)

Number of schools visited Quantity/number 36 (May 2006)

Number of street theater events held Quantity/number 103 (May 2006)

Call Centre

% calls dropped (does not include calls droppedwithin 5 seconds) Percentage (%) 3.5 (May 2006)

% calls answered within 20 seconds Percentage (%) 69 (May 2006)

% calls answered within 30 seconds Percentage (%) 21 (May 2006)

Total calls answered Quantity/number 56,427 (May 2006)

Urban Customer Services

% meters read in a month Percentage (%) 99 (April 2006)

% meters billed on actual readings in a month Percentage (%) 99 (April 2006)

% connections made in less than 14 days Percentage (%) 77 (April 2006)

# connections with no advance on the meter for90 days Quantity/number 4,215 (May 2006)

# flow limiter connections with consumption> 200 liters per day Quantity/number 3,722 (April 2006)

# meters that have not been read for morethan 90 days Quantity/number 1,703 (May 2006)

Operations and Quality of Service

The quality of service and operations has animportant impact on a financier’s perspective ofcreditworthiness and also complementsmanagement quality and financial performance.In Durban, although piped water supply iscontinuous, factors such as UFW have increasedrather than decreased in recent years. With eachbudget, the utility sets aside provisions for baddebt, to cover its losses for nonpayment andleakages that result in UFW. In 2005-2006, theprovision was R296 million.

Factors that affect Unaccounted-for Water arepoor management, theft, and administrative

causes (nonfunctioning meters, meters notbeing read, etc.). Currently, Durban bills 99%of its customers based on an actual meterreading, which helps to address potentialadministrative causes. Through the educationdepartment, the utility has started a pilotproject based on a “caretaker” approach,according to which community members arehired to watch over a set number ofhouseholds, to check connections and leaks inhigh-water loss areas. The CSAs, discussedabove, are also a core component of the driveto reduce bad debts and UFW. A GIS databaseprovides a wide range of data for the utility tounderstand the causes behind UFW, and targetareas for improvement.

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In rural areas, a cholera outbreak in 2000 helpedshift the municipality’s thinking on free basicwater and sanitation. The utility developed aprogram to provide clean water and urinediversion (composting) toilets to poor areas,along with training for households andcommunities on how to use them. In partnershipwith other relevant municipal units, the utilityfollows up with the households to ensure theirproper use. More recently, the utility made a

decision to pay for connection costs for the poor,as well as for developers, in order to encouragedevelopment that includes access to water andsanitation.

Performance Improvements

A summary of relevant performanceimprovements over the last 10 years is providedin Table 3.7.

Table 3.7: Performance Improvements

Prereform Postreform Impact onbankability?

Business culture Public sector department Business systems with a Yescustomer orientation arenow in place

Operations culture Water department Water department is run as Yescomprising engineers a business with financingwithout regard to cost intrinsic to work plans

Operating areas 1 million people, largely 3+ million comprising urban Yeshomogenous service and rural, along with manydelivery varied demographic and

socioeconomic groups

Autonomy/ Water department a Water department a Noindependence function of the municipal function of the municipal

governance structure governance structure

Financial planning Financial planning not Financial planning strongly Yeslinked to utility operations linked with operations as

well as decisions forbusiness planning

Readiness for Planning started two Management team Yestransformation years before remained the same, for

democracy; Durban was the most partabout two years behindJohannesburg andCape Town in terms oftransition, which allowedthe city to learn fromother experiences

Access to capital Municipality relied on Municipality relied on Yesmarkets capital markets to fund capital markets to fund

resource gaps resource gaps


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22 Source: http://www.treasury.gov.za/mfma/default.htm

Table 3.7: Performance Improvements (Contd...)

Prereform Postreform Impact onbankability?

Management Management capacity Focus on business Yescapacity based on engineering management skills for

skills senior management

Utilization of the Minimal Increased use of the private Yesprivate sector sector for services, building

capacity of local enterpriseto support the local economyand reduce total costs forthe utility; a concession withthe private sector alsostrengthened relations withthe industrial base throughlower and more stable tariffs.

Unaccounted-for Originally, with a client Now, UFW is at 30%, YesWater base of 1 million, although this is down from

UFW was 14% 45%. UFW is difficult toreduce given outdatedinfrastructure in the annexedareas, plus illegal connections


eThekwini municipality takes a holistic approachto budgeting and finance, considering thebroader needs of its citizens as identified in theIDP. Cost recovery is a core principle, along withexpenditure management, particularly whencosts cannot be recovered. Importantly, themunicipality receives budgets from all itsdepartments and accesses finance for them.The departments then repay their debts to themunicipal treasury, using the same interest rateapplied in the original loan.

Characteristics of the DomesticFinancial Market

South Africa’s experience with municipal financeshould be considered in the context of

national trends and policies. For example, perthe constitution, national government guaranteesof local government debt are illegal. TheMunicipal Finance Management Act (MFMA) No.56 of 2003 aims to modernize budgeting,accounting and financial management practices,along with building municipal capacity,transparency and accountability to be able todeliver services to communities. The MFMAobliges all three spheres of government—fromthe national to local—to be transparent abouttheir financial affairs.22

South Africa has a very sophisticated financialmarket for debt products. The local bond marketis 10 times the size of the Johannesburg StockExchange (JSE). Hedging products have beendeveloped in recent years allowing for greaterliquidity in the market, and a secondary marketfor bonds has developed. Overall, investors aresupportive of long-term investing, which, in turn,

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benefits municipal investing (a small percentageof the overall market). In Durban, the high qualityof infrastructure and the city’s financial strengthcreated an environment in which grace periodsare seldom if ever required. The municipality iscontent with borrowing from lenders, whoprovide highly favorable rates, rather than launchbonds. In addition to commercial borrowing,South African companies, such as INCA(Infrastructure Finance Corporation Limited),launch bonds on the market, and then onlend tomunicipalities. Municipalities also privately placedebt with banks and investors.

Drivers of Municipal Finance

Municipal finance reflects a small portion of totalmarket activity in South Africa, while for theprivate banks and financiers, governmentbusiness is considerable. Thus, the forcesdriving municipal finance are important tounderstand and consider. Prior to democracy,White-controlled authorities, such as DurbanMetro, were able to access market financebecause of an implied guarantee by government.With the government guarantee, ContractualSavings Associations (CSAs), which formerlyhad limited ability to assess risk, brokered dealsbetween municipalities and the market.

With the advent of democracy, the newconstitution noted that sovereign guarantees tolocal authorities were illegal—if the private sectorwanted to lend to a local authority, it had toassume the risk. In this environment, the CSAsleft the market, as they were unprepared andunable to execute the task adequately. Due totax loopholes, private banks continued to providelong-term, fixed finance to municipalities untilthese were also closed, leaving a market gap.Into this vacuum stepped the Development Bankof South Africa and the Infrastructure FinanceCorporation Limited (INCA), both of which wereable to enter the market for long-term finance.Private banks continued to provide workingcapital and asset finance, but not at long-term,fixed rates. This trend continued until thefinancial charter was introduced.

The financial charter was designed to restructurethe economy to reflect the new South Africa.Private banks, investors, and CSAs are givenpoints for investing in Black-owned business,management control, and other factors, includingthe quality and intensity of training programs;procurement from Black-owned firms, andinvesting in infrastructure for the previouslydisadvantaged. Each institution must achieve aspecified amount of investment, otherwise, theyrisk losing all government business.

The impact of the financial charter cannot beunderestimated, as the banks have respondedby reducing interest rates on municipal lending.For example, eThekwini Municipality currentlyborrows at a heavy discount from the privatebanking sector, and will continue to borrow at adiscount until the banks meet their charter points.As a consequence of the risk of losinggovernment business, the risk: reward analysisby banks favors municipal infrastructure in orderto meet the charter conditions. Further, becauseof exchange controls put in place by the SouthAfrican government, banks are forced to investdomestically, which benefits municipalities’access to the market.

In addition to the private sector’s approach to themarket, the DBSA also continues to pursuemunicipal finance, although it has found themarket highly competitive followingestablishment of the financial charter. As a result,DBSA also provides highly discounted rates formunicipal borrowing.

Financing Water and Sanitation ateThekwini Municipality

When it comes to municipal finance, themunicipality’s Treasury Department manages aportfolio of investments and arranges forlong-term borrowing from the market. All of themunicipal departments are ring-fenced in order toensure transparency and to promote realisticbudgets, in line with the MNMA. In manyrespects, the municipality acts like a centralbanker to the different departments, promoting


50


stability and conservatism at a central level, andthen letting the different departments operate ona surplus or deficit at the end of the year.Departments operating on a surplus gain interest,while those operating on a deficit (through anoverdraft to the treasury) are charged interest(currently 11.7%). The municipality can borrow atfixed or floating rates, depending on which islower, but it provides finance to the departmentsat a fixed rate. To determine the amount ofmarket-based borrowing needed, the treasurystarts with its overall budget, and then subtractsgrant-based and internally generated funds, asillustrated in Table 3.8.

For the Water and Sanitation Unit, all projectedcapital expenditures are proposed to the citycouncil and, if approved, are put into the capitalbudget, and work can proceed. To fund theproject, the utility provides bridge financing fromits own account, which, for larger capital works,results in an overdraft situation in the short term,until loan funds can be raised by the municipality.Further, the topography of the rural areas wherethe utility provides basic services is often morerugged than anticipated, resulting in a mismatchbetween MIG budgets (set annually) and actualcosts. In this case too, the utility uses itsoverdraft to make up the difference, and thenreflects that difference to the MIG in the nextannual cycle.

Because the Water and Sanitation Unit relies onits overdraft for working capital, this financingstructure means that while it is independent interms of its budgets, because tariffs are notapproved at full cost recovery rates, it is stronglydependent on the city in the long term. Inpractice, the difference between the actual costof providing service and what can be charged toconsumers gets charged back to the council atthe end of the year.

There are several factors that contribute toeThekwini Municipality’s ability to attractdomestic market finance to meet its resourcegaps, including:

■ Durban’s historic financial strength prior to theadvent of democracy, and the ability of SouthAfrica’s new political system to maintainfinancial sustainability within the country as awhole. Early on, Durban’s municipal andutility leaders recognized that a business-as-usual approach would not work with thenewly amalgamated municipal structure.Recognizing the need to provide basicservices as well as foster civicmindedness,there was a shift toward treating people ascitizen-customers, which transformed thefocus of municipal agendas.

■ One of the most impressive results of thisapproach was the municipality’s development

Table 3.8: Utility Finance Worksheet

Steps Figures

1. Overall budget for the year (2006-2007) R2.8 billion

2. Amount derived from grant funding (internationalplus MIG and equitable share) R1.3 billion

3. Amount requiring financing R2.8 billion—R1.3 billion = R1.5 billion

4. Amount to be generated internally(e.g., taxes, cost recovery) R500 million

5. Determine the average % of fundsdepartments spent in a year 90%

6. Market-based finance required = R1.5 billion—R500 million X90% = R900 million

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of a GIS-linked database with information onthe municipality’s physical infrastructure,housing patterns, demographics, customerdatabase, payment history, and other factorsthat provide the municipality and water unitwith a vast array of information that facilitatesbetter management. In addition to data, theGIS system uses aerial photographs toprovide context to the data, for example, totrack settlement patterns in informal areasand shack farms, as well as topographicallandscapes in rural areas. This use oftechnology allows management to recognizeand target hot spots for capital expenditure orother programs, including outreach andeducation, which leads to more cost-effectiveprograms and approaches.

■ South Africa’s legislation enshrines the rightto water for all citizens, but leavesresponsibility for service delivery to localauthorities. From a financial perspective, thecentral government does not guaranteemunicipal finance, which means thatmunicipalities must be sufficiently financiallyrigorous to meet their resource needs.

■ The existence of such national programs asthe Municipal Infrastructure Grant (MIG) andEquitable Share (ES), which are intended toincrease infrastructure services to the poor.While local government is responsible forwater services, a strong national regulator,the Department of Water Affairs and Forestry(DWAF), South Africa, has supported waterservices over the last decade to ensurestability in service provision and so thatweaker municipalities could adjust to theirnew role.

■ Finally, and perhaps most importantly, nationallegislation to reform the financial servicessector has helped municipalities that arefinancially responsible to attract significantlevels of finance at preferable rates.

Still, the transformation process is ongoing.eThekwini faces numerous challenges, from achanging and growing customer base that ismostly poor, to the adequacy of governmentsubsidies, as well as staffing and human

resources constraints in the near future. Newrisks and challenges continue to emerge and theutility’s ability to anticipate and address theserisks before they affect financial and operatingperformance largely relies on strongmanagement, good governance, and a stableexternal environment.

Bibliography

People Met

1. Neil McLeod, General Manager, eThekwiniWater Department

2. Ebrahim Seedat, Corporate FinancialServices, Manager: Finance, eThekwiniMunicipality

3. Mary Anne Cobalt, Senior Manager, HumanResources, eThekwini Water Department

4. Steve Pietersen, GIS Team, eThekwiniWater Department

5. Teddy Gounden, Manager, CommunityEducation and Councilor Liaison, eThekwiniWater Department

6. Roy Maharaj, eThekwini Water Department

Literature

1. Durban Water Policy, June 2004

2. Durban Water Policy, March 10, 2005

3. eThekwini Online—Water and SanitationHome Page

4. Durban Water Strategic Plan, GobaMoahlioli Keeve Steyn (Pty) Limited, FirstDraft, January 2004

5. Global Credit Rating Company, eThekwiniMunicipality, 2004

6. National Water Act, 1998. Republic of SouthAfrica

7. eThekwini Municipality Sewage DisposalBylaws, Tariff of Charges 2005-2006

8. eThekwini Municipality Sewage DisposalBylaws, Tariff of Charges 2006-2007


9. Draft Water Services Development Plan.Volume 1: Status Quo Report. Durban MetroWater Services, April 1999. Draft 1

10. South Africa Strategic Framework for WaterServices: “Water is Life, Sanitation isDignity.” September 2003

11. Government Gazette, December 19, 1997.“Water Services Act, 1997”. Act No. 108,1997

12. South Africa Financial Sector Charter

13. DWAF, 2004. “A History of the First Decadeof Water Service Delivery in South Africa,1994-2004.” Internet: http://www.dwaf.gov.za/Documents/Publications/firstdecade.pdf

14. eThekwini Municipality BorrowingFramework Policy And Guidelines. Internet:

15. eThekwini Municipality InvestmentFramework Policy and Guidelines. Internet:

16. eThekwini Municipality, July 2004. WaterServices Development Plan: PublicInformation Document. Internet:

17. eThekwini Municipality, July 2004.Draft Water Services Development Plan,Volume 2. Prepared by the eThekwini Waterand Sanitation Unit

18. van Ryneveld, Philip, January 2005.“Mobilising Urban Infrastructure FinanceWithin a Responsible Fiscal Framework:South African Case.” Background documentprepared for “Practitioner’s Conference onMobilising Urban Infrastructure Finance in aResponsible Fiscal Framework” in Jaipur,India, January 6-8, 2005. Internet:

19. eThekwini Water and Sanitation Unit TariffSheet, Internet:

20. Goldstone, Carvin, March 28, 2006.“Durban Rates could Increase by 7.5%.”The Independent Online. Internet:http://www.iol.co.za/index.php

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4. Johannesburg Water,South Africa

53

Summary

Ongoing transformation within JohannesburgWater and the City of Johannesburg haveresulted in a financial and operationalturnaround, implementation of more sustainablebusiness practices as well as the mobilizationand extension of service delivery. Followingexpiry of a five-year management contract with aprivate operator, control of the utility reverted topublic sector control in July 2006. The followingfactors contributed to success of both the City ofJohannesburg and its water utility:

■ The vision and strong leadership tosuccessfully complete corporatization ofpublic entities.

