Report No. 44744-TN Republic of Tunisia Water and ...

April 1, 2009

Document of the World Bank

Report N

o. 44744-TN

Republic of Tunisia

Water and Sanitation Strategy

Report No. 44744-TN

Republic of TunisiaWater and Sanitation Strategy

Sustainable Development DepartmentMiddle East and North Africa Region

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TABLE OF CONTENTS

Executive Summary

I1 Tunisia‘s water resources and allocation principles ......................................................... 12 I11 Water sector achievements and success factors ................................................................ 14

I Preamble ............................................................................................................................... 12

Drinking water and sanitation performance: Main indicators ....................................... 15 Impacts on the population.. ............................................................................................ 16

Vision. choice. policy. and planning ............................................................................. 16 IV.2 Institutional factors ....................................................................................................... -17

A specific system for rural areas ........................................................................................... 19 Economic factors: the role o f sustained growth ............................................................ 20

Operators internal success factors ..................................................................................... 22 V.l Governance .................................................................................................................... 22

commercial nature supported by the state ............................................................................. 22 Relationships with donors ..................................................................................................... 22 Relationships with customers ................................................................................................ 23

The sector operators ....................................................................................................... 24 Internalization o f Tunisia’s national vision and objectives ................................................... 24 Capacity Building .................................................................................................................. 24 Beneficiaries’ involvement in management activities in rural areas ..................................... 26

111.1 111.2

IV . 1 I V Institutional and economic factors o f success ................................................................... 16

A centralized and de-centralized system for urban areas ...................................................... 18

IV.3 V

Urban and rural systems managed by public institutions o f industrial and

V.2

V I Current system limits and emergent deficiencies ............................................................. 27 Various services limits and emergent deficiencies ........................................................ 27

Limits and deficiencies in urban drinking water supply ........................................................ 27 Limits and deficiencies with regard to rural drinking water supply ...................................... 31 Limits and deficiencies in urban sanitation ........................................................................... 32 Limits and deficiencies in rural sanitation .............................................................................. 40

Common limits and deficiencies ................................................................................... 41 Synergy between various drinking water supply operators and sanitation ........................... 41 Cost recovery and tar i f fs in urban areas ............................................................................... -42 Cost recovery & tar i f fs in rural areas (AIC/GIC/GDA) ....................................................... -48 Regulation. autonomy and operators performance incentives ............................................... 50

Limited participation o f the private sector ........................................................................... -51 Strengthening customer relationships ................................................................................... -53

VI1 Sector challenges and the need for reform ........................................................................ 53 Challenges for the drinking water sector (managed by SONEDE) ........................................... 53 VI1 . 1 Challenges for the sanitation sector (managed by ONAS) ............................................ 54 VII.2 Drinking water and sanitation challenges in rural areas ................................................ 57 VII.3 The need for reforms ..................................................................................................... 58

VI11 Options for institutional reform for urban drinking water and sanitation ................... 59 VI11 . 1 Regional water and sanitation companies with a national company for production and supply ............................................................................................................... 59

V I . 1

VI.2

Constraints and limits in SONEDE and ONAS management autonomy .............................. 50

VIII.2 Merging SONEDE and the ONAS i s possible and makes more sense than regrouping electricity and gas in the same company ................................................................. 60 VIII.3 Maintaining the two enterprises but with more thorough decentralization, improved management efficiency and increased private sector participation ........................... 61 VIII.4 The concession .............................................................................................................. 63 VIII.5 Water and sanitation holding company ......................................................................... 64

I X Common reforms to all options for urban drinking water ............................................. 65 and sanitation ............................................................................................................................... 65

Creation o f a regulatory entity ....................................................................................... 65

Common reform actions to all institutional options ..................................................... -71 Common actions to drinking water and sanitation ................................................................ 71 Actions specific to drinking water (managed by SONEDE) ................................................. 72 Actions specific to urban sanitatlon ....................................................................................... 72 Need for reform in rural areas drinking water and sanitation ....................................... 73

Institutional aspects for rural drinking water ................................................................. 73

X I Financing: possible reforms ................................................................................................ 75 XI1 Conclusions and recommendations .................................................................................... 78

IX . 1 IX.2 IX.3

Private sector participation ............................................................................................ 68

. . X

X . 1 X.2 Institutional aspects o f rural sanitation. ........................................................................ -75

TABLES

3 Table 1 : Water resource allocation (million m ) ........................................................................... 13 Table 2: Water Supply vs . Demand (million m ) ......................................................................... 13

Table 4: Investments in the water and sanitation sector (1 992-2005) ........................................... 21 Table 5: Connection to sanitation indicators ................................................................................. 33 Table 6: Used water purification .................................................................................................. -34 Table 7: Average quality o f the water treated in water treatment stations .................................... 35 Table 8: ONAS staff in 2006 ......................................................................................................... 38

3

Table 3 : Water resources allocation (%) ....................................................................................... 14

GRAPHS

Graph 1 : SONEDE performance and personnel expenses (2001 -2005) ...................................... -43 Graph 2: ONAS performance and personnel expenses 200 1-2005 ............................................... 44 Graph 3: Income and water cost /m3 SONEDE 2001 -2005 ........................................................... 44 Graph 4: Income and water cost /m SONEDE 2001-2005 .......................................................... 45 3

Water and Sanitation Strategy in Tunisia . Final Report

Acknowledgements

This report was prepared by a team led by Mohammed Benouahi (Lead Water Supply and Sanitation Specialist). Major authors to the report were Mohamed Larbi Khrouf (Consultant, Water and Sanitation Engineer), Mohammed Lahouel (Consultant, Economist), Ameur Horchani (Consultant, Water Resource) and Klas Ringskog (Consultant, Institutional Specialist). Vijay Jagannathan (Sector Manager), Julia Bucknall (Lead Water Resources Specialist), and Claire Kfouri (Water and Sanitation Specialist) also provided input to the report. Administrative support was provided by Zakia Chummun and Angeline Mani.

A draft o f this report was formally reviewed in Tunis on April 3, 2007 and in Washington D.C. on October 17, 2007, chaired by Ms. Cecile Fruman (Acting Country Director). The peer reviewers were: Alex Kremer (Senior Sector Economist), Nabil Chaherli (Senior Sector Economist), Ndiame Diop (Senior Economist) and Philippe Huc (Senior Water and Sanitation Specialist).

Republic of Tunisia

Strategy for Water Supply and Sanitation in Tunisia

Executive Summary

1. At the request o f the Tunisian Government, the World Bank mobilized a team o f multidisciplinary specialists to prepare a strategy for the water supply and sanitation sector in Tunisia.

2. This strategy i s a comprehensive overview o f the institutional, organizational and economic aspects o f the sector. Based on an analysis o f the current situation, this strategy wi l l examine the strengths and weaknesses o f the sector and review reform options o f reform that address upcoming challenges and provide the highest level o f service at the lowest possible cost for urban and rural beneficiaries, while guaranteeing the widest and most sustainable service coverage.

3. Tunisia i s a Mediterranean country with limited water resources o f 4,860 million m3/year o f which 610 million m3are rarely renewable, 1,550 million m3/year are renewable and 2,100 million m3/year are surface water flowing into rivers that can be mobilized at a rate o f up to 95%. The Water Code governs water resource allocations and gives priority to fulfil l ing the demand for potable water in the urban and rural sectors, with secondary attention given to the requirements o f the industrial, tourist trade and agricultural sectors. The projected water balance between available resources and demand between different sectors shows a slight increase by the year 2030, provided that: (a) water resource mobilization efforts are maintained; (b) desalination o f brackish water and recycling o f salt water are pursued; (c) water savings policies are implemented in agriculture and other sectors; and (d) water pollution control measures are supported. Agriculture uses the majority o f the water resource base, although the potable water share o f these resources will slightly increase from 13.4% in 2010 to 17.7% by 2030. The industry and tourist sectors are expected to maintain limited usage o f water resources.

4. Even if the anticipated water balance between available resources and demand remains positive by 2030, the margin will s t i l l represent an incentive for improved management efficiency o f water resources across all sectors.

5. conclusions:

The diagnosis and evolution o f the water sector have lead to he following

6. sanitation with highly positive impacts on the quality o f l i f e and economic development.

The sector has achieved remarkable results in the areas o f water supply and

7. The continued improvements o f water and sanitation services have always been priority areas in the national economic and social development plans. Sector leaders,

Water and Sanitation Strategy in Tunisia. Final Report 1

more importantly SONEDE and ONAS , have addressed these priorities with very satisfactory results. Access to potable water has become permanent throughout the country, including in marginal areas, and a large percentage o f the population now has access to sanitation services. Currently, the entire urban population has access to potable water and over 90% o f the rural population is supplied through SONEDE and other associations (GIC/GDA). Moreover, 80% o f the urban population now has access to sanitation services. This achievement i s even more remarkable given that water resources are limited, the climate i s arid, the ecosystems are fragile, and the required financial investments are high.

8. (a) a marked improvement in quality o f l i fe and economic development; and (b) improved health as shown by a net decrease in the occurrences o f diarrhea among children. Potable water service delivery has also had a positive impact on integrated development, and the urbanization o f rural areas has strengthened the community spirit and stimulated the development o f small operation and maintenance facilities.

This performance has provided notable advantages, such as:

9. The sector’s strong performance is due to the vision and experience o f the operators, to the institutional framework which has been implemented, and to the sustained growth o f the Tunisian economy over the past several decades.

10. The sector has made advances on the basis o f national Development Plan in coordination with the national strategy for water resource development. The operators and the General Directorate o f Rural Works and Water Resources (DGGREE) have identified regional water demands and have encouraged the development o f long-and medium-term measures to ensure a clear vision o f the sector’s future. Through the establishment o f successive five-year plans, the DGGREE and operators has also improved the targeting o f quantifiable objectives, water resource mobilization and investment optimization.

1 1. The Operators have gained technical experience by merging proven technologies, while adapting these to country specifics (i.e., handling iron in rural areas, adapting water treatment techniques in desalination plants, pipeline corrosion control, odor control in treatment plants and ventilation in activation basins).

12. The existing institutional framework has facilitated sector development, although it encourages urban water supply and sanitation monopolies at the national level. The lack o f adequate water service delivery and specialized sk i l ls 1960 to 1970 was remedied by the training o f competent operators on a national scale. Moreover, SONEDE and ONAS were created as industrial and commercial entities governed by legislation tailored to their respective mandates. The main actors also participate in these organizations’ board o f directors. Oversight is carried out by the responsible ministry, as well as by other specialized ministries, i.e., the Prime Minister’s office, the Ministry o f Finance, the Procurement Commission, the Accounting Commission (Cow des Comptes), etc. This oversight exerts strict control over operators, ensuring the required financial and administrative discipline.


13. As regards the populations o f remote rural areas or those without SONEDE assistance, a participative approach was developed through the creation o f Collective Interest Groups (AICs) which have today become Agricultural Development Groups (GDAs). This type o f success in a complex sector that includes numerous projects throughout the country, at times in remote and rugged areas, i s due to the strategy adopted by DGGREE. Their strategy was thus able to harmonize and synchronize activities among different actors, Le., consulting firms to develop studies, entrepreneurs to handle works, and IACs/GICs/GDAs for water production.