■ A multistage approach that began with astrategic plan to dismantle the existing citystructure and the use of private sectorcapacity for skills transfer.

■ A proven capacity to spend monies toassuage investor fears coupled with acommitment to transparency. The City ofJohannesburg had utilized over 90% of itsbudgeted expenditure in the past, and thishas increased to over 95% in the last twoyears. Although the city does not haveunqualified financial statements due to itscomplex problems,23 lenders, nevertheless,price the risk accordingly. With improvedinformation and transparency, the city hasboosted market confidence, thereby reducingits cost of borrowing.

Introduction

The City of Johannesburg began to transformitself in the late 1990s with a broad platform ofreforms that paralleled the country’s shift todemocratic rule. In Johannesburg, a strategynamed iGoli 2002 was developed to tackle thecity’s core challenges: financial stability, servicedelivery, accountability, administrative efficiency,and political leadership. Prior to theimplementation of iGoli 2002, 15% of thepopulation lacked waterborne sewerage, while13% were without access to safe drinking water.

This case study profiles the transformation of theCity of Johannesburg as a municipal entity, with aspecific focus on Johannesburg Water, and someof the internal and external factors that have ledto its success.

Transformation Process: The City ofJohannesburg

In the late 1990s, the City of Johannesburg washeaded toward bankruptcy. As part of aturnaround strategy and eventual transformation,the city consolidated its 11 administrations intofive local councils ahead of the 2000 elections.The iGoli 2002 plan was adopted, which soughtto overhaul and reform the city’s approach toproviding public services. A ContractManagement Unit (CMU) was created torestructure service delivery throughout the cityand act as a regulator. The approach to reform

23 This includes the completeness of its asset register. The City has sought qualified financial statements for five years, butthe problems are deemed too complex, particularly with the rise in informal service areas, historically weak revenuemanagement (this has changed with the management contract), and other factors.

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was predicated on the idea that politicalinterference in public service delivery should beminimized, and that, where possible, there couldbe greater accountability if government was amajority or sole shareholder in public companiesthat provided public services. As a result, the citycorporatized its key departments.

Creation of UACs

As part of the transformation, the city dividedthose public services that could functionaccording to business principles into threecategories: Utilities, Agencies and CorporateDepartments (UACs). All are 100% owned by the

Table 4.1: Overview of Water and Sanitation Services, Johannesburg Water Pty (Limited)

Area served 1,626 km2


Volume of water produced 473,000,000 m3/year

Water consumers served 10,670,000


Water coverage (% population with a connection or within200 m of a standpipe or other source of water) Over 75%


Number of consumers provided with waterborne sewerage,pit latrines or septic tanks 520,669

Unaccounted-for Water 32%24

Credit rating (for the municipality)- Short-term zaA+- Long-term zaA1

Source: Johannesburg Water.

Table 4.2: Snapshot of South Africa

South Africa


GDP R1,350 billion

GDP growth (average five-year) 4.2%

GDP/capita (p.a.) R17,756

Prime rate 10.5% p.a.

Inflation 3.9%


Source: http://www.statssa.gov.za

24 Data for 2006.

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City of Johannesburg, but are also set up asindependent companies, and are accountable tothe city council through agreed service deliverytargets.

Utilities provide billable services directly tohouseholds and businesses, such as electricity,water and sanitation, and solid waste removal;utilities also operate without subsidies.Johannesburg has three utilities, each with itsbrand: City Power (electricity); JohannesburgWater (water and sanitation); and Pikitup(garbage collection, street cleaning, and wastemanagement). Johannesburg Water accounts for23% of the city’s operating revenue, and is one ofits largest sources of revenue (electricityaccounts for 29%; property rates accountfor 23%).

Agencies perform other public functions (roads,parks, and economic development), and arestructured as companies, but rely on the cityfor funding.

Corporatized departments (which include thezoo, civil theater, bus service, and the freshproduce market) all operate on concessioncontracts with declining subsidies over time.

As the City’s regulatory body, the CMU monitorsand evaluates UACs against service deliveryagreements, and develops performancebenchmarks, providing data and analysis tosupport policy and strategy development andinform decision-making. UACs report annually tothe CMU. A separate Shareholder Unit (SHU)negotiates and ensures compliance withshareholder agreements, and reports to the cityon shareholder issues and the UAC’s financialperformance.

During this period of organizational upheaval, anew corporate culture was required even as thestaff was largely retained (the city deliberatelysought to avoid layoffs). To increase capacity,efficiency, and staff morale, as well as shapepublic perception, special attention was devotedto branding the UACs with unique identities andinternal cultures. Considerable effort was made

to change public perception of what had been aninefficient public sector.

Transformation Process:Johannesburg Water

Background/Rationale

Water and wastewater service delivery were keycomponents of the change process, and between1998 and 2000, the city prepared to amalgamateits seven utilities into one autonomous company,Johannesburg Water. To solidify thetransformation into a unified professionalcompany, the city decided to initiate a five-yearmanagement contract (2001-2006) through aninternational bidding process, with the objectiveof raising internal capacity and increasingoperational and financial performance. In 2000,agreements were signed between the City ofJohannesburg and Johannesburg Water (a publiccompany), which transferred the city’s waterinfrastructure assets to Johannesburg Water.Another agreement established service targets.These steps set the stage for the managementcontract, which was won by Johannesburg WaterManagement Company (JOWAM), a consortiumled by the Suez Group. One of the core featuresof the successful offer was a proposed emphasison increasing internal capacity, while graduallyreducing expatriate staff over the five-yearperiod. At the start of the contract, JOWAMopened 27% of its shares to local BlackEconomic Empowerment Business (BEE)companies including: MWAM, Tsholo, andLetlapa.

Legal and Regulatory Framework

Policy formation and implementation withinJohannesburg is influenced by policies at thenational level as well as by the regionalIntegrated Development Plan (IDP), whichprojects the municipality’s vision for 2020. Thecity’s planning process, which looks out over a15-year time frame, is complemented by thebudgeting and planning processes of each of theUACs. Within this framework, Johannesburg

Johannesburg Water, South Africa

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Water develops and submits three-year budgetsto the council for approval. These budgetsinclude capital expenditures, intended targets offunding allocation, salaries,25 and new posts.

Water sector governance is informed by thefollowing legislation:

■ The Water Services Act (1997) and the WaterServices Amendment Act (2004), which setforth a vision for local governments to assumeresponsibility for water services, anddistinguished between Water ServiceAuthorities (WSAs)—local government—andWater Services Providers (WSPs). The Actrequires all WSAs to prepare a Water ServicesDevelopment Plan as part of the municipality’soverall Integrated Development Plan (IDP).

■ The Municipal Services Act (2000) whichdesignated three spheres of governance:federal, provincial, and local. Under the Act,municipalities are designated as WaterServices Providers (WSPs) with theresponsibility for water and sanitationservices provision. The municipality has thechoice to either provide such services itself,or to contract out service provision functions.

Further, South Africa’s Strategic Framework forWater Services sets national coverage targets forwater and sanitation, including universalprovision of access to a functioning basic watersupply facility by 2008, and universal access to afunctioning, basic sanitation facility by 2010.

Although Johannesburg Water is an independentand autonomous company, policy decisionsrelating to water supply and sewerage/sanitationservices are determined by the city government.In many areas, this has an impact on thecompany’s operations, for example, the FreeBasic Water Policy.26

Subsidies for CAPEX and OPEX

As previously mentioned, South Africa’s nationalwater policy states that all South Africans areentitled to free basic water and sanitationprovided by local authorities. To implement thispolicy, there are two national programs:

■ The Municipal Infrastructure Grant, operatedby the Department of Provincial and LocalGovernment (DPLG), is a consolidated fundthat provides capital expenditures for basicinfrastructure services. The MIG’s approachsimplifies transfers to municipalities bysupporting municipal capital budgets,promoting integrated development planning,and allowing flexibility in budget programming—meaning that municipalities can determinehow they will spend the funds, provided theyare used in accordance with MIG principles.

■ Equitable Share, as explained in SouthAfrica’s constitution, reflects theGovernment’s commitment to allocatenational tax revenues equitably between thenational, provincial, and local spheres ofgovernment. Johannesburg Water does notreceive funding through the Equitable Shareprogram; the City of Johannesburg absorbsit instead.

To receive MIG grants, Johannesburg Watermakes proposals directly to the fund, accordingto initiatives in the City of Johannesburg’s IDP.MIG grants are allocated to the utility bothdirectly and indirectly via the city. While the MIGis insufficient to meet demand, it does make adifference: in 2005, MIG allocations totalednearly R60 million, part of which was used toprovide education and outreach activities toschools. By contrast, Johannesburg Water’sinvestment in poor areas was R727 millionfor 2007.

25 Under the Municipal Finance Management Act, the utility has the right to set salaries, although a salary cap for differentpositions is established by the City Council.26 South Africa’s Free Basic Water Policy stipulates that each person shall receive 6 kiloliters of water per month for free.

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Profile of the Management Contract

Johannesburg Water is a 100% publicly-owned,corporatized water and sewerage companyserving the greater Johannesburg area. Between2001 and 2006, the company’s organizationalstructure was heavily influenced by JOWAM.JOWAM was launched with 13 executives andexperts to facilitate a rapid skills transfer andchange. Over the course of the contract, theexecutives and experts were gradually reducedand replaced by Johannesburg Water staff. Perthe contract, JOWAM had four executives in thethird year of the contract, and two for the lasttwo years.

Despite the JOWAM management contract, thecity retained control over some services,including billing, metering, and credit control. Bylate 2004, the utility was responsible for about40,000 customers, or about 40% of the city’srevenues for water and sewerage. Thesecustomers received separate, itemized water andsewerage bills from the utility, while the restreceived a consolidated statement of municipalcharges (e.g., electricity, roads, etc.) from thecity. While this was done as a stopgap measurefor the duration of reform, it also undermined theutility’s autonomy.

The new management team also faced a numberof administrative and financial challenges after itassumed control of the utility. For example, at thetime of tendering, the city reported a collectionrate of 81% although the actual collection ratewas closer to 69%. Further, the city’saccountants did not factor depreciation costs intotheir financial model and budgets. As a result, in2003, the utility’s budget showed considerablechange due to accounting measures, includingan additional R230 million in bad debt, and overR150 million in depreciation costs.

To mitigate a financial crisis, the utility developeda finance strategy over 2003-2004, with a goal tobreak even by 2006-2007. To achieve this, it wasagreed that: the core task of meter-reading wouldbe transferred from the city to the utility; 170,000accounts (an additional 30% of the revenue

base) would also be transferred to the utility; andtariffs would be increased by 3% above inflationper year over a three-year period. The city alsoagreed to provide a subsidy of R240 million peryear through 2007. The financial strategywas linked to plans to increase operationalefficiencies, specifically through the G’cin Amanziproject in Soweto.

Ultimately only 30,000 accounts, rather than170,000, were transferred, because the citywas in the process of implementing a newrevenue management system across all of itsdepartments and utilities, and thus sought toretain control. However, the utility’s focus onmeter reading and billing in middle and highincome areas resulted in a 46% increase inturnover over a four-year period.

Outcomes of the Management Contract

Over the life of the management contract,Johannesburg Water managed to turn around itsfinancial and operating position, whiletransferring skills to employees. Some of thesuccesses of the operational transformation are:

■ Improved operating performance, includingcreation of a customer call center thatanswers 90% of all calls within 30 seconds.Over 80% of network repairs are completedwithin 48 hours of notice, and over 80% ofsewers are unblocked within 24 hours.Whereas, prior to the management contract,water quality could not be assured due to anabsence of quality monitoring/testing, nowover 500 samples a month are tested, withover 99% bacteriological compliance. Further,tanker water supplied to informal settlementsis treated, which was not previously possible.

As a result of the management contract,which has progressively transferredresponsibility for meter-reading to the utility,the percentage of meters read monthlyincreased to 94% from 50%, while revenuecollection on the utility’s customers increasedfrom 56% to over 105%, as a consequence ofcollection of outstanding and current debt.


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■ Improved environmental performance,including an increase in wastewater treatmentcapacity from 940 million to 1.01 billion litersper day; increased compliance with effluentstandards, from 82% to 98% between 1999and 2005, and an increase in sludge disposalcompliance up from 50% to 100% between2000 and 2005. Complementing thisenvironmental performance was the costeffectiveness of different interventions: powerconsumption and ferric chloride consumptionwere sharply reduced between 2000 and2005. Likewise, the number of overflows atwastewater treatment plants declined from646 spills per year in 2001 to 138 spills in2005.

■ Increased cost effectiveness throughmanagement improvements, in addition to theexamples of cost-effectiveness gainsmentioned above, levels of UFW water werereduced, thereby also reducing the cost ofbulk water, which the utility purchases fromRand Water.27 At the start of the contract,UFW was estimated at 42%, but had fallen to35% by 2006. Over the life of the contract,power and chemical savings amounted toR25 million. Due to increased efficiencieswithin the management structure, staffovertime was also reduced, from nearly481,000 hours per year to almost 393,000.Unauthorized absences by staff were alsoreduced from 2,217 days in 2003 to 197 daysin 2005. Further, the utility procures over 60%of its purchases from Black EconomicEmpowerment Business (BEE) enterprises.

■ Improved asset management. JohannesburgWater, with JOWAM support, sought toimprove the quality of its water infrastructureassets, first by understanding the extent ofthe network. To do this, the utility developedan asset register, and implemented apreventative maintenance plan. The plan,along with increased staff training toimplement planned maintenance, has broughtabout more accurate annual capital

investment programs, resulting in sufficientinfrastructure investment to meet the city’sexpansion. Likewise, annual investmentprograms have been fully implemented:between 97% and 98% of the capitalexpenditure budgets were spent, increasinginvestor confidence in the utility’s financialand operational capacity.

These operational improvements helped toimprove the public’s perception of the utility,which has, in turn, enhanced public perception ofthe City of Johannesburg and its ability tomobilize domestic finance for public sectorinvestment.

Risks and the Turnaround Strategy

Johannesburg is a rapidly growing city, withgrowing challenges. Some of the risks faced byJohannesburg Water include:

■ A backlog for basic water and sanitationservices to achieve development targets.The backlog is twofold, and related toincreased population growth in informalsettlements, and differing definitions ofcoverage. First, approximately 70% of theutility’s base is residential, a figure that hascontinued to rise in tandem with populationgrowth in the city of 5%. New accessbacklogs typically occur in low-income areas,due to increased migration and sharp growthof informal settlements. The city’s planningprocess does not support infrastructureinvestments in informal areas. Further, as theutility uses GIS to track its customer base inmetered areas, information about residentsand consumption patterns in informal areasremains limited. The second challengepertains to coverage definitions. The city’sIDP does stipulate for formalization of severalareas. When this occurs, the utility providestanker water as a stopgap measure beforeinfrastructure investments are made.Although the utility considers tanker water a

27 The utility estimates that the bulk of its UFW losses are a result of commercial, rather than physical losses.

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basic service level, the national governmentdoes not; hence, despite increased levels ofaccess to tanker water in informal areas,national statistics on access to basic waterservices remain unchanged. This has created atension between city planners, the utility, andthe national government, which is concernedabout meeting its development targets inanticipation for the World Cup in 2010.

■ Need for a shift from “firefighting” toroutine and planned maintenance on waterinfrastructure. Although there is a plannedmaintenance program, which is supported bythe asset register, it is not well-funded, andmay be insufficient to meet the utility’s needs:just 2% of the value of infrastructure investedeach year is spent on planned maintenance.

■ The growing need for qualified employeesto maintain and extend service quality andefficiency in operations. Although the utilityhas improved substantially under themanagement contract and turned around itsfinancial and operational position, there is agrowing need for the skills needed toincrease spending capacity andeffectiveness, particularly in the areas oflogistics, project management, engineering,and accounting. At the same time,competition for skilled workers is extremelyhigh in South Africa on the whole, and inJohannesburg in particular. Given the salarydifferential between the public and privatesectors, even for recent graduates, there is aconcern that the pool of potential trainedemployees will be insufficient to achieve theutility’s goals.

To address some of these challenges, the utilityhas embarked on a three-pronged “turnaround”strategy to convert its current risks into profitablebusiness activities through innovative strategiesand approaches. The strategy has a clear focus

on achieving targets over the next five years, andseeks to build on the momentum created byJOWAM.

The turnaround strategy includes:

■ Addressing substantial underbilling for waterservices. Part of the reason the utility’s costsexceed revenues is that the water tariff is notpredicated on cost recovery. To mitigate this,the utility is in the process of shifting from thetraditional flat tariffs levied for standpipes(see the bullet on UFW below), to aconsumption-based approach, while workingwith the city to impose a benchmarked tariffthat would be consistently 3% higher than theConsumer Price Index (CPI).

■ Increasing accounts receivable. Currently, thecity manages billings for about 40% ofJohannesburg Water’s customers. In thecontract’s first year, a certain percentage ofcustomers were migrated from the city to theutility’s remit, which increased the utility’sbilling rate. The utility then took over otherfunctions, including metering, ManagementInformation Systems, and water qualitychecks. Importantly, the utility ring-fenced itsservice area to ensure appropriateboundaries between the city and the utility.However, the city continues to manage creditcontrol for the majority of customers, meaningit is responsible for collections once the bill issent out. Consequently, the utility does nothave full control of its accounts receivable,which limits its financial autonomy, andsometimes increases confusion over rolesand responsibilities regarding bill payments.The utility is working with the city to resolvethis matter, to help rationalize its balancesheet and resolve outstanding billing issues.28

■ Addressing the high levels of UFW. A reviewby the utility found that in metered areas,

28 Due to the high levels of accounts receivable (estimated at over R2 billion), the city has adopted several measures toimprove the situation, including an 18% interest rate on outstanding charges, and disconnection after several months ofnonpayment. If services are cut off, both the outstanding charges and a reconnection fee are required, although the City’sCredit Control Department does provide various options for repayment depending on the situation. Reconnection fees rangefrom R272 for reconnecting a water main at the meter to R1,237 to reconnect after a disconnection at the water mainssupply.


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UFW stood at reasonable levels, but in areaswhere consumers are charged a flat rateregardless of consumption, losses weresignificant. In Soweto, where losses areparticularly high, the flat rate is in place forhistoric and political reasons; however, thesystem has created substantial waste, partlydue to aging and inadequate infrastructure,and partly due to retrofits to waterconnections. In response, the utility, throughthe Gcin’Amanzi, or Soweto Water Project,introduced a program to repair all water pipesup to the property line, and then retrofit alltoilets, cisterns, taps or other waterinfrastructure in all of the houses. Householdscould choose either a prepayment meter or ayard tap. The objective is to retrofitdesignated houses so that there are noleakages, and then “start afresh” withmetered service provision.29 The project,which began in mid-2003, aims to recover itscosts over four years; the project will becompleted by December 2008, and will costR650 million. The initiative has acomplementary education component thatincludes door-to-door consultations on allaspects of the program, including hygieneeducation. One of the expected outcomes ofthis project is a 10% reduction in UFW.

Financing was identified as a core requirement ofthe turnaround strategy’s success. To obtainfinancing, Johannesburg discussed its program,and specifically the Gcin’Amanzi with a range ofinternational banks. This tactic differed somewhatfrom the usual process by which the cityarranges loans for the utility. The EuropeanInvestment Bank (EIB) and AFD expressedinterest and arranged EUR80 million in loans tothe city for the sole purpose of supportingJohannesburg Water. The utility is fullyresponsible for the debt, and pays interest on theloans. Bulk water purchases have been reducedby approximately 70% per household as a resultof the project; the savings resulting from thereduced outlay for bulk water will pay for the

costs of program implementation over roughlyfive years. More than 95% of properties thatbenefit from the program have opted for theprepayment meter over the yard tap. Further, theutility writes off the cost of the meters to consumersafter three years, provided that the meter has notbeen tampered with in that time frame.

Accessing Domestic FinanceUsing Bonds

Background

In recent years, the City of Johannesburg hasreceived considerable attention for itsparticipation in the municipal bond market. Thecity aims to raise R6 billion in debt from thedomestic capital markets between 2005 and2010, a strategy that is backed by investorconfidence. Since its first experiences, whichrequired guarantees from international financialinstitutions, the city now issues bonds withoutguarantees, and intends to issue longer-termbonds of up to 30 years, in order to match theasset life of infrastructure investments.

The City of Johannesburg turned to the bondmarket as an alternative to commercial lending.In the early 2000s, the City was financiallyoverextended, carrying a series of bad debts aswell as a growing capital expenditure backlog. Ithad relations with seven banks, but given itscredit needs, was close to exceeding its creditcapacity. Four credit lines with the DevelopmentBank of South Africa (DBSA) had beenexhausted. Bond issuances offered the potentialto diversify funding sources, reduce the cost ofborrowing, and also extend the maturity profile ofdebt. By pursuing municipal bonds, the city alsosaw an opportunity to open up a new market forSouth Africa’s municipalities.

South Africa already possessed a sophisticatedfinancial market for debt products. The local bondmarket is 10 times the size of the Johannesburg

29 Households are offered an option to either use a prepayment meter for a household connection or receive a yard tap. As ofMay 2006, the project was extended to 37,000 properties in Soweto, out of a planned 170,000 properties.

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Stock Exchange (JSE). Hedging products havebeen developed in recent years to allow forgreater market liquidity, and a secondary marketfor bonds has developed in recent years. Overall,investors are supportive of long-term investing,which, in turn, benefits municipal investing.


With the turnaround in city management andoperations leading into and after the 2000elections, the city’s economic developmentstrategy and budgets indicated capitalexpenditure backlogs exceeding R10 billion,while actual expenditures stood at just overR1 billion. To prepare for a bond launch, the cityneeded to secure an investment grade rating andestablish internal capacity to manage the issue.Extensive research, presented in nonfinanciallanguage, was required, including an evaluationof the city’s debt portfolio to identify inefficienciesand then sell the idea to management and thepoliticians. A council resolution was needed toproceed, and this would include a procurementprocess for appointing advisors and leadmanagers. Then, to gain support from investors,the city needed to establish a track record, withpublished annual financial statements that wereaudited, coupled with an action plan to addressauditor’s concerns.

The city’s efforts bore fruit: its credit ratingimproved from a BBB+ to an A,30 while financialand administrative management within the cityimproved considerably. In 2003, the citysubmitted signed financial statements to theAuditor-General on time. Interest rates werefalling and the rand was strong, which createdthe possibility for lower borrowing costs. Throughthe Municipal Finance Management Act (MFMA),the national government allowed municipalities toborrow through domestic financial markets. In2003, the city signed an agreement with its bondadvisor, a consortium comprising Barclays Bank,

African Harvest Capital and Ernst & YoungCorporate Finance, with the intention to issuemunicipal bonds. The bond advisors analyzedthe City’s credit profile to determine the bondstructure, size, and timing of a launch. With allthe necessary elements in place, and after aperiod of nearly two years, the City pitched itsprospectus to investors through roadshows inJohannesburg and Cape Town.

In 2004, the city launched bonds worth R2 billionto refinance debt and recapitalize its aginginfrastructure. The first, COJ01, was forR1 billion, and was 50% oversubscribed. COJ01was neither guaranteed by the government norsecured by government assets. A second bond—COJ02—raised an additional R1 billion, and waspartially guaranteed, which allowed for a longertenure (12 years). Funds raised through the bondissue were allocated for the water sector as wellas for roads, transport, and electricity, and forinner-city renewal; the refinancing of old debtsthrough the bond will save the city aboutR20 million annually between 2004 and 2010.

Seven banks continue to work with the city asbond advisors and underwriters. The banks—Standard Bank, ABSA, Barclays, Deutsche Bank,RMB, Investec Bank and Citibank—wereselected to set up and issue the bonds on behalfof the city, for a projected R6 billion through2010. This longer-term arrangement will obviatethe need to appoint a new transaction team foreach issue. The bonds are listed on the BondExchange of South Africa.

Municipal finance is working in Johannesburg asa cost-effective means to raise finance for capitalinvestments, as well as increase transparencywithin the city, one of iGoli 2002’s core goals.Since CoJ02, several bonds have been issued,each with a lower interest rate and a tighterspread, reflecting investors’ increasingconfidence in the market.

30 Johannesburg sought ratings from two companies: Fitch and CA Ratings. The former is an international rating agency; thelatter is locally based.


Bibliography

People Met:

1. Jean Pierre Mas, Chief Executive Officer,JOWAM

2. Johan Kruger, AfCap Consulting

3. Martie van Rensburg, CEO, TCTA

4. Manu Padiaychee, Executive Director & CFO,Johannesburg Water

5. Jason Ngobeni, City of JohannesburgTreasury

Literature

1. City of Johannesburg Rating, CA Ratings,2004

2. City of Johannesburg Website

3. Johannesburg Water Website

4. JOWAM, 2006. “Management Contractbetween Johannesburg Water and JOWAM(2001-2006): Summary of the ResultsReceived”

5. Ngobeni, Jason, 2004. “The Missing Link:Sustainable Municipal Financing Strategies,the Experiences of City of Johannesburg.”CDS Conference, Hanoi

6. Smith, Laila, 2006. “Neither Public NorPrivate: Unpacking the Johannesburg WaterCorporatization Model.” UNRISD, Geneva

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5. Office National d’Eau etd’Assainissement (ONEA), Burkina Faso

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Summary

In Burkina Faso, the public utility ONEA hasimproved service delivery through strongoperating and financial performance, at the sametime achieving the main goals of its contract withthe government. ONEA’s dependence onoperating grants, at 1.88% of all operating costs,is low but capital grants make up between 10%and 20% of the total investment costs. Thecompany has at its disposal shareholders equityand substantial cash flow. The key findings fromthis case study are:

■ Despite high levels of political commitment,the government has begun to shift away fromdirect investment in the water sector, whichcould impact ONEA’s financial position ifalternative forms of finance, includingdomestic market finance, do not materialize.ONEA does not currently access localmarkets to finance capital infrastructure,although, the results of an assessment ofperformance standards and internalstandards indicate the company may havethe ability to do so.

■ Due to ONEA’s strong performance, it iscurrently building relationships with banksand has begun borrowing for working capitalpurposes or for investments maturing withinfive to seven years. ONEA is also currentlyaccessing opportunities of using commercialfinancing for medium-term investments.

■ While ONEA’s financial position is strong, itsability to access market finance is not certain.Considerations, such as regulations on publicsector borrowing, balance sheet structure,

and overall profitability also have an impact.A persistent challenge is the need to maintainthose areas that are strong while improvingand reforming those areas that need attentionin the face of limited resources.

■ Although ONEA is legally autonomous, itstruggles to collect payment from publicsector customers. The company’s creditcontrol policy appears to be ineffective fromthe perspective of financial viability, andresults in unnecessary borrowing to covercosts.

■ The transition from a privately-run utilitymodel between the 1940s to the 1970s,characterized by frequent change to a stable,publicly-managed utility (from the late 1970sto the present), has been achieved bycomplementary long-term and short-termstrategic planning as well as financialplanning. Increasingly, the need for strongerfinancial and investment planning hasbecome clearer, particularly with regard toharmonizing financing decisions with thepolicies and activities outlined in thecompany’s strategic plan.

Overall, ONEA is a well-managed company thathas made significant progress in terms of itsmanagement and operations, in part due to amanagement contract. ONEA has soundadministrative and financial management,financial autonomy and independence, goodrelationships with customers and banks, short-and long-term strategic planning, a commitmentto professionalism, a history of cooperation withthe private sector on certain aspects of itsbusiness, and a relatively sound institutional

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environment (although some improvement isneeded). The reform program has enabled thecompany to:

■ Enjoy autonomy in managing water andsanitation utilities, although certain aspectsrelating to governance need improvement.

■ Implement a tariff structure conducive to costrecovery, with special considerations for thepoor.

■ Improve its financial and economic efficiencyin order to generate cash flow.

■ Enjoy greatly improved technicalperformance.

■ Put in place quality human resources withexperience and practical knowledge.

Sovereign guarantees may be one way tostimulate market-based finance, but this mayconstitute nothing more than reassurance forprospective lenders. In order to tap the domesticfinancial market, certain improvements inONEA’s external environment may be required,such as: increased autonomy in borrowing andgovernance; establishment of disciplinarymechanisms with regard to the implementation ofthe plan contract; and increasing tax benefits onloans taken by the company. Finally, the utility’sManagement Information System should beimproved.

Introduction

Burkina Faso is located in West Africa, andborders Mali, Niger, Ivory Coast, Togo, Ghanaand Benin. Its climate is characterized by twoseasons: a rainy season, between June andSeptember, and a dry season between Octoberand May. As a landlocked country with aSahelian-Sudano tropical climate, water issuesare a core concern. The country’s economy islargely agrarian; cotton, a key crop, is highlydependent on water. With a population growth of3%, the country is expected to have 18 millioninhabitants by 2015, up from 13.1 million in 2005.In recent years, there has been a noticeableincrease in the use of water for economic and

social purposes; the water sector has risen as apriority area for government in poverty reduction.

The drinking water, sewerage disposal andexcreta sector is subdivided into three parts. Inurban centers with a population of over 10,000people, ONEA is a corporatized state corporationthat provides water to domestic, public andprivate (industrial and service economy) users.Following decentralization, local communitiesand municipalities in semiurban and rural areasare increasingly responsible for watermanagement, although a range of serviceproviders is possible, including government,NGOs, the private sector, and user associations.

This case examines ONEA’s transformationover the last several years into a moreviable company with the potential to accessmarket-based finance. For example, throughincreased efficiencies, the company extendedservice coverage from 36 urban centers to43 urban centers in 2005.


In Burkina Faso, a series of reforms have beenimplemented over time to address poormanagement and weak water service delivery.Political will and donors support were key driversof the changes effected by ONEA to reorientmanagement toward commercial principles, andstrengthen financial and accounting operationsunder a contract between ONEA and thegovernment. This contract led to increasedefficiencies and, concurrent with some changesin the financial services sector, has increased thepotential for increased market-based borrowing.