14. The Tunisian economy’s strong growth during the past four decades, at over 5% per annum, enabled the government to mobilize substantial internal and external resources to finance sector investments. The increase in public revenue parallel to this growth was also instrumental in ensuring sustainable project funding. Moreover, this economic growth greatly stimulated household incomes, thus access to water supply and sanitation services.

15. In addition to improving economic growth and improvement in the quality o f life, relatively l o w cost, service delivery to low cost for low-income households has helped increase overall ’service delivery to the majority o f the population. The implementation o f an efficient cost recovery system has also played an important role in sector development by providing a large portion o f required financial resources. Thus, a relatively high cost recovery for expenditures demonstrates the overall efficiency o f the water sector.

Emerging Issues and Future Challenges

16. SONEDE and ONAS have increased their operations through the development nationwide o f activities throughout the country. Their staff complements are very high, perhaps overly so compared to the amount o f works and relative to international criteria for good performance.

17. The implementation o f investment projects and modernization o f management systems are progressing at a relatively slow pace for several reasons, directly related - but not always - t o the operators.

18. The issue o f infrastructure rehabilitation and upgrading i s becoming problematic for the sector. Financial constraints are impeding the rate o f infrastructure upgrades. Also at risk i s the quality o f service provided, especially for the sanitation sector.

19. SONEDE i s not benefitting from increased revenues from the implementation o f important investments in sustainable potable water supply, i.e., as regards quality improvement, which could increase i t s expenditures and jeopardize i t s financial viability. Also, the development o f water resources and transfers, including desalination facilities in the south o f the country, will be more costly in future, especially without clear policies on optimized cost recovery. The transfer o f potable water and sanitation services to SONEDE and ONAS could also undermine these institutions’ financial situation.


20. Cost recovery issues are crucial for ONAS whose production deficit has lasted for the past several years and whose investments are almost exclusively financed by the government. Subsequent reductions in expenditure were implemented to forestall these financial constraints, but the quality o f sanitation services was negatively affected.

2 1. Tariff adjustment uncertainties preclude operators from preparing reliable financial projections and undermine planning for current investment expenditures.

22. since collaboration and pooling o f funds could help to reduce costs.

A lack o f synergy between these two activities i s an important issue, especially

23, For the potable water sector, the major challenges include:

Increasing costs o f water resources due to longer transfer periods; The introduction o f desalination facilities to increase the volume of water resources and improve water quality; Ensuring the sustainability o f water supply, especially for large urban areas; Management of extreme climate variations, especially drought; Water supply for rural and peri-urban areas; Demand o f an increasingly well-informed population for water quality Over-staffing issues need to be addressed as well as management o f human resources; Demand management; Modernization o f institution management (SONEDE); Lower cost service provision at a lower cost; Tariffs, cost recovery and associated regulations; Upgrading/rehabilitation and expansion o f existing infrastructure; Future sector financing; Autonomy and management tools; Delays in project implementation periods; and Compensation for implementation delays for new information technology methods (NTIC) and new management tools.

24. For the sanitation sector, the major challenges include:

Expanding the service delivery area to small towns where costs are higher than revenues; Rehabilitation and expansion o f sanitation infrastructure, e.g., wastewater treatment plants and pumping stations; Over-staffing issues; Delays in project implementation, hindering closer project phasing which would ensure better use o f financial resources; Modernization o f facility management (ONAS); Tariff/cost recovery and their oversight; Service delivery at a lower cost;


Compensation for delays in implementation o f new information technology methods (NTIC) and new management tools; Rural sanitation institutional issues; Industrial pollution in water treatment plants (STEP) hindering their operations; Quality demands from a better informed population (regarding odors, mosquitoes, and spillage); Management o f extreme climate variations, especially floods; Increasing the rate o f treated waste water reuse to avoid costly spillage; Protection o f economically viable activities, i.e., tourism area preservation; Identification o f technical solutions to avoid waste water treatment waste (i.e., sludge, gases, etc.); Wider scope o f sanitation infrastructure to areas lacking services and follow- up o f urban development; National subsidies and solidarity, and subsidy targeting; and Future sector financing.

25. The major challenges in rural areas, are:

Potable Water Supply

Limited level o f financial resources for AICs/GICs/GDAs; . Weak management o f AICs/IGCs/GDAs;

Service provision should be in line with SONEDE standards;

Water distribution methods not in line with beneficiary expectations; and Potable water supply in rural areas i s a burden for SONEDE.

Sanitation

Financial constraints in water production and collective installation

Individual household connections will create hygiene problems; Institutional weakness o f rural water sanitation services;

maintenance; and Identification and adoption o f technical solutions for the rural areas.

26. These challenges require global reforms to promote the efficiency o f the potable water supply and sanitation sectors. The strategy addresses possible reforms, showing the advantages and disadvantages o f each scenario. The strategy also presents the option o f developing a regulatory framework for the potable water supply and sanitations sectors.

27. The objectives o f these reforms are as follows:

Create a forward-looking development framework focusing on an overall sector strategy;


28.

29.

Ensure better coordination between potable water and sanitation sectors; Develop a beneficial synergy between the two activities; Create incentives for private sector participation, combining potable water and sanitation; Establish transparent relations between government and operators through delegation o f responsibility to the relevant entities; Develop an incentive program based on good performance and a more modern management system; and Provide sustainable resources, taking into consideration the interests o f marginalized social groups.

The institutional options for the urban sector are as follows:

Creation o f regional water and sanitation entities linked to a national

Maintaining both entities with better decentralization, more efficient

Creation o f concessions;

organization for water production and supply and treatment Merging o f SONEDE and SONAS;

management, and increased private sector participation;

Creation o f a national water and sanitation holding company; and Multi-sectoral integration o f potable water, sanitation, electricity and gas.

Since SONEDE and ONAS activities are primarily concentrated in the southern part o f the country, the option o f regional water and sanitation entities would entail the creation o f one o f the largest organization serving the Tunis region, medium-sized entities for the regions o f Sousse and Sfax, and smaller entities for the other areas. Aside from the Tunis area, the viability o f this new structure would require substantial tar i f f increases in other regions which would be contradictory to the objective o f national solidarity. Moreover, regional entities would be more likely to experience social pressures. However, this option would entail additional expenditures for the creation o f these new entities and would deprive the country o f knowledge sharing on regional endeavors. Moreover, the sector would require staff with a high level o f competency, which i s not currently available, nor would these skills be used efficiently in view o f some regional activities. However, this option may be better suited to the development o f concessions. International experience has shown that proposals made by private companies to oversee these services are o f a higher caliber if water and sanitation are jo int ly managed.

30. The other option would be to merge the two national entities, SONEDE and ONAS, however, this scenario i s not recommended due to the large number o f staff concerned, currently 12,000 persons. The merge could also create social and management problems because o f status issues between the two institutions. Also, the only way to improve efficiency and reduce costs would be through reorganization and reduction in staffing costs, which would greatly reducing staff complements. This would be dif f icult under the current conditions.


31. Long-term concessions to private companies for water supply and sanitation services would not be the best solution for Tunisia since the two public enterprises are currently operating efficiently. This management system would better suit a country where public services are not performing satisfactorily. Moreover, this type o f concession could imply higher tariffs for water supply and sanitation since the private sector would be unable to mobilize the required financial resources at a better rate than SONEDE and ONAS. In fact, the private sector would not be able to benefit from increased revenue through a lower rate o f technical and commercial losses since the latter are weak compared to international standards.

32. The option o f maintaining the existing two-entity structure would require greater decentralization and implementation o f reforms for better efficiency in order to facilitate decision-making and improve service delivery to users. This option would also need a modern administrative and technical management system, as wel l as a sound analytical accounting system employed as a management tool. The creation o f a dual ONAS- SONEDE entity would provide the opportunity to explore possible synergies between water and sanitation and for them to coordinate their policies accordingly.

33. The holding company scenario would have the advantage o f providing better coordination between water and sanitation services by developing their jo int synergies. I t would also provide a strong tar i f f pol icy beneficial to the two entities, as wel l as to beneficiaries. The current scenario would also stimulate the development o f strategic options for services, particularly by encouraging new technologies, private sector development, optimization o f financial conditions, provide required services for mega- project development, and support technical and financial planning. Finally, the holding would require a simplified and coherent structure and l imited expenditures.

34. In many countries, power and gas distribution i s managed by the potable water and sanitation provider. This multi-sectoral approach could be useful as a means to developing trade synergies, i.e., as regards client relations as wel l as technical interventions in the field. The dual responsibility o f this joint sector approach could also be appealing to the private sector.

35. In addition to institutional restructuring, the two existing entities would need to develop decentralization measures and implement certain reforms to ensure better overall efficiency. Moreover, efficient decentralization would require the delegation o f certain responsibilities to facilitate decision-making and improve service delivery for users. Priority actions can be summarized as follows:

Lower Staffing Costs. Assistance would be required to align the number o f staff with ongoing activities. A satisfactory solution would need to be identified by negotiations with both parties. Private Sector Participation in Activities of Both Entities. This action could be taken in conjunction with staff reductions, and would be an incentive for private sector participation.


Modernization of Facilities Management, N e w information and communication technologies (NTIC) would need to be incorporated into the management systems o f both entities to ensure modernization and upgrading.

Institutional Elements o f the Rural Areas

36. I t i s recommended that the current participatory approach and management of potable water systems by GDAs be maintained. However, i t would be beneficial to consolidate these elements and to modify their collective distribution system into an individual scheme. The participatory approach remains fragile and would require government assistance. Appropriate measures would be required such as tari f f modifications, production subsidies for potable water supply similar to those in place for investments, etc. Remote and sparsely populated areas would continue to be supplied through individual connections (individual water sources, water tanks, etc.).

37. Rural sanitation services should not be managed by ONAS since this would deplete i t s financial resources. I t would be more advisable to implement a specific financial and institutional system based on rural potable water services. The approach o f a “Strategic Sector Study o f Sanitation Services in Rural Areas” would be more realistic, even though upgrading and detailed studies would be required. This study would allocate tasks among GDAs, DGGREE and ONAS. I t would be useful to further develop this scheme and implement it on a pi lot basis. The technical findings o f pi lot schemes have recently been applied, whereas institutional applications have not been implemented.

Development of Regulatory Statutes as a Priority

3 8. Sector regulations are currently implemented at different levels o f oversight. Staff recruitment and new positions are handled by the government and are based on the needs o f both operators. Expenses are submitted to the Internal Procurement Commission for specific amounts; expenses in excess o f the threshold are reviewed by the Superior Procurement Commission. Water and sanitation services must also be in line with national health and environmental standards. Water tar i f fs are established by the government fol lowing a review o f cost and tar i f f adjustment requests f rom operators. Following the amendment o f legislation on contractual agreements, partnership activities with the private sector are controlled through contracts signed by the public operator and his private partner. Finally, performance monitoring is carried out under five-year program contracts which outline the objectives o f water service delivery, production, and other service quality indicators.

39. This regulatory arrangement has facilitated sector development through the allocation o f additional responsibilities for operators in control o f national monopolies. However, these regulations have reached the limits o f political and administrative standards inherent to important decision-making. However, quality and service demands are very high and thus more expensive and a new institutional framework will need to be developed to ensure coherence between these requirements and cost recovery. The creation o f a legal regulatory system could resolve the information imbalance between


government and operators and the new institutional and independent framework would also ensure better performance monitoring o f operators. Transparent terms o f reference will be prepared to alleviate sector bottlenecks and giving operators a better vision o f the methodology needed to achieve government’s goals. Indeed, the creation o f a regulatory body would improve the current disconnect between the legal authorities and the entities regarding tariffs for water and sanitation services. Both entities have expressed concerns regarding the lack o f tar i f f adjustments needed to ensure their level o f operation, often over several years (such as the case o f ONAS) and the Government also believes that management systems for entities could be improved and that costs could be reduced.