ONEA’s transformation is ongoing, and dates asfar back as the 1940s. AOF Power Company in1954 began efforts to ensure a safe drinkingwater supply in Bobo-Dioulasso andOuagadougou. In 1960, SAFELEC succeededAOF Power Company and, in 1968, VOLTELEC,Burkina Faso’s (the country was then calledUpper Volta) national electricity company, wascreated to manage the electricity and watersupply. This obtained until 1970, when electricity

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Table 5.1: Overview of Water and Sanitation Services in 2005, ONEA

Area served NA

Estimated size/population of service area 2.8 million

Volume of water produced 41,384,486 m3

Water consumers served (2005) 2.3 million


Water coverage (% population with a connection or within200 m of a standpipe or other source of water) 84%


Number of consumers provided with waterborne sewerage,pit latrines or septic tanks 524,167 m3 31

Unaccounted-for Water 18.5%

Credit rating- Short-term- Long-term NA

Source: ONEA.

Table 5.2: Snapshot of Burkina Faso

Burkina Faso


GDP (millions FCFA) 3,005,00132

GDP growth (average five-year) 5%


Maximum lending rate 14.75%

Inflation 3.2%34

Unemployment rate NA

Poverty rate 45%35

Source: Ministry of Economy and Development, MEDEV.

31 Amount of treated sewerage in 2005, for a population of 669,150.32 Data for 2005.33 Data for 2005.34 Compared to an average of 7.1% for EMUWA.35 Data for 2003.

Office National d’Eau et d’Assainissement (ONEA), Burkina Faso

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was decoupled from water supply. The NationalWater Company (SNE) was created and chargedwith overseeing the generation and supply ofsafe drinking water in urban and semiurbancenters throughout the country. In 1976, the firstwater policy was enacted, which transferredmanagement of water to the public domain.

The second period, from 1977-1994, sawnationalization of the management of publicfacilities, and the creation of ONEA. ONEA’s(then called Office National de l’Eau [NationalOffice of Water, Burkina Faso] [ONE]) masterplan was developed in 1978; in 1984, theMinistry of Water Resources was reorganized,and ONEA’s responsibilities were expanded toinclude sanitation, which led to the creation ofONEA36 in 1985. ONEA became a statecorporation37 in 1994 with legal autonomy, oneyear after signing its first contract plan with thegovernment. Most recently, ONEA underwent aseries of reforms and signed in 2001 a five-yearcontract with an international water serviceoperator and consultant to reorient managementtoward commercial principles, as well as tostrengthen financial and accounting operations.This contract led to increased efficiencies and,concurrent with developments in the financialservices sector, has increased the potential forincreased market-based borrowing.

ONEA is a legally and financially autonomouspublic company that has the government ofBurkina Faso as its sole shareholder. In itsmanagement and operations, ONEA is subject togovernment authority, through decisions takenduring Council of Ministers meetings. ONEA isalso subject to restrictions concerningindebtedness, as provided for in theindebtedness regulations, which govern statecorporations for all debts exceedingCFA 1 billion, and whose term of payment isgreater than one year. Although the governmentdetermines policy and sets tariffs, as well as

ensures service quality via the Ministry of Health,ONEA has the power to study tariff changes andpropose appropriate tariffs, in line with achievingtargets set in its contract. Lack of autonomy withrespect to indebtedness may be a hindrance interms of recourse to domestic financial markets.


In recent years, supported by above-averageGDP growth, Burkina Faso’s externalenvironment has created greater choice for watersector actors, whether as a result ofdecentralization, which creates options andownership at a local level, or due to increasedfinancial liquidity, which creates opportunities fornew types of investment. This section examinessome of the key external forces influencingONEA.


Burkina Faso’s water strategy, articulatedthrough a water policy paper and a 1998 waterstrategy document, is aligned with the MillenniumDevelopment Goals (MDGs). Specifically, thewater strategy aims to ensure access by the poorto safe drinking water and sanitation, to expandthe service area through the construction of3,000 modern water points, including 1,000 newboreholes each year, to rehabilitate 500boreholes, and to equip secondary urban centerswith a network of simplified systems for safedrinking water supply. Achievement of thestrategy’s aims is in line with sustainable serviceprovision and increased public finance.

At the core of the country’s water strategy isincreased participation by local communities inthe planning and decision-making process forwater management. The Government, incollaboration with development partners, hasdeveloped a “road map” to achieve the MDGs, withan objective to have a “program budget” by 2007.

36 Decree n° 85/387/CNR/PRE/EAU of July 22, 1985. November 2, 1994.37 The company was transformed into a state corporation by decree N° 94-391/PRES/PM/MCIM/EAU (this decree waseventually modified by decree N°96-161/PRES/PM/MEE/MCIM of May 17, 1996, which was, in turn, modified by decree N°2001-095/PRE/PM/MEF/MEE/MCPEA concerning the ONEA by-laws. Source: Legal service unit of ONEA.

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Notably, the country’s sanitation coverage lags incomparison with water supply, and, since 1994,the country has sought to fill the gap through thedevelopment of Sanitation Strategic Plans(SSPs), coupled with a national strategy for thesubsector, which was adopted in 1996. SSPs havebeen implemented in the major towns,Ouagadougou and Bobo-Dioulasso, and arecurrently being implemented in four secondarycenters. Further study to determine effectivenessand sustainability of these SSPs is planned, beforescaling up the approach at a national level.


Burkina Faso’s urban and rural water sectorinstitutional framework is organized around threeinstitutions: government agencies,38 territorialcommunities, and ONEA. There are a total of 49urban municipalities and 302 rural municipalitiesin the country, to which the government willgradually transfer 11 areas of jurisdiction,including drinking water supply and sanitation, aspart of a broad decentralization strategy.

This institutional framework is complemented bylegal and regulatory frameworks, as well as acontractual framework that governs ONEA’soperations in urban areas. ONEA operates onthe basis of triennial contracts, which stipulatethe commitments of both parties (ONEA andthe government) relating to water sectormanagement. ONEA also works on a contractualbasis with municipalities. For example, in 2004,ONEA signed a lease contract for themanagement of safe drinking water supply in sixtowns. ONEA has also signed conventions ofpartnership with some municipalities that do nothave safe drinking water systems. Theseconventions provide a contractual frameworkwhereby ONEA offers advisory support andtechnical expertise for the development andimplementation of municipal development plans

for supplying drinking water, health, andsanitation. Notably, the conventions do notmention remuneration to ONEA for theseservices, and it is unclear how payment will bestructured, if at all.

Company Structure

ONEA’s chief executive is its Managing Director,who is appointed by the Board of Directors andserves as Chairperson of the board. TheManaging Director is responsible for thecompany’s daily operations, and has extensivepower in the management and representation ofthe company. The Managing Director isevaluated annually by the board; he or she maybe fired on the recommendation of the minister,or by the board. The Managing Director isassisted by a Secretary General and an officialresponsible for quality. The Secretary Generalcontrols the management departments, the legaland litigation department, and communicationsand public relations, including documentationservice. ONEA comprises nine functionaldepartments39 (see Figure 5.1).

ONEA’s operations are highly decentralized.ONEA consists of three operational departments(Ouagadougou, Bobo-Dioulasso, and auxiliarycenters) as well as 43 centers throughout thecountry. ONEA owns and runs six laboratories forwater quality assurance. The ONEA Center forWater Treatment and Sanitation evaluatestraining needs and ensures implementation of thecompany’s training program for internal andexternal staff.

Governance

ONEA falls within the stewardship of theMinistere de l’Agriculture, de l’Hydraulique et desRessources Halieutiques (Ministry of AgricultureWater Supply and Fishery Resources, Burkina

38 This includes the Ministry of Agriculture, Water and Fishery Resources in charge of Water and Sanitation; The Ministry ofEconomics and Development; The Ministry of Local Administration and Decentralization; The Ministry of Finance andBudgetary Affairs; the Ministry of Health; and the Ministry of Commerce.39 A new organization adopted by the Board of Directors on 23/12/2005 was established on March 7, 2006, and added fournew departments, including a Planning and Investment Department (PID), and a Computer Department (CD).


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Faso) (MAHRH), whose trusteeship technicalcommittee is the Directorate of Water Resources(DWR).40 The company is governed by a Boardof Directors (the board), which meets regularlyper its constitution.41 The board wields extensivemanagerial powers and must be informed of allimportant issues relevant to the company’sgeneral operations (e.g., formulation ofobjectives and guidelines, purchase and sale ofcapital assets, borrowing, control over theDirectorate, as well as the balancing ofaccounts). The board submits a general annualreport on ONEA’s economic and financialsituation to the General Assembly of StateCorporations (GASCs), per the law governingpublicly-held stock companies. The GASC ischaired by the country’s Prime Minister andapproves ONEA’s accounts and makesrecommendations as well as guidelines to theChairperson of the Board of Directors and theManaging Director.

ONEA works on the basis of triennial plancontracts signed with the government, which

clearly establish performance targets andindicators (there were 34 indicators in 2001 and28 in 2004 (see Annex 1). The contracts alsogovern relationships between ONEA and publicinstitutions, and includes regulations relating topublic sanitation service, which govern therelationships between customers and ONEA.Since 1993, four contracts have been signed.ONEA’s compliance with the agreed indicators,which is validated by an international technicalauditor, was 83% in 2003, and 65% in 2005. Thisdecline is due to a disagreement between ONEAand the auditor with respect to some of theassumptions used. The latest plan contract,signed in 2004, terminated in 2006. This contractis expected to be renewed and effective in 2007and will include specifications for the productionand distribution of safe drinking water, raw water,and sanitation in urban and semiurban areasthroughout the country.

Plan contracts map out the roles andresponsibilities for ONEA as well as thegovernment, although there does not appear to be

Figure 5.1: ONEA Organizational Structure

Sole Shareholder: Government of Burkina Faso

General Assembly of State Corporations

Board of Directors

Directorate, Functional Directorates, OperationalDirectorates

■ Sanitation Department (DASS)■ Operations Department (DEX)■ Finance Department (DF)■ Human Resources Department (DRH)■ Customer Care Department (DCL)■ Procurement and Logistics Department (DAL)■ Planning and Investment Department (DPI)■ Computer Department (DI)■ Department in Charge of ZIGA Operations for

Main Contractors (DMOZ)

40 By-law N° 2006-18/MAHRH/SG/DWR in application of decree N° 2006-242/PRES/PM/MAHRH of 02/06/06.41 Decree N° 2001-095/PRES/PM/MEF/MEE/MCPEA.

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any accountability mechanism for governmentaction (or inaction). The government’s role largelyconcerns minimizing or eliminating risk relating togovernment interference. For ONEA, this results ina number of benefits, such as exemption fromtaxes and customs duties, and enhanced credibilitywith the private sector and financiers.

The latest contract between ONEA and thegovernment outlines commitments anddetermines technical, financial, and commercialobjectives. These are evaluated based onsuccess in meeting 28 indicators, which focus onthe topics outlined in Table 5.3.

The implementation of these commitments ismanaged by a Monitoring Committee, whichincludes representatives of both government andONEA, one representative for employees, andanother for customers. The Monitoring Committeemeets twice a year to make an appraisal report onthe status of implementation. The report is

submitted to the Board of Directors, and verified byan international auditing firm. The report is notmade public, which raises some concerns abouttransparency. ONEA’s new total quality controlsystems allow for some positive and negativereinforcements throughout the life of the contract,which is viewed as a positive step.


ONEA’s internal environment has improvedconsiderably in recent years due to effectivereform programs coupled with theaforementioned management contract in effectfrom 2001-2006. This section outlines some ofthe key areas of internal performance that relateto a utility’s capacity to borrow.

Customer Base

ONEA provides metered networked services andmanages standpipes42 to private households,

Table 5.3: Categories of Indicators in the ONEA/Government Contract

ONEA Commitments Government Commitments

■ Water resource development ■ Water resource development

■ Utilization of safe drinking water supply facilities ■ Taxation

■ Provision of water service ■ The development policy for safedrinking water and sanitation sector

■ Quality of water supply ■ The ONEA recovery policy ofconsumption bills for the government andpublic institutions and offsettingirrecoverable debt obligations

■ Sanitation ■ Government debt obligations

■ Investments ■ Personnel management

■ Finances ■ Water resources

■ Customer care management ■ Evaluation

■ Human resources management

■ Internal management and informationmanagement system

■ Dissemination of indicators

42 ONEA manages 1,878 standpipes.


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government branches, and municipalities inurban and semiurban areas. Its total potentialcustomer base is estimated at 2.8 million, ofwhich 84%, or 2.3 million, currently receivewater. In Ouagadougou, service coverage is92%, while in Bobo-Dioulasso, Burkina Faso’seconomic capital, coverage is 86%. In thecountry’s 43 secondary centers, ONEA has acoverage rate of 62%, although it aimed toincrease this to 82% by 2005.

Human Resources

As a corporatized utility, ONEA has extensivemanagerial authority to achieve the objectivesset out in its contract. The contract determinesrequired managerial skills, as well as setsstandards of accountability for ONEA.43 Overall,ONEA has a reasonably stable human resourceenvironment. As of December 2005, thecompany had 650 permanent staff, theoverwhelming majority of which were male(88.46%), and relatively young: 46% ofpermanent staff is under the age of 40, while only14% are over 50 years old. The rate of attrition islow, 1.4% per year. The management to staffratio is 1:3, while the staff to subscriber ratio in2005 was 7 per 1,000 connections, animprovement over 2001 levels, when the figurewas 8.4 per 1,000 connections. To fill therelatively few staff positions open at any giventime, the company conducts recruitment bycandidate application, and operates acompetitive internship program to train anddevelop potential future employees.

ONEA’s evaluation and promotion mechanismsfor staff are based on merit rather than seniority,and are grounded in the principles ofbenchmarking against discussed and acceptedtargets and objectives between staff andmanagement. However, it is unclear whether thecriteria for staff evaluations are realistic or

objective, or what types of follow-up mechanismsto track performance have been implemented.

Overall, relations between management and staffare cordial, although there was some tensionfollowing implementation of a salary incrementscheme that was unilaterally selected by thegovernment in 2004.44 A disciplinary committeesettles disputes between employees andmanagement, and is empowered to takedisciplinary action, including dismissal in case ofa serious offense. The company maintainsregular dialog with the unions (National Union ofWorkers in Water and Sanitation Sector,SYNTEA). The union is involved in ONEA’smanagement through its representative on theBoard of Directors.

In recent years, ONEA has focused considerableenergy on developing a more coherent corporateculture and a common vision for staff. To achievethis, the Total Quality Control Unit hasimplemented intensive sensitization, which aimsto obtain ISO45 certification for the company.Activities include a mobile quality control teamthat visits various ONEA sites. These efforts haveimproved staff morale and the company image inthe eyes of customers. Further, a neworganizational structure is being developed tocreate new, horizontal units (e.g., computer,logistics, provisions units, etc.). In the nearfuture, the company intends to develop acomputerized master plan that includes anintranet for internal communication, andcompany-wide access to the Internet.To complement these efforts, the companyallocates 2% of its budget to training internal andexternal staff.