40. A legal Regulatory Commission would ensure a better balance between the demand o f quality services and cost recovery, and facilitate decision-making on tariff and subsidy levels. This Commission would also establish regulations for tariffs, monitor the quality o f service, and create more transparent relations between operators and government on the basis o f objective data and regular monitoring. Additionally, the Commission would have the authority to oversee the power sector, and eventually the transport sector, although its role would not be identical to a structure managed by the private sector. The proposed Commission will have no decision-making power over tariffs and subsidies, which will remain under government oversight. I t s role would solely be to provide objective information to government on the entities’ management efficiency and on their required funding to achieve government goals. The Commission will be independent and will incite more transparency in data provided. It will be staffed by qualified individuals and will control performance indicators. Since it will have no decision-making authority to set tariffs, this will guarantee i t s independence. If government does not deem it advisable to raise tariffs, the Commission can then recommend alternative measures such as limiting the investment programs. Proposals put forth by the Commission would carry more weight with government and will encourage entities to adopt management tools and performance indicator monitoring systems.

41. In view o f the sector’s current situation, establishing the Commission i s considered a priority, regardless o f the institutional framework selected.

Financing and Cost Recovery

42. Tunisia’s tariff system focuses on cost recovery, efficiency, and solidarity between budget lines and inter-regional issues. In light o f these objectives, tar i f f scales have become national and progressive. Although tar i f fs ensure cost recovery for water, they have been lagging for sanitation.

43. Subsidies established for water consumption and the regions have helped to achieve social objectives, in spite o f insufficient targeting. The ideal policy would be to make direct transfers to disadvantaged households instead o f imposing the lowest tar i f fs with unreliable targeting. Certain countries have been successful with the direct transfer method, but the required conditions for this system do not yet exist in Tunisia.


44. The current water tariff system does not distinguish between domestic water consumption and economic uses, except for the tourism sector which enjoys the same tariff as the highest domestic segment o f the population. Thousands o f retailers, small- scale industrialists and art isans thus benefit from reduced tariffs.

45. recommended since the amount o f revenue generated would be low.

However, the application o f new tariffs for this specific group o f users i s not

46. SONEDE finances activities through i t s own resources, except rural investments which are funded by government. Future tariff policies should focus on the financial stability o f SONEDE. The creation o f an official Regulatory Commission would allow a more thorough review o f tariff adjustment cases and could provide an incentive for better cost reflection resulting in improved oversight.

47. For the sanitation sector, accumulated deficits have hindered i ts development and the quality o f i t s service delivery. Sanitation i s as important as potable water, especially in view o f the fragile state o f the environment which i s critical for quality o f l i fe and economic activity. Although government has financed the majority o f ONAS’ investments and a portion o f sector development, the institution must also develop i t s independent financing capacity through user contributions for the following reasons: (a) even if beneficiaries living in healthier environments are dispersed, pollution i s essentially due to potable water consumption. As a result, the application o f the polluter- pays principal implies that the latter will be charged for pollution control efforts; and (b) financing o f this activity must be separate from public finances and macroeconomic issues. In the long term, sanitation should be financed by the users. This goal will only be achieved progressively, however, since tar i f fs w i l l require readjustment to avoid financial problems within ONAS and to give this institution a degree o f financial capacity.

48. In rural areas managed by AICs/GICs/GDAs, investments are entirely financed by government. Operation and maintenance expenses are financed through potable water tar i f fs paid to AICs/GICs/GDAs. However, even if these tar i f fs are higher than those for SONEDE (with a comparable consumption rate) and they adequately cover operating costs, they do not meet the demands o f maintenance nor upgrading expenditures. When AICs/GICs/GDAs face breakdowns due to lack o f maintenance, they will not have the required funding for large-scale repairs and upgrades o f equipment and works. It i s therefore recommended that Government cover maintenance and upgrading costs through the creation o f a maintenance fund for AICs/GICs/GDAs.

49. Some collective sanitation pilot projects implemented by ONAS for government are financed by the State. Individual sanitation installations are financed by the owners. I t i s recommended that operating costs for collective works be financed partly through sanitation charges, and the balance by a state subsidy which would cover operating costs for wastewater treatment plants and pumping stations.


50. Tunisia has now established higher service delivery standards for the quality o f potable water and sanitation. Accordingly, financial assistance should support this trend, whether collections are made from the users (Le,, the urban sector for water) or divided between users and the state (i-e., sanitation). Tariff policies must ensure that urban water activities can financially support their own operations and that cost recovery for water production i s sustainable in the sanitation sector. The creation o f an official Regulatory Commission would be useful to better assess costs in view o f targeted objectives, especially for quality issues, and to prepare the tariff adjustments with more transparency.

5 1. Finally, it i s recommended that a detailed study on the option o f an “urban water and sanitation holding” be prepared to better formulate i t s context and implications for all sectors. The merging o f SONEDE and ONAS scenario would be worth assessing in the context o f this study to identify the best possible option. The creation o f an official and independent Regulatory Commission is, however, crucial at this point and should be a priority. Pending the results o f the study, reforms can be implemented to ensure the efficiency o f both operators.


Strategy on Drinking Water and Sanitation in Tunisia

DIAGNOSIS

At the request o f the Tunisian Government, the World Bank has mobilized a team o f multidisciplinary experts to undertake a strategy o f Tunisia's drinking water and sanitation sectors.

This comprehensive strategy specifically focuses on the sectors' institutional, organizational and economic aspects. It includes an analysis o f the current situation and identifies reforms that would contribute to tackling. upcoming challenges and deliver the best service at least cost to beneficiaries in urban and rural areas, while guaranteeing wide water and sanitation service coverage and sustainability.

The present document does not aim to be an exhaustive study o f the issues at hand, or attempt to provide answers to all the challenges reform will present for these two sectors. Rather, it i s a strategic analysis meant to identify the main axes o f reforms that should be implemented based on the results o f this reflection.

11 Tunkia 's water resources and allocation principles

Tunisia i s a Mediterranean country with limited water resources not exceeding 4,860 mill ion m3 / year, among which 610 million m3 / year are not easily renewable. 1,550 million m3 / year i s renewable groundwater, and 2,100 million m3 / year i s surface water flowing into oueds (rivers) and mobilizable at 95 %. Flow variations observed during the 1985-2006 period are between 7 and 8 billion m3.

The annual average precipitation i s estimated at 36 billion m3, with a variation between 7 and 90 billion m3, as observed during the last century.

Since 1970, several research studies for planning and simulation have been conducted using basic data from hydrological and hydro-geologic analyses obtained from measurement stations that are dispatched throughout the country.

The objective o f these studies and other related projects i s to mobilize the potential in variable surface water as well as in fragile groundwater resources, in order to satisfy fast- growing water needs while limiting the negative effect o f pollution, and ensuring water resources sustainability.

This research and analysis lead to the implementation o f several programs, including integrated developments in all the regions o f the country, according to a chronogram o f


mobilization o f water transfer, protection against floods, valuation o f subterranean waters, replenishments o f groundwater, provision o f drinking water to urban and rural areas, and water supply to irrigation perimeters. These represent multi-objective programs comprising water treatment and recycling through irrigation activities, whose scope i s adapted to hydraulic units and their connections.

- Resources available

for exploitation Total water demand

for all sectors

The studies and programs were carried out within the framework o f a larger regional master plan (for the North, Central, and South regions), mobilizing the various hydraulic systems in order to satisfy the need for drinking water in major urban and rural areas, as per the water code, as well as f the tourist, agricultural, and industrial sectors.

1996 2010 2020 2030

2,767 3,300 3,106 3,121

2,528 2,689 2,72 1 2,770

Thanks to the efforts designed to mobilize resources (construction o f large dams, earth dams, and hill lakes; groundwater replenishments, channels and water transfer systems, etc.), and to brackish water desalination, salted water recycling, water saving policies in the agricultural and other sectors, along with water resources protection from pollution, the country’s balance between supply and demand wi l l show a water surplus by 2030. Thus, the water safety o f the Tunisia will be ensured. However, managing the water system i s becoming increasingly complex and integrated, and the need for water depollution i s contributing to cost increase.

Table 1 below shows the evolution o f water demand for the various sectors (in million m3>:

Table 1 : Water resource allocation (million m3)

Table 2 below shows the supply vs. demand process for water resources (in million m3):

Table 2: Water Supply vs. Demand (million m3)

The programs developed were based on research studies in several areas, and aimed at limiting the r isks and threats associated with overexploitation, deterioration o f water quality, pollution, erosion, droughts, floods, shortages, malfunctions, waste, inefficiencies, climatic change, and deterioration o f primary data quality and value.


For example, the PISEAU I project for 200 1-2007 included components dealing with participative management o f water demand, integrated management o f water resources, conservation o f water resources and environmental protection against pollution. The project also provided for creating a modern storage information data processing system for water resources (SINEAU).

According to Table 3 below, agriculture absorbs a significant portion o f water resources, even if the share o f drinking water increases slightly, from 13,4% in 2010 to 17,7% in 2030. The respective shares o f industry and tourism remain very low, although they also may increase slightly.

Table 3: Water resources allocation (%)

Whether or not the balance between water resources supply and demand remains positive in 2030, the difference s t i l l requires a more efficient method o f managing these resources.

se cc

The drinking water and sanitation sector in urban and rural areas have been Tunisia's major concern since i t s independence in 1956. Safe drinking water and sanitation are essential to economic and social development, as well as to health. This is why this sector has always been considered a priority in al l national economic development plans.

The sector is managed primarily by two operators in urban areas who are well-known and respected throughout the national territory: the Socie'te' Nationale d 'Exploitation et de Distribution des Eaux (SONEDE) for drinking water, and the Ofjce National de 1 'Assainissement (ONAS) for sanitation. Rural drinking water service i s managed by collective interest associations: Associations o f Collective Interest (AIC), Collective Interest Group Groupings (GIC), and for Agricultural Development GDA), while rural sanitation services are s t i l l provided by pi lot projects.

These operators have been successful in meeting the objectives laid down by the Government. Thus, the entire country gained easy, permanent access to healthy drinking water even in areas considered difficult and sanitation services are provided to almost al l the population. These achievements were accomplished in spite o f water scarcity, climate aridity, the impacts o f discharges on the receiving environment, and the heavy load o f financial requirements.


However, the reforms implemented since the creation o f these two large operators have been limited, dealing primarily with organizational adaptations without addressing the institutional aspects. In addition, efforts were developed to economize on water usage, and adopt new technologies. On the other hand, private sector participation in the water sector i s considered modest, and limited to a few functions.

III. 1 Drinking water and sanitation performance: Main indicators

Some indicators showing these operators performance are mentioned below:

In 2006, urban water, rural water, and urban sanitation coverage rates, have reached respectively 100 %, 9 1 YO, and 80,9 YO.

The number o f SONEDE services users i s over 2 million, and 1.27 million for ONAS, while AIC / GIC / DGA have extended their services to more than 2.55 million. This broad coverage was made easier thanks to a progressive tariff structure that has allowed low-income households to access drinking water.

Access to healthy water and adequate sanitation services are basic human needs, essential to health, on the same level as medicines and vaccines. Infections by hydrous transmission have dropped significantly in Tunisia. The National Institute o f Public Health indicated that infectious and parasitic diseases account for only 3.5% o f the total causes o f death, and that there was a downward trend in the frequency o f children with diarrhea, from 15.6% in 1987 to 3.6% in 2002. On the other hand, the last case o f cholera reported in Tunisia goes back to 1986.

Service providers deliver a continuous, permanent, secure, and relatively uniform service throughout the entire country. SONEDE laboratories analyze the quality o f drinking water (in 2004, SONEDE took 53.938 samples, analyzed regularly by public health system services).

In the same way, the quality o f water treated by purification plants, and the impact on the receiving environment are analyzed by ONAS laboratories, under the control o f the Public Health System and the National Agency for Environmental Protection (ANPE);

Drinking water operators, other than SONEDE, DGGREE or GDA have responded to demand by providing water in sufficient quantity and in a continuous manner. Drinking water supply to SONEDE customers i s insured 24 hours a day, and every day o f the year. Cutoffs are very rare, due to certain management requirements and not to system failures. The number o f breakages i s 12.364 in 2004, that i s a breakage every 3.2 km. Breakages are found in the outdated water supply networks.

The improvement o f sanitary conditions was facilitated by the development o f drinking water and sanitation projects in rural and peri-urban areas.


In addition, ONAS had to respond to a tremendous increase in drinking water demand, control nuisance situations and potential health hazards, and protect sensitive ecosystems.

However, the direct and indirect economic impact o f drinking water and sanitation services extension, which i s considered an important growth factor, has not been studied.

111.2 Impacts on the population

The beneficiaries’ perception o f the operators i s generally positive. The services provided are appreciated, and the migration towards other providers doesn’t appear to have been considered, in spite o f tari f f increases.

Connection to the SONEDE and ONAS networks i s usually considered an achievement, and an indication o f moving up on the social ladder. Accessing the service seems relatively easy, and it i s available to low-income people. Anomalies are usually reported to the SONEDE and the ONAS as wel l as to the concerned Ministries. The beneficiaries’ reaction to system failures is fast and rather energetic, which stimulates the operators’ promptness to deal with issues. Complaints are thus taken into account and dealt with diligently.

The continuous provision o f services and the operators’ diligent and effective interventions to deal with the consequences o f breakdowns and floods, have greatly contributed to the ONAS and SONEDE positive image among consumers.

The quality o f the service and the pricing pol icy are generally the same everywhere in the country. Nonpublic users pay their invoices normally, and the water cutoff rate for nonpayment doesn’t appear to be excessive.

The coverage o f drinking water services in rural areas (91%) had a very positive impact on health, integrated rural development, as well as more generally the development o f these areas. In addition, a population cluster develops around each water supply facility. Moreover, the collective management o f the service has strengthened communal spirit and encouraged the creation o f micro-enterprises for maintenance purposes in rural areas.

I K l Vision, choice, policy, and planning

Drinking water supply and sanitation services were developed within the framework o f a clear long-term vision, supported by an unambiguous political will based on popular support for the various National Development Plans. The average annual investments within the 10th and 1 lth plans are 100 mi l l ion Dinars (MD) for SONEDE, 100 MD for ONAS and 30 MD for A I C / GIC / GIC.

16 Water and Sanitation Strategy in Tunisia. Final Report

O n the other hand, rigorous management, the development o f the required skills, and a planning process connecting the development o f water resources on national scale with a rational classification o f priorities, has resulted in a harmonious approach to project design and more efficiency in implementation. In addition, project design and implementation benefited from an extended database, and was based on feasibility studies. This has resulted in the access to drinking water for the majority o f the population, and to wastewater treatment in most urban areas.

SONEDE, ONAS, and A I C / GIC / GDA were able to generate significant knowledge throughout their history, and to use it appropriately. In addition, they combined certified and safe technologies, and adapted new technologies to the country’s specificities (iron treatment in rural areas, adaptation o f pretreatment techniques in desalination plants, water pipes corrosion control, odor treatment in water treatment stations, aeration system o f sludges tanks, etc.). These efforts are testimony to the assimilation capacity o f new technologies by public operators.

Timely climate, drought and f lood control efforts in sensitive and vulnerable areas have allowed the operators to develop short-term solutions integrated within a long-term vision for drinking water supply and hydrous pollution management. The success o f this approach has provided enough time to develop adequate long-term solutions, and to raise the required funds, without depriving consumers o f minimum service.

Finally, SONEDE, and AIC/GIC/GDA tari f f adjustments are made fairly regularly, with the active and positive participation o f al l the concerned actors within the sector and constitutes significant success factors for drinking water operators. The introduction o f a sewerage tariff, which hasn’t been readjusted regularly during the last decade, made it possible, however, to finance a large share o f operating costs. On the other hand, consumers’ payment capacity for the services was strengthened thanks to the past decades o f sustained economic growth;

IV.2 Institutional factors

Even if the institutional structure confers a monopoly on water and sanitation to SONEDE and ONAS in urban areas, the two public institutions, o f industrial and commercial nature, are governed by rules that clearly specify their respective missions. Their contract specifies in detail their respective five-year objectives. SONEDE and ONAS have an investment program included in the five-year plan, and a budget determined in consultation with the relevant Ministry, the Ministry o f Finance and the Ministry o f Economic Development.

The main parties are represented by the board o f directors o f SONEDE and ONAS, and their activities are monitored by the relevant ministries, the Prime Minister’s Office, the Ministry o f Finance, the Commission Supe‘rieure des Marche‘s (procurement committee), and the Court o f Audit, etc. Thus, recruitments are subject to prior approval, and


procurement activities are regulated and submitted to relevant procurement committees that also include outside members. In addition, external auditors regularly audit SONEDE and ONAS accounts, and the Court o f Audit i s entitled to conduct management controls.

In the absence o f an independent regulatory body, tariffs are determined after consultation and discussion with supervisory authorities, and are even discussed within inter-ministerial councils. Tariffs are published in the form o f ministerial decrees in the Official Journal fol lowing a transparent process. In the case o f nonpayment, SONEDE discontinues the provision o f drinking water.

SONEDE and ONAS have contributed to the creation o f sk i l ls and competences, and in the improvement o f human resources in their respective sector, thanks to their training and retraining policies.

In order to improve the re-use rate o f treated water in agriculture, a f i rs t step has been taken to form an appropriate institution through the creation o f a commission within the Ministry o f Agriculture to ensure efficient coordination.

Rural drinking water supply differs when dealing with agglomerated rural areas; semi- dispersed rural areas, or dispersed rural areas. Agglomerated rural areas are considered similar to urban areas and are supplied by SONEDE, even if that becomes an increasingly heavy load to carry. For dispersed rural areas, a participative approach was set up through the creation o f Associations o f Collective Interest “AIC” and Groupings for Agricultural Development “GDA”. Though these structures possess some weaknesses, they are appreciated because they supply dispersed rural areas with drinking water without direct intervention from the SONEDE.

O n the other hand, there i s an institutional vacuum with regard to sanitation in rural areas. This can sometimes become an issue when drinking water consumption increases and rural areas become agglomerated.

A centralized and de-centralized system for urban areas

The institutional system for urban areas i s centralized with some level on decentralization.

At the time o f SONEDE and ONAS inception, there was an obvious lack o f drinking water and sanitation services. Moreover, professional competences in these two areas were scarce. This explains the creation o f operators to operate on a national scale able to develop a comprehensive national approach in terms o f planning and priorities, and to facilitate relationships with the various donors and mobilize external resources for projects implementation. The geographical size o f the country made it possible to benefit from the advantages o f a centralized approach.

At the time o f the creation o f these public utilities, centralization made it possible for al l cities to benefit from scarce competences. It also allowed to capitalize on experiences,


coordination as well as cross subsidies between regions, without which it would have been impossible to supply drinking water and provide sanitation to some cities.

While being centralized, the institutional system i s also decentralized, since both SONEDE and ONAS have regional and even local representations. This type o f organization brings them closer to customers, to local and regional authorities, and to infrastructures.

Both operators are represented in regional councils, which allows them to take into account the regions needs, and to ensure a certain regional and social equity by providing uniform services.

A specific system for rural areas

With the development o f drinking water projects in rural areas, starting in 1980, there has been a burgeoning o f AIC/GIC/GDA destined to ensure the sustainability o f infrastructures built in these areas.

The operators in charge o f developing drinking water supply infrastructures in rural areas are SONEDE and DGGREE. These infrastructures are operated by SONEDE and the AIC/GIC/GDA groupings. The number o f AIC/GIC/GDA groupings has increased from 100 in 1987 to 2809 in 2005, including 16 10 for drinking water, 1075 for irrigation, and 124 for both (drinking water and irrigation). AIC/GIC/GDA groupings supply drinking water to more than two million consumers.

The success o f the rural drinking water supply sector, a complex sector given the multitude o f very diversified projects scattered throughout the country and often in difficult areas, i s explained by the strategy adopted by the DGGREE. This strategy made it possible to harmonize and synchronize the activities o f the various actors (consulting f i rms, construction companies, and AIC/GIC/GDA groupings for operational activities. The DGGREE played a key role in the creation o f AICS/GIC/GDA groupings.

Several consulting f i r m s and other small services f i r m s were created under the impulse o f the DGGREE, and established at the time o f the starting o f the rural drinking water supply projects. They all contributed to improve living conditions in rural areas.

In 2005, there were 932 water points for rural drinking water projects, including 284 deep wells, and 114 shallow wells, with the remaining ones being tapping on SONEDE or DGGREE networks from natural springs.

The poorly suppiied areas are mainly located in mountainous regions in the North Wes. This i s due to the insufficient hydrous potential o f local water tables, or to the frequent drying up o f local springs in summer or during years o f drought. This situation requires the use o f large water storage tanks ‘in wintertime, or long distance water transfer as well as pumping. In both cases, water treatment proves to be essential.


SONEDE has built large axes through mountainous regions Nor th o f Jendouba, Beja and Bizerte, connecting the dams located in the North o f the country, in order to ensure the supply o f the entire rural population o f one mi l l ion inhabitants, scattered in these areas without sufficient hydraulic resources.

Some regions located in the South, the Center and the Cap Bon are endowed with water resources loaded with i ron or salt, requiring specific treatments to reduce salinity and ferric concentrations. The SONEDE and DGGREE carried out several pilot projects to solve the problems linked to water supply to these areas.

To tackle constraints in terms o f water resources in difficult regions, DGGREE carried out hydro-geologic prospecting activities that contributed to identifying exploitable tables and provide for the needs o f the various projects.

The revision o f the AIC/GIC/GDA status on several occasions resulted in increased accountability on the part o f the management boards, and in improving the coverage rate as well as operational effectiveness.

State funding o f important repairs (replacing drilling equipment, electric pumps, etc.) contributed to AIC/GIC/GDA groupings positive image by the beneficiaries. In addition, DGGREE assistance and supervision constituted insurance and a protection for these groupings.