ONEA has two core development plans: adevelopment plan which focuses on the long

43 Article 5 of the specifications book, Articles 22,24, 25 28 and 29 of the ONEA by-laws and Articles 9 and 10 of the plancontract.44 In this instance, ONEA management took the position that, as an autonomous company, they were not bound to thegovernment’s decision, which impacted civil servants. After about a year of discussions, ONEA and the governmentnegotiated a mutually agreeable approach.45 ISO—the International Organization for Standardization. See www.iso.org

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term (2004-2015), and a Strategic Plan, whichcovers a four-year cycle (the current one is for2004-2008). These plans articulate thecompany’s long-term vision, and take intoaccount the entire company, from the Board ofDirectors, which receives guidelines from theGASC46 through to staff. Likewise, the companyensures planning and investments according toan investment plan, based on estimations for10 years, and updated annually. ONEA must alsodevelop a financial policy geared toward limitingfuture government support in terms of financingits activities. At least every five years, ONEAhas to propose an acceptable billing to theauthorities.

The 2004-2008 Strategic Plan sets out changesintended to facilitate adaptation to ongoingexternal changes, such as policy and legalreform (e.g., the Integrated Water ResourceManagement Policy), decentralization, andongoing government disengagement fromservice provision. ONEA’s current objectives are:

■ Maintain financial equilibrium and improveprofitability.

■ Improve ONEA’s image in the eyes ofcustomers and increase customersatisfaction.

■ Improve the satisfaction and commitmentlevel of the ONEA staff through regular andsystematic evaluation.

■ Improve sewerage disposal and excretafacilities through strategic planning, andachieve a service area coverage rate of40% in the two main cities of the country(within the context for the supply of safedrinking water).

Social measures are also taken to help increaseaccess to drinking water by the poor. For example,ONEA is currently implementing a program to

extend 50,000 connections to the poor, at a costof CFA 50,000 (approximately US$100) perconnection.47 This builds on previous efforts,such as a program in 2004 to add 7,000connections (at a cost of CFA 100,000).

ONEA’s Development Plan (2004-2015) wasformulated in 2004 and focuses on meeting theMDGs. The plan contains the following elements:

■ Demographic summary.

■ Determination of the coverage rate, as wellas present and expected specificconsumptions, and how they relate to thetargeted values of the MDGs.

■ A balance sheet mapping water resourcesand needs.

■ A sector investment plan for 2004-2008,totaling CFA 83.4 billion, which includesCFA 19.6 billion already received(CFA 13.2 billion from donors andCFA 6.4 billion from ONEA cash flow).

ONEA’s Development Plan constitutes a majorstep toward institutionalizing the MDG targets;however, more work is needed to update the dataused, and integrate planning with the company’sfinancial model. This is necessary to estimate theimpact of the investment plan and the financingmethods used (e.g., grants, loans) on ONEA’smedium- and long-term financial equilibrium.


Between 2001 and 2005, when the managementcontract and reform program were in effect,ONEA’s operations and quality of serviceimproved considerably. Overall, since 2001, thecompany has improved the regularity of watersupply, so that in two-thirds of its service areawater is available 24 hours a day; however thereis rationing in the remaining one-third. Water

46 General Assembly of State Corporation is Body that acts as Shareholders General Assembly. It meets annually and ischaired by the Prime Minister.47 The cost of a new connection is CFA 80,000 in which user contribute for 20,000 to be connected. In addition, the user hasto pay in advance CFA 30,000. The 50,000 comprises 20,000 for connection and 30,000 as advance payment.


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supply coverage in 2005 was 84%, bettering atarget of 82%. The water quality rate is 98%(as measured by the Ministry of Health), and thenumber of complaints in 2005 came in below thetarget of 1%. At the same time, however, thenumber of unused boreholes increased to 12% in2005, compared with an average of 7% between2001 and 2004. In response to this increase,ONEA has developed preventative maintenancemeasures and set a target of 2-3% for unusedboreholes in the future. Water losses are in therange of 18%, compared to a target of 16%,although no data are available for illegal orunbilled consumption. The number of unpaidbills, in terms of percentages, is in the range of17%, against a target of 8%.48

While operating performance in the water sectorhas improved, sanitation targets for 2005 werenot met despite considerable investment,suggesting that the impact of recent investmentsto sanitation has not been felt. Coverage inOuagadougou and Bobo-Dioulasso was 40%and 20%, respectively, against targets of 45%and 25%. Still, the level of sewerage treatment isconsidered 100% satisfactory in those areas.

Customer Service

ONEA’s Customer Service Unit managescustomer relations. The Unit frequently carriesout studies on customer satisfaction, and hasfound the results to be largely positive, with acomplaints rate at 0.6% of the total customerbase. Complaints are addressed quickly andmonitored regularly, although complaints are notyet integrated into the Management InformationSystem. Major customers are given preferentialtreatment and their concerns are addressed by acorrespondence unit.

Tariff Structure

While ONEA lacks the financial autonomy to settariffs, it can—and does—propose tariffstructures to its board, based on its financial

model. Following board approval, the proposal isforwarded to the Council of Ministers forconsideration and final approval. Tariffs areconstructed such that larger consumerssubsidize access for small consumers, whilelarger centers in the service area support smallcenters that are in deficit. In its monthly bills,ONEA recently announced a need for demandmanagement, accompanied by a tariff grid thatprovides examples of water bills. For example,the cost for a subscriber, with a minimumguaranteed inter-occupational wage ofCFA 28,811, consuming 6 m3/month, amounts toCFA 2,456, including tax and connection fees,consumption of 30 m3 costs CFA 12,483, and60 m3 costs CFA 46,298. Compared to thecountry’s GDP, this monthly bill represents1.07-20.20% of the GDP per capita (seeAnnex 2). For the poor, (those who consume amaximum of 6 m3/month) this is consideredaffordable. See Table 5.4 for a breakdown of thetariff structure.

Continual reassessment of tariffs facilitatesmaking adjustments as needed. A new tariffpolicy is expected to be analyzed at the end of2006, within the context of pursuing a tariff policybased on marginal costs, and reduction ofbusiness losses.

Billing

All of ONEA’s nearly 85,000 customers aremetered, and billing is conducted monthly. On anaverage, ONEA’s networks billed about 33.7million m3 of safe drinking water in 2005,amounting to about CFA 14.06 billion, againsttotal sales of roughly CFA 14.4 billion. Whileoverall, ONEA’s customers pay their bills, andrates are considered affordable, the averagerecovery rate is significantly below (policy versusactual) the target of 90% (69% for 2001-2003)and 92% (77% for 2004-2005). The main reasonfor the poor recovery rates is a failure by publicsector customers—public institutions,municipalities, and local communities—to pay

48 According to calculations by the technical auditor; ONEA claims that the percentage is closer to 9%, suggesting adifference in calculation method.

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their bills on time. Ultimately, ONEA’s lenientcredit control policy toward the public sectoroffers little incentive for timely and accuratepayment, which negatively impacts thecompany’s cash flow. Table 5.5 highlights thevariance between the actual recovery rateamongst different types of customer, and theassociated target.

ONEA’s Unaccounted-for Water has risen froman estimated 5.6 m3/day per km of network in2004, to 6.1 m3/day per km of network in 2005.Data on the percentage of illegal connections,age of network, and leakage were unavailable,although overall UFW is 18% of water produced.But ONEA’s development plan is expected torehabilitate the network and reduce these issues.

Despite the low recovery rate, ONEA’s turnoverimproved significantly between 2001-2005, fromCFA 13.4 billion to CFA 17.2 billion in 2005,mainly due to the progressive implementation ofthe ZIGA project for supplying water toOuagadougou and the town of Ziniaré. Therevenue increase is due to an increase in watersupplied, along with an increase in the number ofprivate subscribers, from 62,274 in 2001 to84,907 in 2005.


According to the Drinking Water and SanitationPrivate Sector Support Component(DWSPSSC),49 in 2004, there were 76 civilengineering firms involved in public works and

Table 5.4: Tariff Structure at ONEA, Effective 2002-2005 (tax excluded)

2002 2003 2004 2005

Standpipes 186 188 188 188

Autonomous water station 93 95 95 95

Households- 0-6 m3/month 180 188 188 188- 7-30 m3/month 377 393 393 393- Over 30 m m3/month 998 1,040 1,040 1,040

Raw water 426 439 439 439

Company tariff structure 993 998 1,040 1,040

Monthly charge per connection 1,000 1,000 1,000 1,000

Source: ONEA Annual Report, 2005.

Table 5.5: Recovery Rates (accounts receivable measured in number of day) AgainstTargets for Private and Public Customers

Customer-type 2005 Actual 2005 Target

Days outstanding, private customers 94 95

Days outstanding, public institutions 224 190

Days outstanding, municipalities and local communities 1,211 120

Source: Report of internal and technical auditors, June 2006.

49 DWSPSSC is part of PADSEA II, a national reform program that provides support for a national private sector developmentstrategy, with an emphasis on: (i) support for the creation of an environment which is conducive to the development of theprivate sector, in order to improve the process of acquisition of good and services; and (ii) support for the promotion of goodmanagement by private operators.


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provision of equipment and material, 49engineering and design firms, and 567 artisansinvolved in the repair of working handpumps.These companies cooperate with ONEA indrilling, work provision and fixing of handpumps,superstructure architectural design as well as theestablishment of small networks. These servicesare particularly utilized in the ZIGA project.

Since 2001, ONEA has been collaborating withVeolia water and Mazars (a consultancy) inaccordance with a five-year service contract tomanage and reinforce financial and accountingoperations. In addition to the contract, ONEA hasturned over management of the standpipes,50

network extension works, supervision, andcleaning of factories as well as repair andmaintenance of equipment to the private sector.

Overview of ONEA Finance

Traditionally, the water sector has depended on arange of funding sources to finance activities,including government, local communities,bilateral and multilateral partners, as well asinternational NGOs. While available data areunreliable, a study of changes in publicexpenditure in the subsector suggests that, since1993, the government spent an average of 9% ofits resources on the water sector. Of this, 84%originated from donors.51 Over the last 10 years,ONEA spent, according to estimates, an averageof US$30 million per year on the Water andSanitation Sector, and an average ofUS$12 million on sanitation. ONEA relies on itsown resources, along with government anddonor finance. Local bank finance tends to beused on a short-term basis, in the form ofadvances for working capital (in part to bridge thecash flow gap caused by late payments bygovernment agencies).

ONEA’s Strategic Plan stipulates that thecompany must establish financial equilibrium by

2006. In all, ONEA’s financial statements suggestthat the company is performing well, and isfinancially stable. For example, the target level ofindebtedness is 58%, whereas the actual level ofindebtedness is only 51%, suggestingconsiderable room for assuming more debt.Turnover increased from CFA 12,354 million toCFA 17,152 in 2005, largely as a result of newconnections to private subscribers; however,cash flow declined from CFA 4,460 million in2004 to CFA 3,802 million in 2005. This is largelydue to the considerable increase in daysoutstanding for all customers, at 130 days, upfrom 94 days in 2004. As noted elsewhere in thisreport, the recovery period from privatecustomers has improved, while recovery frompublic institutions, local communities, andmunicipalities has actually worsened over thelast few years.

Between 2002 and 2005, ONEA’s net capitalassets grew from CFA 92.5 billion toCFA 153.9 billion, mainly as a result of the newequipment associated with the ZIGA project. In2006, investments were estimated atCFA 36.22 billion, financed from shareholderequity. Projected investments for the period2007-2015 are estimated at over CFA 78 billionfor those ONEA centers under lease contract,and new centers yet to be established.

ONEA’s dependency on operating grants is low,at 1.88% of all operating costs. However, thecompany is highly dependent on grants forcapital investment (between 10 to 20% of thetotal investment costs). The company has, at itsdisposal, shareholder equity and substantialcash flow. Shareholder equity rose fromCFA 62.4 billion in 2002 to CFA 83.5 billion in2005. This was possible due to ONEA’sconservative financial management, a policy ofsaving, disbursement of grants by donors, and anincrease in the provision of investment throughthe company’s contract with government.

50 Private management of the standpipes is almost as old as the standpipes themselves.51 Major donors to the water sector include the French Agency for Development, Germany, Denmark, OPEC, Japan, theKuwait Fund, and the African Development Bank.

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Despite a high level of political commitment, thegovernment is moving away from directinvestment in the water sector, which couldimpact ONEA’s financial position if alternativeforms of finance, including domestic marketfinance, do not materialize. ONEA does notcurrently access local markets to finance capitalinfrastructure, although based on an assessmentof performance standards and internal standards,the company may be able to do so. Overall, thecompany has sound administrative and financialmanagement, financial autonomy andindependence, good relationships withcustomers, short- and long-term strategicplanning, a commitment to professionalism, ahistory of working with the private sector forcertain aspects of its business, and a relativelysound institutional environment (although someimprovement is needed). To support moremarket-based finance, sovereign guaranteesmay be a way to stimulate more market-basedfinance, but this may be limited to a simplecomfort level to prospective lenders.


At the end of 2005, there were nine banksoperating in Burkina Faso, and another two in astart-up phase, and five financial institutions. Thecountry has a strong decentralized financialsystem, national funds for financing, specializedfinancial institutions, insurance companies,representatives of regional financialorganizations, and companies catering topensioners. Important reform programs havebeen carried out by the Central Bank of WestAfrican States within the general context ofstrengthening the region’s financial system,improving monetary policy and acceleratingregional economic integration. According tostatistical data provided by the BankCommission, Burkina Faso’s banking sectorachieves satisfactory performance comparedwith other West African countries.

Burkina Faso’s financial system is characterizedby excess liquidity, which has typically been usedas a deposit in the form of a contribution to otherfinancial institutions of the Economic andMonetary Union of West Africa (EMUWA) or thegovernment. The reason for this has largely beena lack of financing opportunities in the economydue to market insecurity. By April 2006, however,the ratio of resource employment rose to 90%,from 75% in 2004, suggesting greater flexibilityand opportunities for investors.

Within the context of developing its 2004-2008strategic plan, ONEA held a meeting with somebanks, to determine their interest in financingwater sector infrastructure. The banks showedsome interest in deepening their relationship withthe company, and noted that one starting pointcould be project-based funding. Local fundingcould be considered for those projects whosematurity and investment returns do not exceed 10years, and where a grace period could be less thantwo years. Issues such as interest rates, andacceptable returns, have not yet been negotiated.

Bibliography

People Met:

1. Harouna Ouibiga, General-Director, ONEA

2. Jean Raphaël Compaoré, Focal Point,Sanitation Directorate, ONEA

3. Arba Jules Ouedraogo, Director, SanitationDirectorate, ONEA

4. Ousmane SEDOGO, Financial Analyst,Operating Directorate, ONEA

5. Cyrille SOMDA, Senior Officer, InternalAudit, ONEA

6. Frédéric François KABORE, Senior Officer,Service/Quality, ONEA

7. Lydie Laure SOME, Senior Officer, LegalDepartment, ONEA

8. PODA, Financial Directorate, ONEA


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9. Abdou Karim SANFO, Director, DCL, ONEA

10. Maxime BADO, Director, Human ResourcesDirectorate, ONEA

11. Seydou Traoré, World Bank

12. Hervé KOUDOMBO, Director, Large-scaleOrganisations BCIA

13. Mady COMPAORE, Deputy General-Director, Atlantic Bank

14. Mohamed SIMPORE, Director, TransactionBank, Atlantic Bank

15. Christine TANI, Director, Atlantic BankOperating

Literature

1. Financial statements (2003-2005)

2. Report of activities (2005)

3. General Report of the Management of theBoard of Directors to General Assembly ofthe State Corporations from 2003 to 2005

4. Budget forecast (2006)

5. Operational and investment budgetfollow-up report up to March 31, 2006

6. Economic and financial data indicatorsestablished using the IAP, DPAM/DGEP/MEDEV, July 2006

7. Human resources management report(2005)

8. Operations report (2003-2005)

9. Customer Care report (2005)

10. Comment on the new ONEA organizationalstructure, BOD of 23/12/2005

11. ONEA major changes, ONEA LawDepartment

12. Booklet on the total quantity control of thecompany

13. Law N° 025/99/AN of November 16, 1999,concerning general regulations of State

corporations with public capital and publicinstitutions of the country

14. Decree N° 85/387/CNR/PRES/EAU of22-07-1985 concerning the establishment ofONEA

15. Decree N° 2001-095/PRES/PM/MEF/MEE/MCPEA concerning the ONEA by-laws

16. By-law N° 2006-18/MAHRH/SG/DWRconcerning DWR organisation

17. Decree N° 94-391/PRES/PM/MCIM/EAUconcerning transformation of ONEA into astate corporation

18. Decree N° 96-161/PRES/PM/MEE/MCIM ofMay 17, 1996

19. Decree N° 98-221/PRES/PM/MEF ofJune 19, 1998, determining the proceduresfor indebtedness of the government and itsbranches

20. Decree N° 2003-672/PRES/PM/MAHRH/MFB concerning approval of specificationsbook ONEA

21. Regulation of Public Sanitation Service,ONEA September 17, 2003

22. Regulation of Water Supply Service, ONEASeptember 17, 2003

23. Lease Contract with Diébougou Town,ONEA July 2004

24. Plan Contract ONEA/Government,April 2004

25. Report of the Technical Auditor concerningplan contract, 2002 to 2005

26. Plan Contract Implementation Report 2004-2006 by December 31, 2005, ONEA, OD

27. Report of the Technical Auditor concerningservice contract, December 14, 2003

28. Studies on the tariff structure

29. ONEA developing plan

30. Strategic Plan 2004-2008

31. ONEA financial model

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Annex 1: Performance Indicators in the Plan Contract ONEA/GoBF

N° Indicators 2001 2002 2003 2003 2004 2005 2005Objective Objective

A4 Water resourcesdevelopment

1 Level of protection 95% 75% 75% 96% 73% 72% 96%of the waterresources

A5 Use of facilities forthe provision ofsafe drinking water

2 Total output of the 81% 83% 82% 80% 83% 80% 80%facilities

3 Amount of 84% 86% 85% 84% 83% 82% 84%water supply

EX 4 Production of safe 96% 97% 97 96% Not availabledrinking water

A6 Population served

EX 5 Number of new 5,352 5,719 5,323 4,000 Not availableconnections

EX 6 Number of new 8 24 24 50 Not availablestandpipes

4 Inactive connections 15% 15% 7%in terms of %

5 Water coveragerate Not determined in the plan contract 82% 84% 82%

A7 Water quality

6 Level ofwater quality 99% 99% 98% 98% 98% 98% 98%

7 Level of carryingout tests 96% 96% 96% 93/94/95 98% 95% 96%

8 Level ofbiologicalquality 99% 99% 99% 99% 99% 99% 99%

A8 Sanitation

EX 11 Number ofsanitationplantsestablished 6,961 6,824 10,213 8,000 Not available


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Annex 1: Performance Indicators in the Plan Contract ONEA/GoBF (Contd...)


EX 12 Number of schools 12 0 14 35 Not availablewith sanitationfacilities

EX 13 Towns withsanitation 2 2 2 5 Not available

9 Sanitation 40% 39% 40% 45%coveragerate inOuagadougou

9 Sanitation Not determined in the plan contract 12% 20% 25%coverage ratein Bobo-Dioulasso

EX 15 Security level Not determined in the plan contract Not availableof the wells

EX 16 Expenditure 82% 65% 52% 50% Not availablerate insanitation

EX 17 Investment 15.7% 5. 31% 1.72% 25% Not availablerate insanitation

10 Sanitation Unplanned for 41% 85% 70%subsidy rate

11 Sanitation Unplanned for 130% 106% 100%expenditurerate

12 Quality of Unplanned for NC 100% 90%seweragetreatment

A9/10 Investmentsand finance Sanitation

13 Productivity -1.6%/ -1.90% -2 .07% 2.4% 5% 4% 4%level of capital *(0.55%)assets (EBE/net averagecapital assets)with or (withoutZIGA project)

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14 Production 66% 67% 78% 65% 75% 76% 67%expenditurerate

15 Indebtedness ratio 8.7% 17.5% 26.5% 20% 29% 35% 58%

EX 21 Investments -0.8% -1.13% -1.06 0.3% Not availablereturns with or (0.3%)(without Zigaproject)

A11 Customer care

16 Recovery of 161 218 169 160/140/ 82 94 95arrears from 120privatecustomers(in days)

17 Recovery of 205 411 237 120 137 224 190arrears frompublicinstitutions(in days)

18 Recovery of 514 813 997 120 1,158 1,211 120arrears frommunicipalitiesand localcommunities(in days)

19 Recovery of Unplanned for 1,504 1,283 120arrears fromspecificcustomers(in days)

20 Level of 0.8% 0.63% 0.63% 1% 0.68% 0.64% 1%complaints

EX 26 Average NA 72 47 48 Not availableperiod ofintervention/hrs

21 Total 69% 67% 72% 90% 71% 83% 92%recoveryrate


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22 Recovery rate 86% 86% 78% 92% 88% 90% 95%from privatecustomers

A121 Human resourcesmanagement

23 Personnel ratio 9.03/ 9.03/ 8.17 8.1 8.40 7.27 6.5= number of water 8.9 8.7service employees/1,000 connections

24 Personnel 26% 30% 28%expenses DWS/operationalexpenses

EX 30 DWS personnel 0.3 0.3 0.23 0.20ratio

25 Personnel 20% 13% 30%sanitationexpenses/sanitationoperationalexpenses

EX 31 Personnel 28% 28% 26% 25%expenses/operationalexpenses

26 Personnel 18% 18% 21% 20% 24% 24% 16%expensesrate/turnover

27 Training ratio 53% 47.5% 49% 55% 50 39 55

28 Training expenses rate 1.31% 1.5% 1.75% 2% 2% 2% 2%

Report of the internal and technical auditors June 2006. Data of technical auditor and ONEAimplementation report.

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Annex 2: Billing and GDP per Head

Monthly Water Sanit- RED VAT Bill Accumulated % GDP/consumption ation (ATI) Growth Headper m3

188 393 1040 21 1000 202

6 1 128 126 1000 293 2 456 1.07%

30 1 128 9 432 630 1000 1 840 12 483 408.27% 5.45%

40 1 128 9 432 10 400 840 1000 2 050 23 131 841.82% 10.09%

50 1 128 9 432 20 800 1 050 1000 3 111 33 779 1275.37% 14.74%

51 1 128 9 432 21 840 1 071 1000 12 660 35 030 1326.30% 15.29%

60 1 128 9 432 31 200 1 260 1000 46 298 1785.10% 20.20%


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Summary

Senegal’s experience of reform and involvementof the private sector in improved water supplyservices has been a considerable success, whenconsidered against established performancetargets. Likewise, the development of acomprehensive financial model, using historicaldata and updating them annually, has allowedthe utilities Société Nationale des Eaux duSénégal (SONES) and Sénégalaise des Eaux(SDE) to access both domestic and subregionalfinance on commercial terms. Some of the keylessons of Senegal’s experience are:

■ Private sector participation, through a leasing(affermage) contract, can be a viable optionfor effective service delivery. In Senegal’scase, the successful elements of thecontracting have been accomplished throughstrong political commitment at the veryhighest levels of government, transparency incontracting, participation by all sectorstakeholders in evaluating performance, andclear performance targets for all parties(in Senegal’s case, SONES, SDE, and thegovernment).

■ The decision to introduce a private sectorpartner is a political rather than an economicone. It requires willingness on the part of allshareholders, and the nature of private sectorparticipation should be determined after anobjective and detailed diagnosis of the sector.In Senegal’s case, detailed study ofexperiences in other countries,complemented by a lengthy process ofdiscussion and brainstorming, resulted in afeasible model that has yielded considerablebenefits.

■ Senegal’s unique regulatory structure, that is,a series of contracts that check and balancethe power and responsibility among the corewater sector actors, is successful in part dueto transparency, including open competition,widespread dissemination of information andopportunities and tendering procedures.Further, as the contracts require long-termpartnership, issues such as mutualconfidence among partners, commonunderstanding of the contract, honoringcommitments, the absence of misinformation,developing common environmental, economicand social management systems, anddeveloping a mechanism for negotiationsshould be addressed as early in the processas possible.

■ Public support must be developed through asensitization and information campaigntargeted to the public, and delivered bypublic representatives (locally-electedrepresentatives, civil society, etc.). Further, asprivate sector participation is relativelyunfamiliar to the domestic private sector, atransparent tendering process and minimumqualifications for acceptance are important.Finally, the transition period should be asshort as possible, to avoid the degradation ofservice quality, which could erode publicsupport for the reform process.

■ Senegal’s strong sector performance inrecent years has also been accompanied byclearly stated objectives and targets, drivenby government. Further, the government’spolicy of targeted subsidies for connection aswell as basic services can have a strongimpact on access to the poor and consumerperceptions about private sector participation.Social connections can be financed

6. Société Nationale des Eaux du Sénégal(SONES) and Sénégalaise des Eaux(SDE), Senegal

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through a mix of government support andcross-subsidies (in Senegal’s case, thecross-subsidies have been between largerand smaller users of water services).

Introduction

Senegal is situated at the extreme west of theAfrican continent, and shares a common borderwith Mauritania, Mali, Guinea, Guinea Bissauand Gambia. Senegal is a democratic republicwith a popularly elected president. It is a memberof the Economic and Monetary Union of WestAfrica (EMUWA), the Economic Community ofWest African States (ECOWAS), the AfricanUnion and the Franc Area. Senegal has a drytropical climate, and sources its water throughsurface and groundwater. Over the last severalyears, water demand has increased largely dueto economic and social growth. According toexperts, Senegal has sufficient water resourcesto meet the needs of its population: only 3% of

surface water and about 30% of groundwater isused per year for all rural and urban needs.However, Senegal’s water resources are poorlydistributed relative to demand, which, coupledwith inefficiencies in service delivery, has createdgaps in service coverage.

In 1995, Société Nationale d’Exploitation desEaux du Senegal (Senegalese NationalCorporation for Water Utilization) (SONEES)faced bankruptcy due to weak tariffs andinsufficient recovery rates. As a result, thegovernment embarked on broad sector reformwith the adoption of a law (n° 95-10, April 7,1995) that replaced SONEES with three entities:SONES, SDE, and Office National del’Assainissement du Sénégal (SenegaleseNational Sanitation Office) (ONAS).52 SDE wasselected following a call by the Senegalesegovernment for international tenders to managewater supply services in Senegal’s 56 urbancenters using the public distribution systems.

Table 6.1: Overview of Water and Sanitation Services, SONES and SDE

SDE/SONES

Area served 2.7 million m3


Volume of water produced 124.7 million m3 53

Water consumers served 4.002 million


Water coverage (% population with a connection orwithin 200 m of a standpipe or other source of water) 89.9%

Number of metered connections NA

Number of consumers provided with waterborne sewerage,pit latrines or septic tanks NA

Unaccounted-for Water NA


Source: SDE/SONES, 2005.

52 ONAS was created to manage the sanitation subsector, but is not addressed in detail in this study.53 Data for 2005.54 Of which 392,000 are local connections. Seventy-one percent of SDE’s customers are serviced by network connection;18% are served by standpipe.

Société Nationale des Eaux du Sénégal (SONES) and Sénégalaise des Eaux (SDE), Senegal

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This case study examines Senegal’s watersupply sector, beginning with the creation ofSONES and SDE.


The transformation of Senegal’s water sectorbegan in 1994 with the introduction of ayear-long process to improve urban watermanagement and water service delivery. Theprocess resulted in the introduction of newinstitutional and regulatory frameworks based oncontracts governing the sector and thedissolution of the national water utility provider.The changes were driven by continued poorperformance, and increasing financial debt,coupled with reduced ability to recover costs.Under the new arrangement, asset management,service delivery, and policy functions areseparated, while two new entities—a public assetholding company, and a service deliverycompany—were created using private sectorparticipation. Regulation is conducted on thebasis of four contracts that bind each of the new

entities and government to check and balanceone another’s performance.



Due to increased demand for water urbanization,coupled with the growth in secondary towns,Senegal faces considerable water constraints,particularly with respect to improved servicedelivery of drinking water. There is growingdemand for water by industry and domesticusers, greater demand for water quality, andrising unemployment and incidence of poverty.Understanding this situation, the government ofSenegal initiated an institutional reform programin 1995-1996, coupled with an investmentprogram of US$450 million through the WaterSectoral Project (WSP) and the Long Term WaterProject (LTWP). The country’s overall strategy isto guarantee access to water and sanitationservices for all, while assuring the sector’sfinancial viability.

Table 6.2: Snapshot of Senegal

Senegal

Population 11 million55

GDP US$7.9 billion

GDP growth (average five-year) 4.7%56


Prime lending rate 12-13%

Inflation 1.7%

Unemployment rate57 NA

Poverty rate NA

Source: Ministry of Finance.

55 Data for 2005. Population growth rate is 2.4%.56 For the period 2000-2005. The rate is estimated at 6.1% for 2005.57 Specific data on unemployment was unavailable, but it is on the rise.

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The 1995 sector reform program hinged on threestrategic objectives: (i) to create a technically andfinancially sustainable state asset holdingcompany; (ii) to implement an ambitiousinvestment program to reduce the water supplyshortage and facilitate access to water andsanitation for the poor; and (iii) to maintain watercharges at socially acceptable levels. Coupledwith these objectives was a goal to restorefinancial viability through improved management,billing, and cost recovery, while reducinggovernment subsidies for all types of waterusers. To achieve this goal, support from theprivate sector was deemed necessary.

In 2005, the government launched theMillennium Water and Sanitation Plan (PEPAM),a sector-wide plan to achieve universal coveragefor water and sanitation. PEPAM was developedusing a participatory approach that included allstakeholders, including the private sector, andpresents a clear road map for government action,and achievement of the MDGs.


The reform process in 1994-1996 overhauledthe sector and created new institutionalarrangements for improved service delivery. Withsupport from the World Bank, a planning processbegan, resulting58 in a unique institutionalarrangement bound by contracts to balancepowers amongst different stakeholders, mostnotably, the Ministry of Water, SONES and SDE.SONES is a public asset holding company,responsible for owning and maintaininginfrastructure, funding capital investments, andregulating SDE. SDE is majority owned by aninternational company, Société d’AménagementUrbain et Rural (private French water company)(SAUR), and is responsible for service delivery.Four major contracts bind SONES, SDE, and theMinistry. Two contracts are in effect between

SONES and the Ministry: the first is a 30-yearconcession contract authorizing SONES tomanage the sector, while the second outlinesSONES’ investment obligations. A third, signedby all three actors, is a 10-year leasing contractthat governs water systems operations. Thefourth is another 10-year contract betweenSONES and SDE, outlining specificresponsibilities and performance targets foroperations and service delivery.