IV.3 Economic factors: the role of sustained growth

Economic growth has contributed to provide the necessary resources to finance the water and sanitation sector.

Robust growth that characterized the Tunisian economy during the past four decades, on average more than 5% per year, made it possible for the Government to mobilize internal and external re2ources to finance investments in water and sanitation in a sustainable manner. Moreover, economic growth led to improvements in household incomes, making it possible for them to afford water and sanitation services. Thus, progress in this sector would not have been possible with a l o w rate o f economic growth.

Water and sanitation services developed thanks to sustained investment efforts. These investments have doubled during the period between the 8th and 10th Development Plans, increasing from less than 110 MD a year to more than 221 MD a year (see Table 1). These investments increased in relation to total gross fixed capital formation, exceeding 2.8%. This upward trend concerned both water and sanitation. Thus, resources allocated to this sector increased at a pace even more sustained than macroeconomic growth and total investment.


Table 4: Investments in the water and sanitation sector (1992-2005)

Annual Annual Annual average average average 1992-96 1997-2001 2002-2005

Amount in current MD

Water 58,7 81,6 114,4 Sanitation 50,8 78,3 107,3

21

GDP Yo Water 0,37 0,33 0,35 Sanitation 0,32 0,3 1 0,33

Total 0,69 0,64 096

FBCF Yo Water 1,42 1,29 1,46 Sanitation 1,24 1,23 1,37

Sources: SONEDE, ONAS, Annual Reports, Ministry of Agriculture and Water Resources. .~ ~

Investmentfigures in the water sector include projects executed by SONEDE as well as non- SONEDE rural projects. Sanitation spending doesn ’t include ONAS investments.

Users have financed SONEDE investments in urban drinking water supply; the public utility doesn’t receive subsidies to invest in urban areas. These investments are financed annually by SONEDE through self-financing and external loans, and revenues from consumers cover its debts. However, rural projects carried out by SONEDE are completely financed by the State budget; the water utility conducts these investments to some extent on behalf o f the State. As for sanitation projects, they are largely financed by state grants.

The development o f the sector contributed to growth, in particular with regard to some industrial and to tourism activities. These activities benefited f rom quality drinking water supply at competitive prices in comparison with international prices. Tourism, an important sector in the country’s economy, i s the main beneficiary o f the development o f sanitation, which has largely contributed to the protection and improvement o f the environment in general and o f seaside resorts in particular.

In addition to growth and the rise in living standards, the supply o f water and sanitation services to l o w income households at relatively l o w prices contributed to their extension to the majority o f the population. The introduction o f a credible and effective collection system also played an important role in the development o f the sector, contributing to generated benefits. A l o w level o f commercial losses, and a rather high rate o f invoice collection test i fy to the public utilities effectiveness.


V.1 Governance

Urban and rural systems managed by public institutions o f industrial and commercial nature supported by the state

The sector benefited from a sound organizational and governance system in spite o f some deficiencies. The operators are institutions o f industrial and commercial nature with financial autonomy, clear statutes, and objectives to fulfill, and are responsible for the supply o f services in their respective fields, while maintaining financial balance.

The operators’ mode o f organization allowed the inclusion o f the main partners representatives in the board o f directors, and to subject the sector to rigorous rules o f management. Contract programs were later developed to better define the relationship between the state and the two operators, SONEDE and ONAS. Monitoring projects cost and implementation was ensured thanks to a series o f tools and methods that certainly limited the operators’ autonomy but imposed a certain rigor in terms o f management. These tools and methods include: management control, monitoring o f procurement activities, external audit, contract-program, and, more recently, prior approval and monitoring for recruitments. Some o f these methods maybe less usefu l today, and should be replaced by a posteriori control.

The State has always provided support to the sector through investment subsidies for sanitation and drinking water in rural areas, and through a tar i f f policy that facilitated access o f low-income consumers to these services. The organization o f the sector that allowed commercial companies to operate, and the support provided by the state, in particular through subsidies or guarantees for foreign loans, facilitated the sector regular development,

Relationships with donors

Operators usually use loans from multilateral and bilateral donors to finance a substantial share o f their investments. It i s worth noticing here that the World Bank contributed to SONEDE and ONAS initiation.

Loan terms are generally advantageous (low interest rates, repayments over a long time frame, etc.). Some donors have also provided grants for specific activities.

Loans are granted with state guarantees, when they are not contracted directly by the Government o f Tunisia and transferred to operators (as was the case o f some loans that benefited ONAS).


Donors took part in the financing o f rural drinking water supply projects through the provision o f loans to the Government. These projects are usually carried out either by SONEDE, DGGREE, or by the CRDA.

Some donors have also provided assistance for AIC/GIC/GDA design and implementation.

Bilateral cooperation agencies have provided meaningful assistance for the operators’ development activities.

In addition to their financial support, donors often provide assistance in terms o f technical, management, strategic development, and capacity building activities.

Generally, loan contracts include conditions for project implementation, and sometimes the implementation o f management reforms (on the part o f the operators).

Donors also make recommendations for tariff readjustments.

Operators must provide donors with project implementation reports o n a regular basis (semi-annually or quarterly).

Projects financed by loans above a certain amount (specified in loan agreements), require the donor no objection with respect to specific allocation.

Issues that have arisen between operators and donors stemmed from the fact that Tunisian and donors’ procurement procedures may be different and even contradictory at times. Moreover, donors’ procedures are not uniform, which may have added to the problem.

Relationships with customers

The relationships o f SONEDE and ONAS with c’ustomers relate primarily to requests for connection, invoicing, and collection operations, as well as to complaints. Consumers’ complaints may be filed by phone, or on ONAS Website. O n the other hand, some communications activities have been especially designed to encourage the public to save water.

AIC/GIC/GDA managers’ relationships with the beneficiaries are direct with regard to daily problems, and through the annual general meeting for other issues. The beneficiaries elect these managers.


V.2 The sector operators

Operators have played a key role in the sector’s success.

Internalization o f Tunisia’s national vision and objectives

For a long time, Economic and Social Development Plans have been very useful frameworks to set objectives and determine investment plans for water and sanitation. The operators involved in this process made medium-term commitments for which they were held accountable during and after implementation periods. They participated actively in the planning process; taking into account local and regional needs for water and sanitation services in their investment programs. These operators have accumulated substantial experience over several national plans. This experience has been subsequently very useful in project and program design and implementation, and in progressively extending water and sanitation services to the population.

Capacity Building

The creation o f SONEDE (1968) and ONAS (1974) resulted in a new approach and dynamics, as wel l as in a more propitious climate in terms o f investments, and know-how and technological development. In addition, the adoption o f modern management techniques made it possible to reach 100% drinking water coverage in the country’s urban areas, and 80.9% with regard to sanitation. This performance has allowed SONEDE and ONAS personnel to improve their know-how by using various technical and management methods in the drinking water and sanitation sector.

The two companies have accumulated substantial know-how based on national traditions and on other countries knowledge systems in the areas o f exploitation and management o f drinking water resources and sanitation. This knowledge covers the entire water circuit, from water mobilization upstream to water treatment downstream.

In addition, this know-how was developed through adaptation to the specific conditions o f the country’s each region, and thanks to the two companies’ executives and other member o f the personnel assimilation and creative capacity, whose sk i l ls improved thanks to the development o f professional training.

Technical Capacity

The drinking water and sanitation sector has emerged as a major source o f jobs for a variety o f activities.

SONEDE, ONAS took advantage o f the realization o f many projects throughout the country to improve capacity and competence.

Technology transfer and international cooperation in projects and programs design,


implementation, and management have also contributed toward improving knowledge.

SONEDE, ONAS and the other structures responsible for drinking water supply in rural areas have succeeded in capitalizing on know-how accumulated through years o f experience.

- Training competent executives

The two organizations benefited fully from the teaching and professional training system, and obtained additional training when necessary to meet their specific needs. Retraining in various specialized areas was also available to them.

SONEDE and ONAS have developed their own training programs that they carried out or that were provided by independent consultants. These programs are based on competence requirements for .the personnel to fulfill i t s mission and to learn new technologies.

The 513 training cycles in 2005 for SONEDE related to computer engineering and management. Thus, 2,473 agents o f a total o f 6,93 1 agents attended the training sessions, including 50% supervisory staff members and 16% operation agents. For ONAS, training was centered on the use o f new purification technologies, networks, and management. Overall, for the two companies, an average 40% o f the personnel participated in the training and retraining sessions.

- Managerial quality

For SONEDE and ONAS, supervisor-to-staff ratio remains low for two main reasons. The f i rs t relates to the low subcontracting rate, particularly for routine tasks. The second has to do with the fact that the two companies are overstaffed, after many temporary jobs have been made permanent.

In 2005, the supervisor-to-staff ratio reached 8.2% for SONEDE and 11% for ONAS. A Quality Unit was created in 2004 with the purpose o f optimizing the use o f human and technical resources.

SONEDE and ONAS’ contract program for each National Development Plan comprises a clause relating to the obligation to improve the supervisor-to-staff ratio.

Man agemen t

Recently, the two companies have manifested a keen interest in improving management and governance. In the past, the operators’ focus was essentially on technical issues, but they became lately more aware o f the need for qualified management personnel and to introduce modern management methods. The increase in the number o f consumers, the scarcity o f financial resources, and a more regular management control explain this trend. However, computerization and efficiency require that efforts deployed be more constant in order to improve management effectiveness and the use o f New Information and


Communications Technologies (NICT) tools. Thus, SONEDE and ONAS have started a large management modernization program, with regard €0 methods and training.

Recruitment Discipline

Profiles selection and recruitment are programmed for each development plan and are monitored by the supervisory entities. Recruitment i s carried out by way o f entrance examination in accordance with established standards. The recruitment and regularization o f temporary employees are carried out in accordance with a calendar agreed upon with union delegates.

- External audit

External audit i s carried out in accordance with the regulations in force that apply to al l public enterprises. The annual audit i s carried out by known competent entities selected through a tender process.

Computerization

SONEDE and ONAS maintain information systems used for basic management needs such as accounting and financial management, procurement and stock management, personnel management and a common commercial system based at the SONEDE.

ONAS has developed, by subcontracting to consulting f i rms, some applications (operating budget, purchase, maintenance, rol l ing stock fleet management, etc.).

The two companies have programs to widen the scope o f their respective information systems.

Both companies plan to joint ly acquire a modern commercial information system (SIC) adapted to water and sanitation activities. In spite o f similarities in their activities, there i s no other program designed joint ly apart from the commercial system in project. It seems that systems are developed with a l o w level o f integration, and also that some o f them provide only basic information pertaining to personnel management.

Beneficiaries’ involvement in management activities in rural areas

The participative approach adopted with regard to rural drinking water supply favored appropriation by the beneficiaries.

The collective management style adopted by the AIC/GIC/GDA in rural areas contributed to consolidating social cohesion and community spirit, and to improving infrastructures and equipment mutualization. Beneficiaries are directly involved, they cover operating costs and part o f maintenance costs. However, maintenance and renewal costs remain an issue. The collection ratio has improved and individual household connection i s more and more common.


The f ield staff receiving wages (pump assistants, technicians, accountants, etc.) work under the supervision o f the AIC/GIC/GDA committee, elected by the beneficiaries’ assembly. Equipment maintenance and repair are contracted to small private enterprises whose number has grown significantly, following the extension o f drinking water projects in rural areas.