The leasing contract, effective April 23, 1996,notes that SDE must pay dues to SONES inrespect of production, network output andrecovery rate, along with royalties59 and otherfees. SDE must also comply with the law onenvironmental management, and water qualitystandards. In addition, SDE must contribute tothe renewal of facilities and work for theexpansion of the sector. It is also responsible forthe management of products and facilities,renovation of the water production equipment,meters, connections, part of the distributionnetwork as well as business management.

As the asset holder, SONES evaluates the tariffstructure and proposes revisions to government,in accordance with its 30-year concessioncontract. As part of the WSP and the LTWP,SONES monitors water consumption and on-timepayment by public institutions, and works toreduce water usage by farmers. As anautonomous entity, it is allowed to obtaincommercial loans from the domestic and regionalfinancial markets, upon board approval, and afterconsideration by the Ministry of Finance.

The government, which owns shares in bothSONES and SDE, has delegated authority overwater and sanitation utilities. It assumes ultimateresponsibility for the management, maintenanceand development of water and sanitationfacilities. It is also responsible for the

58 Law n° 95-10 of April 7, 1995.59 Royalties paid in 2005 are estimated at CFA 14.6 billion.


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coordination of all activities necessary for properdevelopment of the sector and for formulatingsector policy, developing the legislative andregulatory framework, and setting tariffs.Senegal’s water sector is currently organizedaround four government institutions:

■ The Ministry of Prevention, Public Health,Sanitation and Urban Water Services and theMinistry of Agriculture, Rural Water Servicesand Food Security implement policy andprojects as well as water and sanitationprograms.

■ The Ministry of Economics and Financeensures financial control over the workprogram, including water and sanitationprojects financed by the government.

■ The Supreme Water Board gives generalguidelines in addition to regulating thesector;60

■ The Water Technical Committee providessupport to the Supreme Water Board in allmatters related to water resourcesmanagement.

Other institutions either directly or indirectly holdstakes in the sector. These are the Ministry ofEnvironmental Protection and NaturalResources, the Ministry of Internal Affairs, andthe Ministry of Local Administration andDecentralization.

In addition to these actors, the NGO sectorcontributes to financing access to water andsanitation services in Senegal, and alsocontributed heavily to the creation of SONES.It is estimated that roughly 10-15% ofSenegal’s active water networks have beenfunded by NGOs.

Company Structure—SONES

SONES is a publicly-held, autonomous company(99.6% of the company’s shares are held by thegovernment and 0.4% of the shares are held bymunicipalities). As previously mentioned, SONESis responsible for managing water infrastructureassets, formulating an urban water master plan,investment planning, fundraising, and overseeingwork undertaken by contractors (whether forrehabilitation or new extensions). SONES is alsoresponsible for public education about water andsanitation issues.

SONES reports to the Ministry of Prevention,Public Health, Sanitation and the Urban WaterSector. The company is managed by a Board ofDirectors, consisting of 12 members, chaired byan individual selected by the government.61 Theboard submits an annual report on the economicand financial health of the company to thegeneral assembly. A directorate committee,consisting of the board Chair, representative ofresponsible ministries, the Managing Director ofSONES, as well as a financial auditor and atleast two public officials, ensures permanentsupervision of SONES management, and meetsat least three times a year. SONES is auditedinternally and by external firms, undergovernment supervision.

SONES is headed by a Managing Directorappointed for three-year terms (renewable) onthe proposition of the board and subject toministerial review and approval. The ManagingDirector has extensive powers in themanagement and representation of the companyand is obligated to seek board approval for allborrowings whose accumulated amount during ayear exceeds CFA 1 billion, and for approval of

60 A Supreme Water Board (CSE) was also established in 1998. The Board, whose Chairperson is the Prime Minister, isresponsible for making major decisions concerning organization and management of water resources, solving eventualconflicts related to water utilization, ensuring respect for the laws governing the management of international waters and todecide on all other issues related to the management and control of the use of such resources. The Board is assisted in itstask by a Water Technical Committee (WTC), established by order of the Minister in charge of the water resources.61 There are 12 Directors, composed of seven representatives from relevant Ministries, one representative of public bodyshareholders, and one representative from the General Assembly, all of which are appointed by their respective authorities.The remaining three members consist of the Managing Director, a staff representative appointed by the workers, and arepresentative of Water and Sanitation Services users appointed by the Minister of Commerce upon a proposition byconsumer associations.

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contracts greater than CFA 500 million. TheManaging Director is assisted by a TechnicalAdvisor, a Communications Advisor, and anInternal Auditor.

The company comprises seven functionalDirectorates:

■ Directorate of Works (DW).

■ Directorate of Strategy and Planning (DSP).

■ Directorate of Finance (DF).

■ Directorate of Human Resources (DHR).

■ Directorate of Provisions and Logistics andGeneral Services (DPLGS).

■ Directorate of Heritage and Supervision ofOperations (DHSO).

■ Directorate of Supervisory Management(DSM).

Company Structure—SDE

SDE is a privately-owned company (62.8% of thecompany’s shares are held by SAUR, 32.2% areheld by private Senegalese companies, and 5%of the shares are held by the government), whichhas managed Senegal’s water supply in urbanand semiurban areas since 1996. SDE is knowninternationally as one of the best African utilitiesfor drinking water supply, and it is the first watersupplier in Africa to be certified as ISO 9001 (in2000). In April 2006, its lease contract withSONES was extended for another five years.

SDE has a number of objectives outlined in itslease contract, including operations and

maintenance of water services facilities andresources; to renew operating equipment, andjustify the case to renew and expandinfrastructure to SONES; to manage billing andfee collection for water services provision;maintain customer relationships; and extendnetwork connections, as funded by SONES. SDEprovides a range of service levels, includinghousehold connections and standpipes.

SDE is governed by a 12-member Board ofDirectors. The board has one governmentrepresentative and four representatives of privateshareholders, with the majority of positions heldby SAUR. The board Chair is a representative ofthe Senegalese private sector, who formerly wasa director at SONEES, the former water serviceprovider. Board members are appointed byshareholders. The Board meets at least twice ayear to balance accounts and review SDE’striennial plan, as well as the company’s activities.It submits an annual report on the company’seconomic and financial position to the GeneralAssembly, which approves the company’saccounts and provides guidelines to theChairperson of the board and the ManagingDirector. The company is audited annually by anexternal firm.

SDE is headed by a Managing Director appointedby the board, and who may be fired by the board.The Managing Director has extensive authority tomanage and represent the company, and isassisted by a Deputy Managing Director and alegal advisor that also advises on insurancematters. The company comprises 11 functionalDirectorates and 12 regional Directorates.

Figure 6.1: SONES Organizational Structure

Ordinary General Assembly

Board of Directors

Directorate and Functional DirectoratesSteering Committee

Figure 6.2: SDE Organizational Structure

Ordinary General Assembly

Board of Directors

Directorate, Subdirectorate, FunctionalDirectorates and Regional Directorates

Management Committee


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Over the last 10 years, SONES and SDE haveimplemented both the Long Term Water Project(LTWP), estimated at CFA 85 billion, and aproject for 11 regional towns, at an estimatedcost of CFA 605 billion. Coupled with the reformpackage, these efforts have resulted in accesscoverage in urban centers of 88% in 2005,against a target of 85%.62 A core factorcontributing to this success was the policy ofsocial connections, which resulted in 100,000additional connections reaching an estimated1 million people.

SONES’ current development plan extends from2006-2011, and includes provisions for theextended lease contract with SDE. The planfocuses on consolidating the sector’s performance,and includes several new commitments andincreased standards for SONES, such as anincrease in social connections to 15,000 annually,from 2006 forward (between 1996-2005, the ratewas 6,000 per year); an increase in pipelines to 43km/year from 2006 forward (up from 23 km/year);and increased investment of CFA 68 billion overthe five years, with a significant share derived fromshareholders’ equity. The development plan alsosets out SONES’ provisional financial situation,

taking into account major developments such asincreased energy costs, the start ofreimbursement from the WSP and the LTWP,implementation of new investments throughPEPAM, estimated at roughly CFA 32 billion; andreinforcing SONES’ obligations regardingrenovation work for connections, andgovernment willingness to pursue the tariff freezebegun in 2003.

In complement to SONES’ strategic planning,SDE submits annual financial reports and hasdeveloped a working paper called “Letter ofStrategic Guidelines” which is updated annually,and outlines the major strategic areas andobjectives for the company. The letter isdistributed throughout the company at all levels,and is incorporated into department and staffobjectives and performance benchmarks.The company also operates on a triennialmanagement plan to enable transparency inmanagement activities.

As part of the contract extension betweenSONES and SDE, both parties agreed tospecific obligations for the development andmanagement of Senegal’s urban water supply.Specifically, these obligations are categorizedinto technical, financial, and commercialobjectives. There are 21 indicators(see Table 6.3).

62 In 1995, 54% of Senegal’s urban population had access to safe water.

Table 6.3: Categories of Indicators in the ONEA/Government Contract

Technical aspects Performance of water treatment plant: VS/VA, number of observations,loss of water/network performance, number of leakages

Water quality Bacteriologic quality: samples conform, number of samples examined;physical-chemical quality: samples conform, number of samples examined

Service quality Interventions, reactivation into service, unaccounted-for bills, complaints,reduction in the number of complaints

Network renewal Km equivalent to diameter of accumulated distribution, number ofaccumulated connections, number of accumulated meters

Financial aspects Monthly transfer of fee to SONES, bill recovery, all customers included

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Within the framework of the PEPAM program,SONES intends to carry out several investmentsthrough 2015, and expects to borrow from thedomestic markets to finance capital expenditures.

Human Resources

SONES reported 82 full-time staff in 2005, downfrom 86 in 2004. Of these, 35 are senior staff,41 are in technical operations, and six areadministrative employees. The majority (70.7%)of staff members are male, and relatively mature(all employees are over 30 years old, while 75%of staff are between the ages of 30 and 50, and25% are over 50 and will approach retirementage within the next 10 years). SONES is arelatively stable company, from the perspective ofturnover, although its aging workforce does posesome concerns for the future.

SONES has a policy to motivate staff, and hascreated a company culture that encouragesemployees to share in its vision, along with astrong system for internal communication.Management is conducted via evaluation andpromotion, which is based on merit, according topreviously discussed and accepted objectives;raises and promotions are discretionary. SONESallocates about 0.1% of its budget for training.This low figure reflects the age profile andexperience of the workforce.

Overall, SONES’ vision as a company is clearlystated and understood by employees, whogenerally identify with the company’s culture.Relationships with labor unions are normal, andwithout major conflict, while relations betweenmanagement and staff are strong. Thegovernment is active in evaluating SONES’performance contract with SDE, through itsboard representation.

SDE’s staff totaled 1,145 in 2005, consisting ofsenior managers, supervisors, specialistengineers, technicians, and manual workers.SDE also makes regular use of private

contractors for a range of technical services,such as repairs and construction. Themanagement-to-staff ratio is about 8.7%, andstaff is relatively stable. SDE’s stated vision is“to satisfy customers and become aninternational reference point through its practicesin water supply services.” SDE’s vision is clearlydefined and articulated annually through theLetter for Strategic Guidelines. All employees areaware of their job descriptions, requirements forcompliance, and are evaluated annually againsttargets and benchmarks.63 All assessment criteriaare weighted in agreement with the workers’union. During evaluation, the total number ofpoints allocated to an employee is measuredagainst the average score given by the evaluator;employees are also compared with their peers.Reference to the average score serves toeliminate differences in evaluation style, andminimizes subjectivity. The gap between thegroup’s score and that of any individualemployee is the core determinant of theemployee’s salary increase. Notably, anindependent committee determines staff salariesas an additional measure of fairness. Salariesare considered competitive with other sectors,and SDE is considered a good place to work.

SDE’s organizational structure is premised ondelegation of responsibility, to encourageemployee accountability and facilitate quickdecision-making, and has enabled staff tobecome involved in company affairs. This cultureis seen to be responsible for the dearth of ethicsviolations since inception, as well as SDEmanagement’s excellent relationship with theworkers’ union.64 As motivation, the companyoffers awards, medals, work certificates, creditsavings funds, and established complementaryretirement insurance effective January 1, 2006.The company also puts strong emphasis oncapacity-building, and offers several trainingprograms throughout the year. This annualtraining program, which amounted to 57,076hours of staff training in 2005, is developedtaking into account employee needs as identified

63 Evaluations are conducted by superiors.64 In the last 10 years, there was just one day of strike.


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during the annual evaluation process, andcorresponding to the company’s objectives in itsstrategic plan. Training activities are submitted toSONES, and are discussed with workers’ unions.


Overall, the service provision arrangementbetween SONES and SDE resulted in severalsignificant performance improvements in allareas. For example, the performance contractbetween SONES and the government clearlydelineates the obligations of both parties,and a committee was created to monitorimplementation, thereby reducing institutionalconfusion over roles and responsibilities. Withthe creation of SONES, a five-year investmentplan worth CFA 59 billion was approved andimplemented, resulting in the expansion of socialconnections. This resulted in 100,000 newconnections over 10 years, and 1 million newcustomers. The social connection rate increasedby 52% between 2004 and 2005, and thenumber of paying customers increased to morethan 19,000 units between 2004 and 2005.Reflecting the increase in social connections wasthe reduction in service provision by standpipes.In all, there was an absolute increase of 1.8% inoverall volume of water supplied, correspondingto a performance rate of 99.52% against the settargets.

The overall productive capacity of the servicearea increased by 19.6% during 2005, largelydue to the implementation of renovation worksand the maintenance of boreholes in Dakar;utilization of the drinking water treatment plantand Keur Momar Sarr pumping system, andmaking use of new boreholes in line with theproject for water provision in 11 regional towns.At the same time, the system continues to haveunacceptable leakages and pipe bursts with6,820 per year.

From a technical perspective, the reformsincreased clarity and strategic planning in thesector, resulting in beneficial policies includingpreferential treatment to using surface water, andincreased measures to protect groundwaterresources.

Financially, the reforms brought about financialequilibrium65 for both SONES and SDE, andimprovements in cost recovery. The strongfinancial position of the sector has enabledfavorable funding from both international donorsand domestic financial markets. The reformsresulted in a clarification of the fiscalenvironment, kick-starting a process by whichgovernment regulates its water consumption andpays its bills on time. As part of the new leasecontract, a new financial model was developedthat incorporates SDE and SONES’ historicaloperating data. The model includes a revisedowner’s remuneration calculation method andannual indexing of this price, as well as a pricetrend grid mapping the fees paid to SONES. ForSONES, financial equilibrium has been fixed at alevel that enables the company to finance itsinvestments and cater to its operationalrequirements.

Customer Service

Customers receive their water services throughSDE, which has a customer service center toaddress customer concerns. The center isresponsible for handling complaints which arereceived either by a dedicated call center, or fromsuggestion and complaint forms available in thepayment office.66 SDE also holds meetings withagitated customers, institutional customers andconsumer associations. Suggestions are takeninto consideration in the planning process toimprove services. The customer service centeralso collects and disseminates information aboutcustomers, and monitors the quality of water

65 Financial equilibrium was defined as part of the sector’s reform as “the point at which the accumulated cash deficit wasreduced to zero and a sustained accumulated cash surplus was generated.” The financial model developed allows for annualadjustments to achieve financial equilibrium, which included the annual tariff increase required. Source: http://www.worldbank.org/html/fpd/water/pdf/WSS_Senegal.pdf66 SDE does not have an Internet site for customers.

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supply services for management. Thegovernment and SONES are responsible forsupporting customers with respect toconnections, and SDE supports both to identifytarget areas and ensuring speedy completionof work.

In 2005, largely due to the increase in (social)network connections, SDE’s customer base roseto 412,000, up from 383,000 in 2004. Otherfactors included a policy of submeters, and aboom in real estate. Social connections, acornerstone of government policy in the watersector, increased by over 14,000 in 2004, andnearly 22,000 in 2005, a considerable increaseover the 120,000 social connectionsimplemented in the first 10 years of the contract.Customers have recourse through theirrepresentative on SONES’ Board to evaluate theperformance contract, which has led to some ofthe changes in SDE’s approach to customerservice, particularly with regards to socialconnections.

Other SDE measures to improve customerservice include upgrading its offices to facilitateinteraction between customers and collaboratorswith SDE; use of new software (SAPHIR) to keeptrack of customer complaints and suggestions,as well as monitor response time to complaints,and a customer charter that details the rights andobligations of the customer.

Tariff and Billing Structure

Water charges are determined by thegovernment, taking into account several factorssuch as different users (farmers vs. domesticusers), and also the socioeconomic status ofdifferent ratepayers. Senegal’s water tariffs arethe highest in West Africa, largely because waterresources are located at a distance from waterconsumption centers, especially Dakar. The tariffalso includes a cross-subsidy for poorconsumers in 2003. The tariff structure coversthree categories of local subscribers based on

consumption (0-20 m3, 20-40 m3, and over100 m3 per two-month period), and favorconservation: a ‘social rate applies to the lowestlevel of consumption, whereas between 20-100m3 results in a full rate, and a “dissuasive” rateapplies to consumption greater than 100 m3.

SDE’s customer base is composed of 52% localsubscribers, 43% nonlocal subscribers, 3%served through standpipes, and 2% farmers. Billsare sent every two months, based on meterreadings. As part of its contract, SDE has thepower to cut off water supply for nonpayment,and the company has a very high billing recoveryrate. In 2005, SDE reported a billing recoveryrate of 98.2%, and has had a recovery ratehigher than 97% since 2001. Of a total of99.9 million m3 billed in 2005 through meterreadings, nearly half was for individual householdconsumption.

As can be seen in Table 6.4, the social tariff isgenerous, amounting to 60% of the averagewater charge. In addition to the lower rate, theMinistry of Finance also implemented a programto exempt low-consumption users (from 0-40 m3

per two-month period) from the Value Added Tax(VAT), which is 18%. These subsidies amount tobillions of CFA per year, and cover roughly 40%of poor local subscribers. SDE’s revenue modelaccounts for revenue losses from socialconsumers through the tariff system for largerindustry and institutions that pay water bills in asingle block equivalent to the “dissuasive” tariff.Between 2001 and 2005, the average tariffincreased from 456.1 (in 2001) to 483.04 in2005.

Senegal’s system also subsidizes connectionsfor the poor. Local subscribers have a choice ofdifferent connections: (i) an “ordinary”connection, which costs CFA 100,000 for the firstfive meters, and an additional CFA 1,250 permeter for connections requiring between 5-20meters of pipe. Beyond 20 meters, the user mustpay the actual cost, although SONES provides


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support through different financing plans; and(ii) a “social” connection, whereby up to 5 m areprovided free of charge. The social connectionrequires an advance payment of CFA 13,556,as well as a credit guarantee for futureconsumption. About 80% of the waterconnections provided between 1996 and 2003were social connections, financed by the subsidymechanism; it is anticipated that this strategy willcontinue in future years toward achievement ofthe PEPAM targets.


In addition to SDE’s role as a private companyoperating in service provision, a number offormal and informal private sector enterprises areactive in Senegal’s urban water services sector.SONES offers tenders for implementing different

projects that are outside the scope of activitiesdefined as work for SDE, and outside the remit ofSONES’ capacity, including civil engineering,construction and implementation of projects, andindustrial productions (e.g., for material used tosupply network connections). In Senegal,private sector capacity, in particular small andmedium-scale enterprises, is affected by financialconstraints, specifically obtaining bankguarantees and technical constraints.

Overview of SONES/SDE Finance

The SONES/SDE financial status is premised onthe principles of financial equilibrium, i.e., thatcosts are recovered through operating income.As part of the reform process, a financial modelwas developed that incorporates data for bothSONES and SDE, allowing for annual

Table 6.4: Tariff Structure in Senegal

Level of Water Sanitation VAT Municipal Surtax Rates/m3

Consumption Supply (CFA)67 (18%) Surtax onBasic (CFA)/m3 68 WaterRate/m3 (CFA)(CFA)

Local customers 0-20 m3 179.31 10.00 0.00 0.00 1.95 CFAper two-month 191.26/m3

period

21-40 m3 578.84 45.63 0.00 3.25 1.95 CFAper two-month 483.56/m3 69

period

Over 40 m3 601.32 62.43 119.48 3.25 1.95 CFA 788per two-monthperiod

Institutions, > 15 mm 601.32 62.43 119.48 3.25 1.95 788.42industry and (pipeuniversities diameter)

Standpipes Flat rate 219.24 49.41 48.36 3.25 1.95 322.21

67 Sanitation rates are a flat rate based on water consumed for waterborne sewerage.68 This surtax is charged by municipalities to help cover their water and sanitation costs.69 Average charge, 2005.

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adjustments to tariffs and guide planning, toachieve or maintain equilibrium. The utility’sequilibrium is affected by water tariffs, theefficiency of water distribution, and investments.70

Between 2001 and 2005, SONES’ financialperformance was stable, seeing low profits andhigh expenditures, but maintaining a positivecash flow (which has increased by 20% since2003), sustaining a satisfactory debt profile, andgrowing capital assets, from CFA 164.8 billion toCFA 211.771 billion (largely as a result of the WSPand LTWP programs). SONES’ cash flow in 2005increased 10% from 2004, to CFA 6.8 billion,while excess cash flow for operations declineddue to outstanding debt obligations: SDE hasCFA 7.77 billion outstanding in royalties toSONES, while SONES has outstanding debt ofCFA 2.68 billion. SDE’s outstanding royaltiesgrew by 15% in 2005,72 while government debtincreased by 23%. Despite these limitations,SONES’ balanced profit was CFA 843 billion in2005, up from CFA 564 billion in 2004 and up49% from 2003.

SONES’ positive growth rate in 2005 was acombination of an increase in turnover (9%)coupled with a decrease—by 23%—in thecompany’s outsourcing costs, indicating goodmanagement of its direct costs. The debt burden—representing 31% of its turnover in 2005,however, suggests that better measures forrecovering costs will be required for SONES tomaintain a financial equilibrium. Importantly,SONES’ cash flow capacity suggests that thecompany may be able to repay its debts in 10years, which is satisfactory by donor standards.

Further, SONES’ financial base is strong, withinvested capital (shareholder equity plus long-term debt) representing 98% of the totalliabilities, although the ratio of shareholder equity

to loans is about 128% over the last three years.In 2006, SONES decided to carry out anadditional CFA 68 billion in investments over thenext five years, and will draw on shareholdersequity for financing. These investments will be toincrease the number of social connections andpipelines.

SONES relies on concessionary finance fromdonor agencies, supplemented by loans from thedomestic and subregional markets, for 95% of itswater infrastructure investments. SONES hasseveral financial partners to diversify itsdependence on any one source. It relies on localbanks to leverage funding from internationaldonors. The company’s only income is via SDE,its sole client, via royalties and other fees, asagreed in the contract.

Due to the contractual relationship betweenSONES and SDE, there is a very strongcommunication between the two institutions tofacilitate execution of common projects, as wellas improve the management and maintenance ofthe country’s water facilities. In line with its leasecontract, SDE does not depend financially oneither the government or SONES.

SDE’s financial balance is positive and itsposition strong. In the first few years of thecontract, the company carried out severalinvestments, which resulted in a weak short-termfinancial position. Now, the company’s incomeexceeds expenditures; in 2005, income wasCFA 30.2 million while expenditures totaledCFA 29 million. Its internal rate of return is 20%,while the debt-to-equity ratio has averaged 50%over the last three years. Over the last threeyears, net cash flow has increased fromCFA 2.1 billion (in 2003) to CFA 3 billion in2005, enabling the company to repay its debts.Still, the company’s cash position in 2004 was

70 http://www.worldbank.org/html/fpd/water/pdf/WSS_Senegal.pdf, page 22.71 Net of depreciation.72 SONES’ royalties are based on the volume of water produced. With increased capital assets, so increase royalty payments.However, the government’s continued subsidization of farmers has adversely affected SONES’ royalties in recent years; thisis particularly the case with the freeze in tariff increases, effective through 2008.


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CFA 296 million, down from CFA 662 million in2003, largely as a result of outstanding accountsreceivable (largely from public sectorinstitutions), and increased investments.

SONES and SDE have relied on private financethroughout the reform process. As part of thefinancial modeling process, a shortfall of US$21million was projected for 1998. To meet this gap,several approaches were adopted: SDE obtaineda commercial bank loan; some donor funding(from the World Bank and KfW) was structuredas equity rather than debt;73 and SONES soldsome of its equipment to SDE. At the time, theidea of commercial lending to a water utility inSub-Saharan Africa was novel, but, in 1996,SONES approached Citibank for a line of credit.The company offered a number of reasons to thebank, including the credibility of reforms and thecommitment of international donors to supportthe Senegalese government;74 pro formafinancial statements illustrating the utility’sprojected financial viability over the life of thecontracts; and a comfort level from SAUR, SDE’smajority shareholder.

Citibank arranged a syndicated line of credit thatSONES could draw on with a maximum amountof US$24.1 million over six years, at 6% interest,on the condition that SONES create an escrowaccount for its remittances, from which debtservices would be made. This line of creditbecame effective once the World Bank loan forthe WSP was effective. Other loans from localbanks required commitments to meet setfinancial ratios, for example, shareholders’equity: long-term liabilities, or shareholders’equity to balance sheet total. Over time, asSDE’s and SONES’ positions improved, interestrates have fallen, while loan tenures have

expanded, given the shift in the utility’s riskprofile. Further, given their performance in themarket, the comfort letters, required at first, areno longer required.

The confidence of the local banking sectorresulting in a second commercial line of creditwas in 2000, when the Compagnie Bancaired’Afrique Occidentale (Bank of West Africa)(CBAO), funded the construction of a newdrinking water treatment facility through a directloan of US$7 million to SONES as part of aDesign Build Finance contract that wasdeveloped in conjunction with a CDE,Senegalese firm and Degrémont, a French firm.In addition to CBAO, additional funding wasobtained from Banque Ouest Africaine deDéveloppement (BOAD), totaling US$16 million.The loans were provided on commercial terms,with interest rates between 8% and 9.5%, andwith a tenure of between five and seven yearsfollowing a grace period of three years. Tosupport these transactions, the governmentprovided a guarantee, transfer of loans, and acomfort letter to cover political risk. Thistransaction was successful, and served to assurethe domestic banks of the water sector’scredibility, which helped to procure additionalcommercial finance for the LTWP.

The government does not provide directsubsidies or transfers to SDE for capitalexpenditures or operations. It does act as anintermediary between donor agencies andSONES, and offers some commercial lenderswith a letter of comfort to cover political risk.Government decisions, however, have had aconsiderable impact on the sector’s finances. In2003, the Government decided to freeze watertariffs for private clients through 2007, and then

73 This process in itself is worth greater analysis, and can be found in http://www.worldbank.org/html/fpd/water/pdf/WSS_Senegal.pdf74 At the time, Senegal’s economy could be characterized by slow growth and structural adjustment, with strong involvementby a range of international donors.

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raise them by 4% in 2008. For SDE’s publicclients, tariffs increased by 31% in July 2006, andwill increase an additional 10% in 2008, and 8%more in 2011. These tariff decisions were madeas a result of the 2007 elections, and thegovernment’s desire to avoid tariff increases forprivate customers. Unfortunately, this hasincreased SONES’ risk, and increased its cost ofcapital in borrowing both from domestic andregional borrowers.


As of December 2005, Senegal’s banking systemhad 12 banks, another three in the start-up phaseof operations, two financial institutions, a strong,decentralized financial system, national funds forfinancing development, dedicated financialinstitutions, insurance companies, pensioncompanies, and agencies representing regionalfinancial organizations. Due to a strong centralbank, commercial banks and other financialinstitutions operate in a fairly stable regulatoryenvironment.

Overall, the financial sector is characterized byexcess liquidity; until recently, banks have usedtheir liquidity as a deposit to other financialinstitutions (national or regional), due to overallmarket insecurity in the economy. Customerdeposits account for 80% of the banking sector’sbalance sheet. With Senegal’s recent economicgrowth spurt, financial institutions are looking toinvest their money in the economy. Loans tocustomers are on the rise, along with an increasein medium-term credit, which exceededCFA 262 billion in 2003 and CFA 308 billion in2004. Short-term credit also increased between2003 and 2005, by 8.5%.

Risk Factors

Both donor agencies and financial institutionsconsider SONES a worthwhile risk given its

financial position; however, despite the highlevels of government commitment to supportwater sector reform, the political risk surroundingthe needed annual tariff adjustments is still toohigh for SONES to borrow on the market withouta guarantee. As a result, SONES receives lettersof comfort for donors and financial institutions asneeded, to mitigate those risks. Senegal’sgovernment also provides guarantees forfinancial transactions through its concessioncontract with SONES. SDE is likewiseconsidered a viable risk.

In addition to political risk, the lease contractbetween SONES and SDE poses some risks toall parties, including the relationship betweenthe amount of water produced (SONES’responsibility) and the amount of water suppliedto customers; and the risk of mobilizing enoughresources to finance water infrastructure facilitiesand ensure financial equilibrium. Further, SDEfaces the risk of its contract not being renewed,or being fined penalties for noncompliance withthe performance contract, and the risk ofinsolvency, given its lack of control over tariffs.

Bibliography

People Met:

1. Babacar DIOUF, Director, Budget andMonitoring, SDE

2. Ibrahima NDIAYE, Director, Finance, SONES

Literature

1. Submission of outputs to the Board ofDirectors (PowerPoint paper)

2. SONES financial model

3. Case study on the urban water sector reform,M. Fadel Ndaw

4. SDE Organizational structure

5. http://siteresources.worldbank.org/INTWSS/Resources/senegal.pdf


Water and Sanitation Program-AfricaThe World BankHill Park BuildingUpper Hill RoadPO Box 30577NairobiKenya

Phone: (+254) 20 322 6334Fax: (+254) 20 322 6386E-mail: [email protected] site: www.wsp.org

July 2007 (Revised 2009)

WSP MISSIONTo help the poor gain sustained access to water and sanitation services.

WSP-AfrIcA'S fINANcIAl PArtNerS Australia, Austria, Denmark, Finland, France, Ireland, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, The World Bank, and the Bill and Melinda Gates Foundation.

Prepared by: Rachel Cardone, Chimere Diop, Abdelaziz Limam, Jomaa Habib and Antti Inkinen, with guidance from Meera Mehta, Thomas Fugelsnes and Johan Kruger.

Task Team Leader: Thomas Fugelsnes

Editor: Olufemi Terry

Picture Credits: Front Cover: © Joey Cardella,Inside cover: © Dr. Elisabeth von Muench,Other photographs: Courtesy of UNICEF, WSP-Africa and the World Bank.

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