Beneficiaries are involved in projects at the design stage. Through their representatives, they participate in choosing the establishment o f networks, in the definition o f delivery system, and in determining participation quotas. These actions contribute to the beneficiaries’ appropriation o f the system.

Curre

The diagnosis should not be limited to enumerate the operators’ successes, but must also include a critical analysis and identify emergent problems in order to deal with them in the near future and be able to face the challenges to come.

SONEDE, ONAS and the GIC/GDA history i s r ich in terms o f accumulated data, achievements and experiences, which facilitate identification o f emergent problems that may hinder operators’ development.

The reforms concern not only the water supply and sanitation sector institutions, but also al l the other external institutions and organizations linked to this sector

W. 1 Various services limits and emergent deficiencies

Limits and deficiencies in urban drinking water supply

Several factors contribute to SONEDE’s emerging problems. These include:

Size of SONEDE’s activities

SONEDE activities expanded in such a way that i t will have to revise and adapt i t s vision and management style. Indeed, in 2006, SONEDE supplied water to approximately 2 mi l l ion consumers, sold 337 mi l l ion m3 o f water, exploited 42,000 km o f network, and supplied water to 500 urban localities and 2,364 rural localities. These last two figures offer an indication o f the extent o f the territory covered and the dispersion o f the areas serviced by SONEDE.

Excess SONEDE staff

In 2006, SONEDE had 6851 employees (5918 permanent employees and 933 temporary employees), that i s to say a ratio o f 3.5 employees per 1000 consumers. This ratio i s very high for just the drinking water supply activity.


In 2005, the wage costs reached 95.5 MDT, which represents 46.6% o f the total operating costs. The integration o f temporaryheasonal personnel i s programmed for the next years and will increase these costs and the ratio. Operating costs have reached 204.5 MDT, while operating income represent 210 MDT, with a turnover o f 190.3 MDT (including 149.1 MDT from the sale o f water). SONEDE financial capacity i s expected to decrease and i t s financial position i s likely to become o f increasing concern in the future. An action plan must be developed to be able to confront future challenges and reduce the wage costs ratio.

SONEDE’s monopoly for urban drinking water supply under the control o f the state makes it difficult to solve the overstaffing issue.

Massive retirement of SONEDE personnel

In the course o f the next ten years, 2453 SONEDE employees will retire (representing 40% o f the permanent workforce). Among the future retirees, several managers are considered to be the backbone o f SONEDE. This represents a problem as well as an opportunity for the company. This massive forthcoming retirement unless if not dealt with appropriately is l ikely to negatively affect SONEDE’s activities. However, on the other hand, i t could be viewed as an opportunity to solve overstaffing issues, since many tasks are becoming obsolete as a result o f technological innovations and subcontracting. Thus, retraining and redeployment o f personnel, along with the redefinition o f the company’s mode o f operation, which includes involving the private sector more, is necessary. A strategy articulating a precise action plan will be developed and implemented as soon as possible. The reform and upgrading process should be a permanent and continuous process. Scarcity and declining quality of water resources

Collective drinking water supply will require the mobilization o f an increasingly expensive water resource, and with reduced quality (chemical quality); this will require important investments necessitating most l ikely public funding (especially for rural drinking water supply).

SONEDE will face growing demands from its customers

SONEDE customers are increasingly sensitive to:

rn Improvement of service quality through:

- Reducing the level o f salinity in drinking water. For starters, SONEDE will have to supply water with a salinity level less than 2g/l everywhere, which will, in some areas, require the use o f expensive desalinization processes;

- Solving the issue o f the task o f chlorinated water;

- Providing a continuous supply o f drinking water (including over time). This will require heavy investments to secure water supply, especially for the megacities;


- Providing good quality customer service, which will require SONEDE employees welcome and listen to their clients, and provide them with timely and satisfactory responses. This includes issues relating to tariffs transparency.

Least cost drinking water supply: Customers demand service quality, and least cost water supply.

Water service coverage: SONEDE will have to fo l low urban and economic developments, and respond to the subsequent demand in drinking water.

Renewing and increasing capacity without delay

The infrastructures inherited, or built by SONEDE during the first years o f i t s existence, are increasingly outdated; some have already amortized f and need to be rehabilitated and expanded. This i s particularly true for the old grey cast i ron pipes networks and lead service lines. These projects, some o f which are a top-priority emergency, will require heavy investment. SONEDE estimates rehabilitation needs in Greater Tunis for the next 10 years to cost 52 MDT which includes 18 MDT for priority projects).

Difficulties and delays in implementing new in formation technologies (ICT) for modern and efficient management

Information Communication Technology (ICT) and modern management techniques have proven very efficient methods to improve business administration. There is, however, a certain inertia regarding the introduction to, and adoption and use o f these innovations, even though they would be very beneficial to the company and accordingly to consumers. This inertia i s due to the staf fs difficulty adapting to new management methods and to the requirements for existing systems overhaul and reprogramming. Delays in adopting these modern methods inevitably negatively impact performance and productivity, which translates into an increase in the cost o f water. O n the other hand, implementation o f innovations identified (i.e. marketing system, human resource management system, GIs, etc) tends to be sluggish.

Lengthy delays in implementing projects

The time required to implement the various projects i s quite long and incompatible with the necessity for responsiveness. The time required to conduct a needs assessment, design, implement and operate a project i s indeed too long. These delays generate additional costs and prevent the phasing o f investments. (See the paragraph on "sanitation")

Heavy investments that don 't generate new customers

Investments aimed improving the overall quality o f services, rehabilitating and renewing infrastructures will not significantly increase the number o f consumers, and consequently the volume o f water consumed. Nor will they generate additional resources for SONEDE.


An appropriate strategy for these programs should be defined in order to ensure funds are available when needed. The current level o f tar i f fs doesn’t generate sufficient resources to meet the needs o f these ambitious but necessary programs.

Optimization of technology

Optimization o f technology, and the complexity o f new problems inherent to water supply such as updating master plans, entangled national hydraulic interconnection network, counting complexity and importance, leaks monitoring and analysis, will require further study. A policy change regarding these studies will be necessary to ensure their quality and the opportunity to take full advantage o f the benefits technological innovations and private sector experience offer.

Private sector participation in SONEDE activities

The private sector involvement in water supply has grown significantly sectors in recent year. SONEDE should take advantage o f the services offered by the private sector in the areas o f management, feasibility studies, and construction work, to reduce costs and improve quality and safety standards. The participation o f the private sector requires the establishment o f an appropriate strategy dealing with al l the issues that might hinder SONEDE’s development and help the water utility meet i t s quality o f service and safety standards. Indeed, SONEDE efforts in these areas were very modest and must be revitalized. The intervention o f the private sector should not be confined to routine tasks, but also to more complex activities currently carried out by SONEDE. In order to optimize the private sector contribution, SONEDE should, in the beginning, implement close supervision. SONEDE should also determine which tasks are advantageously carried out by the private sector.

Technical planning based on drinking water supply master plans

Project planning and design bases will be better optimized when they are based on master plans for drinking water supply. SONEDE will then have to provide every city (or group o f cities) with master plans for drinking water supply.

More studies on strategy and main management issues

W h i l e management, maintenance, and complex financial issues are becoming increasingly important, the extent o f the project construction phase has now become limited. This should induce SONEDE to develop a new strategy for its activities.

The areas in need o f specific and timely interventions are many and varied. They are often inter-related and require in depth and accurate studies as wel l as an analytical and action program. A renovation dynamics should be introduced within SONEDE in order to initiate the process and successfully identify the said areas.


In order to maintain recognized SONEDE project quality, the public utility database o f studies should be well equipped with quality studies conducted using credible and adequate data. SONEDE should ensure the quality o f these studies. Thus, SONEDE should prescribe the main principles and methodological approaches for these studies, in order to maintain a level o f quality in line with i t s reputation, and reflect the scarcity and value o f water in Tunisia.

SONEDE must therefore conduct more studies dealing with predominant management issues in order to better meet the challenges it faces.

Limits and deficiencies with regard to rural drinking water supply

Consumers in rural areas aspire to a service that meets SONEDE standards

The ICG/GDA provides a very useful service in terms o f rural drinking water supply (DRINKING WATER SUPPLY). After the installation o f standpipes, which achieve a high supply rate (91%), consumers in rural areas now aspire to a service that meets SONEDE standards, particularly with regard to individual connection.

AIC/GIC/GDA are small and their resources insufficient

GIC/GDA are generally very small and their financial and human resources are modest. Indeed, 69% o f GIC/GDA generate a turnover lower under 6,000 Dinars per year, less than 500 Dinars per month. They operate mostly on a voluntary basis. Tariffs do not cover maintenance, renewal, and extension costs, while they are often higher than in urban areas.

AIC/GIC/GDA management tools are insufficient

DGGREE i s in charge o f promoting the AIC/GIC/GDA groupings and offering assistance for their formation; and, once created, it provides them with technical and management assistance. The AIC/GIC/GDA are in charge o f rural drinking water supply facilities and technical and administrative management. DGGREE organizational structure includes a department tasked with promoting these associations that has developed a strategy, prepared their statutes, and developed all the supporting materials needed for their technical and administrative management. DGGREE contributes to strengthening their capacity through the organization o f management seminars and training sessions.

There are DGGREE cells dedicated to GDA activities in all the CRDA, and training sessions are organized for them as well. These cells provide support to GDA (or GIC). DGGREE appears to have difficulty assigning a person to manage the GIC/GDA, which may demotivate the work team and affect the quality o f service, particularly the relationship between management and the beneficiaries. The educational level o f the GIC president i s often rather limited, which does not contribute to optimization o f AIC/GIC/GDA management. Some AIC/GIC/GDA


recruited chief technical officers can be technicians or even fledgling engineers, depending on the size o f the AIC/GIC/GDA. Although there i s currently a desire to optimize AIC/GIC/GDA management, these technicians are not equipped with computers and must work manually. A reporting system must systematically be sent through the Internet to CRDA and DGGREE.

The distribution system doesn ’t meet beneficiaries’ expectations

The projects are designed to supply beneficiaries with water through water points (standpipes or derricks). The water points must be located at a distance that doesn’t exceed 500 meters from the target population. Apart from the distance issue for a number o f beneficiaries, public water points pose a management problem. Indeed, if these water points are not adequately managed, significant water waste and inequality in consumption occur, and cost recovery becomes an issue since consumers pay a fixed monthly fee for the service. If the water point management i s l e f t to a caretaker manager, the water i s supplied one or two hours per day because o f the low benefits generated by this activity. Thus, water availability i s very limited and represents a constraint for beneficiaries who resort to alternative suppliers when they exist, and limit their use o f the drinking water supply system. This situation poses a problem o f return on an investment financed by the state for a service that i s provided during one or two hours per day only. Additionally, the price o f a cubic meter o f water has increased by about 30% to cover the salary o f the caretaker manager. This represents a tariff increase with limited service availability. For these reasons, and when they can afford it, beneficiaries prefer individual connections.

Rural water supply is a burden for SONEDE

Currently, the state undertakes rural drinking water investments and then funds. the rehabilitation o f infrastructures managed by the GIC/GDA to meet SONEDE standards- before their integration within SONEDE. In spite o f that, the integration o f these systems will increase the cost o f water and may constitute a heavy load on SONEDE if tariff readjustments do not accompany this change.

A reflection o f the GIC/GDA future and the role o f SONEDE in rural areas in the long run i s essential, given the ongoing urbanization o f rural areas.

A strategy identifying programs and determining costs must be worked out for the next decade in order to ensure a progressive and harmonious GIC/GDA integration within SONEDE.

Limits and deficiencies in urban sanitation

ONAS services do not cover all districts

The sanitation sector in Tunisia has undergone important developments since the creation o f ONAS in 1974. ONAS’ area o f jurisdiction has gradually increased, replacing the


communes originally responsible for sanitation. However, after 34 years o f existence, ONAS’ services do not cover all district perimeters and tourist or industrial development areas.

Population

Total population (1,000 Inhab.) Urban population 1000 Inhab. Urban population 1000 Inhab.

At the end o f 2006, o f a total urban population o f 6.7 million people, ONAS’ perimeter covers 5.8 mill ion people, which i s 57.6% o f the total population, and 87.8% o f the urban population (Table 5). I t i s important to note that, in principle, ONAS’ mandate does not cover non-urban populations, and 813,000 people are s t i l l under the responsibility o f the communes with regard to sanitation.

2006

YO Size

10 177 6 675 3 502

The connection rate i s very high in ONAS areas (86.6%), and very limited in non-ONAS communal areas (4.9%). Approximately 813.000 people in urban areas, scattered on 109 communes, have a very low sanitation level. The current organization o f the sector clearly shows that the sector develops very unequally in ONAS and non-ONAS cities. This situation reflects ONAS original purpose.

Population borne by ONAS (1,000 Inhab.) % I Total population

% I Total urban population

Urban population under communes’ responsibility (1,000 Inhab.)

On a national level, the connection rate to sanitation i s 80,9% in urban areas (a rather high rate), and i s only 2% in rural areas.

5 862 57,6?’0 87,8?40

813

Table 5: Connection to sanitation indicators

Total population connected to sanitation (1,000 Inhab.) BvONAS

5 573 55% 5076 50%

By communes

Rural

Urban population connection rate By ONAS

By communes

Connection rate o f the population borne by ONAS

Total number o f communes Number o f communes borne by ONAS

Number o f communes NOT borne by ONAS

327 3 ?‘o

2%

80,9% 76,0% 4,9%

86,6%

170

264 155 58,7% 109 4 1,3%


Recently, ONAS had to considerably trim down i ts expansion plans, because o f i ts financial situation, especially since the cost o f providing sanitation services to the 109 remaining communes i s high, and they generate l i t t l e revenue for ONAS. This situation exposes the limits o f the current system and suggests that corrective measures be taken.

Designation

Volume of water consumed by ONAS and SONEDE clients Volume of treated water Purified volume to consumed volume ratio

Wastewater treatment

2006

Y O Millions of

m3/year

227 216

95%

Wastewater treatment i s also part o f ONAS’ mandate mission. This i s in order to bring wastewater into conformity with required standards before discharge or reuse.

Volumes of water consumed by all SONEDE consumers (cities borne and not borne by ONAS)

Urban areas Rural areas

An important volume o f wastewater i s treated in ONAS’ wastewater treatment plants (WWTP). Treatment i s performed by ONAS or by subcontractors from the private sector. In 2006, the volume o f wastewater treated totaled 2 16 million m3, which corresponds to 95% o f the volume consumed by ONAS clients. This information on the ratio, i s provided to give an idea o f the volume treated, and does not represent the treatment rate because, on the one hand, the volume includes rainwater, and, on the other hand, the consumed volume i s not discharged entirely (usually only 80% o f this volume are discharged).

In 2006, for a volume o f 337 million m3 o f water consumed by SONEDE consumers connected to the drinking water supply system, a maximum o f 216 million m3 o f water was purified. Consequently, approximately 88 million m3 o f water was discharged into the natural environment without treatment, therefore not in conformity with discharge standards.

337 301 36

The water treatment rate distributed by SONEDE and transformed into used water i s thus lower than 67.2%.

Volumes of drinking water supply not treated Volume of waste water rejected without treatment

The 88 million m3 o f used water not purified and discharged in the natural environment i s not all necessarily harmful, even if it doesn’t meet the standards, because everything i s dependent on the receiving environment’s fragility and on the volumes discharged.

110 32,8% 88

Table 6: Used water purification


In 2006, 95 treatment stations (WWTP) were operated by ONAS with a total treatment capacity o f 250 million m3 per year. The total saturation rate i s thus 86%.

The average treated water quality i s 43 mg/l o f BODS, whereas the standard discharge parameter i s 30 mg/l.

In 2006, 20 WWTP were functionin with a flow higher than their regular flood discharge. They treated 131 million m , i.e. 61% o f the total volume o f treated water treated by all WWTP.

9

A 135 million-m3 volume o f treated water had a BODS higher than the standard, which means that 63% o f the volume o f treated water was not in conformity to the standards. This situation will improve appreciably very soon with the new treatment units being installed in South Meliane and Choutrana.

This situation demonstrates the need to quickly carry out WWTP extension programs. Moreover, ONAS required that a substantial extension and rehabilitation program o f the treatment stations be included in the 1 1 th National Development Plan.

Table 7: Average quality of the water treated in water treatment stations

Pressing need for rehabilitation, renewal, and increasing infrastructure capacity

As a result o f the financing o f the sector being completely dependent on the state (investments are financed by the state, operations are subsidized, tariff readjustments are decided by the state), the investment policy has aimed primarily at the development o f the sector and expanding the coverage ratio - to the detriment o f infrastructure sustainability and the adaptation o f their capacity to respond to the demand. This i s particularly the case for the WWTP stations (see the above paragraph).

I t i s thus important that, in the future, ONAS have sufficient financial resources to sustain the rehabilitation and extension o f i t s WWTP stations, and i t s sanitation systems in general.


Some environmental problems are not completely solved (sludge, treated water discharge, odors, industrial wastewaters)

In the process o f treating wastewater, the WWTP’s produces 3 products in large quantities which pose environmental hazards and are not yet completely controlled. These include treated effluent; sludge; gas; and occasionally sands; oils; and screenings.

Treated water

In some sensitive areas like tourist areas, outfalls discharging into the sea have been built. This solution makes it possible to get rid o f treated water but poses two problems: safeguarding non-conventional water resources, and whole treatment process cost.

In some areas, re-using treated water necessitated dealing with several issues: water quality (see the paragraph above on WWTP saturation), farming restrictions, treated water salinity, and cost o f transfer. Currently only 29% o f water volumes are re-used (for the irrigation o f 9,000 hectares, including 760 hectares o f golf courses, and 340 hectares o f parks). The dialogue, coordination, exchange o f information between ONAS and the departments within the Ministry for Agriculture in charge o f irrigation are insufficient. The integration o f treatment station projects and irrigated perimeters i s poor. The El Attar WWTP project has been quickly abandoned. The lack o f an institutional organization did not allow for solving the problems that emerged.

Sludge

Sludge produced in large quantity (128,000 m3/year in 2005) in the WWTP poses a problem o f retraction. The use in agriculture was prohibited for many years because o f delays in the drafting o f appropriate regulations (including decree and specifications)

Odors

Nauseous gases are released from treatment stations, and can have detrimental effects on the surrounding areas, when worn water has remained for long periods in the network or when WWTP has to deal with operational issues (saturation, sand formation in basins, etc.)

This situation i s very inconvenient for ONAS, because i t a major issue o f friction with neighbors and even road users. ONAS deals with the issue through various temporary and preventive measures, or by using masking agents (pulverization o f scented substances), but the problem i s not really yet solved.

Industrial wastewater

Approximately 20% o f the pollution that treatment stations have to deal with comes from the industrial sector. In some cases, this pollution has largely contributed to WWTP saturation. Industrial water was also at times the reason treated water was not re-used in


agriculture (color o f the water, presence o f chemicals incompatible with re-use purposes, etc.). Tunisia’s regulations require that manufacturing industries pre-treat their used water before discharging it into the sewerage system (see discharge standards), but in practice, and in spite o f incentive policies (FODEP) and ANPE coercive action, industrialists continue to discharge their used water into the sanitation network, and thus in water treatment stations. A new policy must be adopted to correct this problem.

Discharge standard poorly adapted; high level of treatment required

The Tunisian discharge standard NT106.002 distinguishes three types o f receiving environments (maritime, hydraulic, and the public sewerage systems) without taking into account their specificity and fragility. The standard relates to a very broad range o f biological, physicochemical and bacteriological parameters. Some parameters are very strict and require very thorough and expensive treatments, often without justification for the protection o f the environment considered. To circumvent this problem, ONAS, in i t s tender documents for treatment stations, includes only the most important parameters, and those that can be reached through secondary treatment without supplementary cost. This approach creates a major problem between ONAS and ANPE in relation to impact assessments approval. Indeed, ANPE strictly requires respecting all standards without consideration o f cost. The modification o f the discharge standard NT106.002 i s an urgent matter.

ONAS overstaffed work force

The operating scheme chosen by ONAS, without significant changes since i ts inception, relies on the private sector for most studies and practically all the works; while ONAS carries out the facilities operation and maintenance activities, as well as project design and construction supervision. This scheme explains the high number o f employees.

The ratio o f 4.13 agents for 1,000 customers i s very high for a company that only operates in this sanitation sector only. The staffing structure shows a low ratio o f staff to managers (1 1%) and a high ratio o f supporting staff (73%).


Table 8: ONAS staff in 2006

Total number of staff Managers

Line managers Supporting staff

Number of customers Ratio including customers/subscribers to network operated by private sector

Number o f staff for 1000 customers Number of customers for one staff

Ratio customers/subscribers to network operated by private sector not included

Number o f staff for 1000 customers Number of customers for one staff

Number YO 4,99 1 528 11% 822 16%

3,641 73% 1,340

3,7 268

4,13 242

The number o f employees in ONAS headquarters and in the greater Tunis office represents 42% o f the total. Thus, there i s a strong concentration in Tunis, particularly in headquarters.

The technical supporting staff (headquarters not included) represents only 54,3%, while their type o f activity usually requires the largest number o f staff.

The current structure should be re-examined and optimized in order to reduce staff cost.

ONAS organization

ONAS organization chart included numerous functional positions with rigid human resources management and distribution o f tasks, to a point that negatively affected i t s effectiveness. The organization was characterized by a strong, yet unjustified and poorly managed decentralized structure, which contributed to ONAS overstaffing.

In 2005, ONAS worked out a new organization chart implemented on July 1, 2007. The number o f functional positions went f rom 1 , 168 to 646. This new chart allowed better use o f competences and to the mutualization o f the means o f production and human resources. The creation o f a new “Central Department for Purification and Valorization” and o f a division “Purification” o n the regional leve l i s likely to improve the treatment activity which has been previously somehow neglected. The marketing function has also been given increased importance through the creation o f a specific department devoted to that function, and a Quality Department.

The new organization chart will most likely contribute to improve ONAS operations effectiveness, but if it i s not accompanied by a staff reduction to bring i t to the level needed to perform the required tasks, i t will have in the short run only very limited impact. Solutions should be found to achieve this goal.


Administrative procedures are lengthy and require personnel and human energy (several signatures are needed for the same document). The development o f computerization, already started (with many applications), should result in simplification o f tasks and increased effectiveness.

Lengthy delays in project realization

Sanitation works are important for both the development o f the sector in order to cope with urban and economic development, and for the rehabilitation and renewal o f existing infrastructures. I t has been observed that the time needed to realize a project i s too lengthy and thus incompatible with sector responsiveness. Indeed, the time necessary from needs identification to the decision to realize a project and set it in operation i s too long. The example o f EL Attar treatment station i s notable, even if it is an extreme case.

Several factors are responsible for these delays (procurement systems comprising fastidious studies, issues o f land ownership, administrative authorizations, particularly those linked to impact studies, etc.). These lengthy delays have consequences on sanitation costs. Indeed, project economic and financial benefits are postponed because o f delays in commissioning new pipes and connections (deceleration o f the growth in water volumes chargeable to consumers). Moreover, due to delays in the realization o f a new WWTP or extension o f a saturated WWTP, an environmental cost i s generated through polluting discharges on the receiving environment. Other costs are the financial costs generated by loan commitment fees. Finally, mention should be made o f social costs occurring because o f delays in job creation within the supplying companies; and the cost associated with ONAS staff members who were mobilized during the delays to work on the project. Moreover, the long delays needed for project realization do not allow the phasing o f projects, which would reduce their cost.

I t i s important to re-examine in detail the various causes o f these long delays, and bring appropriate and effective solutions.

Technological choice - Alternative sanitation

Current technological choices in relation to sanitation in urban areas are centered on the collective network and biological treatment stations (low load), with occasional tertiary treatment and disinfection. These choices are explained by ONAS’ desire to offer a reliable collective service that it controls well, having replaced the failing systems discovered when it was created. These systems often consisted in autonomous, individual or semi-collective, sanitation works managed by the owners themselves. This radical solution concealed the individual autonomous systems that were well-conceived and especially well- managed. In other countries l ike France, autonomous sanitation i s encouraged when the conditions o f the natural environment al low it (soil characteristic, presence o f groundwater, etc.). Municipalities are responsible for the control o f the autonomous facilities.


There i s an institutional vacuum in Tunisia with regard to the independent sanitation system sector. Indeed, an independent department in charge o f sanitation i s missing; whose mission would be to ensure that facilities are adequately managed by the private sector or the owners themselves, and make sure that draining, transportation and operation conditions o f sludge in the treatment stations are appropriate.

To solve the problem o f secondary treated wastewater retraction (‘ ‘escamotage’ ’), ONAS has built a certain number o f outlet channels to the sea. In other countries, water discharged into the sea by an outlet channel i s treated to the maximum at the primary level (sometimes even by physical treatment only). Thus, giving some thoughts to this issue may contribute to cost savings.

Wastewater treatment by lagooning i s rarely used in Tunisia (6 o f 95 existing WWTP in 2006), although more cost effective with regard to energy and maintenance. In the case o f small and medium-sized cities, this process can be beneficial on conditions o f access to cheap land (state-owned for example), availability o f waterproofing materials, and to design the lagoons adequately, and, in particular, to discharge the sludge on a regular basis.

Limits and deficiencies in rural sanitation

Individual connections in drinking water supply will generate health problems

With the development o f individual c,onnections for drinking water supply, the issue o f sanitation will gradually arise in rural areas l ike that which occurred in urban areas. On the institutional level, rural sanitation does not fall within ONAS’ competence. ONAS prepared a sectoral study that i s part o f the rural sanitation strategy (1999). This study identified a f i rst set o f 30 rural sanitation centers, and 4 pilot centers, have been developed while 12 others are envisaged.

Institutional deficiency for rural sanitation

ONAS operates temporarily the first 4 sites on a pilot basis. A final solution must be found in order to increasing ONAS obligations. Indeed, ONAS cannot invoice sanitation services in rural areas. Currently, there i s an institutional vacuum with regard to the collective or individual rural sanitation sub-sector.

Financing the collective works operating costs and maintenance

There i s no financing plan with regard to the operating costs o f rural sanitation collective works. Investments are made by the state, as i s the case o f urban areas.

Adopting technical solutions adapted to rural areas

Specific technical solutions must be implemented with regard to sanitation in rural areas. Indeed, urban systems are not always adapted to rural areas because o f low levels o f


water consumption (spatial dispersion, consumption habits, type o f housing, lots size, presence o f animals, etc.).

W.2 Common limits and deficiencies

Synergy between various drinking water supply operators and sanitation

In most countries, drinking water supply and sanitation fal l within municipalities’ competence, and they either directly manage these services, or entrust them to a public regional company or a private company. Thus, these two activities are generally managed by the same entity, public or private. There may also exist, a group o f municipalities constituting an association that manages two sectors.

In Tunisia, and for historical reasons inherent to the development o f the two water and sanitation sectors in urban areas, three different companies, SONEDE, ONAS and DGGREE, manage both.

Because o f similarities between SONEDE and ONAS’ respective activities, and their impact on each other, there are several areas o f synergy that could be exploited in various institutional and organizational forms.

SONEDE collects water from the natural environment, transports it, treats it, and distributes it. After use by customers, ONAS takes over the water circuit by collecting, transporting, treating wastewater and then discharging treated water into the natural environment. Thus, the two enterprises take turns in their intervention on the water circuit . SONEDE and ONAS have share common features:

Both are state-owned enterprises providing a public service; Both operate nationwide; Both are represented simultaneously at the regional and local levels, independently o f each other (even in small communes); Both have the same customers (or potentially the same); Their infrastructures share the same road, side by side; Drinking water and sanitation supply systems bottom plans are the same; The water and sanitation invoice i s the same; The invoice basis i s the same for customers connected to water supply and sanitation systems; and Billing i s performed by SONEDE for both companies

SONEDE and ONAS respective activities have an impact on each other:

SONEDE collects water from the natural environment and ONAS discharges it in the natural environment. Untreated or poorly treated used water discharged in the natural environment may pollute water resources used for drinking water supply;


The creation or increase o f drinking water supply branch pipes by SONEDE generates a sanitation problem and confronts ONAS with a fait accompli, forcing it to develop the corresponding infrastructure; the reliability o f SONEDE’s metering by SONEDE water meters has an effect on SONEDE’s revenues o f course, but also on those o f ONAS. Consequently, SONEDE’s pol icy regarding meter replacement has an impact on ONAS billing; and SONEDE’s water saving policy has an impact on ONAS billing.

In spite o f these similarities and the impact o f one company’s activities on the other, SONEDE and ONAS relations are l imited to a contractual relation with relation to billing, and’to a representation in their respective board o f directors.

There i s no consultation about planning between the two utilities. There are practically no common actions, not even with regard to training. A customer who pays his water and sanitation bill at a SONEDE counter i s referred to ONAS offices to obtain an explanation on his invoice, as wel l as for any other complaint.

In a same city, ONAS and SONEDE offices are generally very distant geographically from each other.

There i s no consultation on tariff policy, and even some competition between the two companies when they introduce a request for tariff revision to the government, because the government generally doesn’t authorize a tar i f f revision to be implemented at the same time or even the same year by both uti l i t ies. There i s also no consultation on policy regarding private sector participation (PSP); and there are even clear differences between the two companies’ positions with respect to PSP. Yet, a common pol icy would be in the interest o f private enterprises participation, since they could be contracted for the two sectors at the same time, and thus reduce their operating and consequently service costs. Moreover, there i s no consultation on human resources policy, as wel l as with regard to the establishment and updating o f the DRINKING WATER SUPPLY and sanitation network cartography. Finally, there i s no consultation in relation to customer service (there i s no common telephone support customer center).

Cost recovery and tariffs in urban areas

Cost recovery

The Water and sanitation sectors are confronted with different situations in relation to cost recovery. During the last few years, SONEDE has realized a net operating profit, though modest and without contributing much to self-financing. Operating income, mainly from user fees, allowed SONEDE to recover al l running costs, including amortization. However, the operating margin dropped in relative terms as the operating ratio evolution shows, which decreased from 1.07 in 2001 to 1.03 in 2005 (Graph 1). The wage bill increased in a proportion higher than operating income, f rom 41% in 2001 to 45% in 2005.


Graph 1 : SONEDE performance and personnel expenses (2001-2005)

RE: Operating Ratio: Operating Income/Operating Costs SPE: Salaries/Operating Income

SONEDE has benefited from tariff increase on a relatively regular basis (once every other year), by 3.2% on average per year between 1998 and 2005, in addition to the tariff structure readjustments carried out in 2005. These readjustments had a positive impact, in conjunction with an increase in water consumption, on operating income that increased by almost 3.7% per year on average during the 2001-2005 periods. The tariff level and structure readjustments kept water tariffs on a more or less stable level in real terms since 1998'.

On the other hand, ONAS has experienced financial problems since 1990, with operating loss occurring almost every year, and an operating ratio well below 1 .OO (Graph 2). Since 2003, the operating deficit rose to approximately 34 MDT on average, and operating income recovered only a small share o f operating costs that fe l l from 90% in 2001 to 80% in 2006, in spite o f savings on cost made since 2004. Salaries, by far largest expenditure, represent more than 50% o f the operating income. Though high, this relative burden i s due to a legacy that goes back to the end o f the 1990s, Indeed, ONAS went through a period o f strong employment growth (permanent and temporary) o f almost 30% between 1998 and 2002, following i t s restructuring in thirteen regional departments. This reorganization contributed to the substantial increase in the wage bill, which, to this date continues to be a heavy burden on ONAS, in spite o f efforts deployed to control them, in particular those relating to overtime and the allowance for standby duty.

' The evolution of water fees in real terms depends on the period for which the calculation was made, given that tariff readjustments were made on a rather irregular basis.


Graph 2: ONAS performance and personnel expenses 2001-2005

1 .o 0.9 0,8 0 7 0 6 0 5 0 4 0,3 0 2 0 1 0,o

RE

m SPE

t ~'I # " I RE: Operating Ratio: Operating Income/Operating Costs

SPE: Salaries/Operating Income

In addition, ONAS' financial situation was handicapped by the insufficiency o f tar i f f adjustments, which were authorized only twice since 1997, in 1998 and 2003, with, as a consequence, a fal l in real terms with regard to tariffs, at a rate exceeding 1.5% on average per year during 200 1 - 2005. ONAS income increases indeed, particularly because o f the increase in the number o f customers, but the increase in running costs largely exceeded that gain.

The insufficiency o f sanitation tariffs i s illustrated by the difference between income and running costs per m3 o f consumed water. This variation was positive for drinking water (Graph 3) and negative for sanitation (Graph 4). While the average costs o f sanitation are higher than water, the average revenue for sanitation hardly exceeds 75% o f that o f water. The wage bill had certainly a great impact on the deterioration o f ONAS financial situation, but keeping l o w tariffs per comparison with drinking water also had a large impact.

Graph 3: Income and water cost /m3 SONEDE 2001-2005

0,600

0,580 ,,* B

m = Revenurnyen

Coirt m y e n

e " 0,560 , 0,540

0,520 - 0,500

0,480


Graph 4: Income and water cost /m3 SONEDE 2001-2005

~

’ 0,600 I 0,500

0,400 1 0,300

0,200 i o,loo ~ 0,000 I

+ Revendm3 I Coirtmyen ,

Pricing

Several considerations influence the establishment o f tariffs in Tunisia: cost effectiveness, efficient use o f rare hydraulic resources, solidarity between the various socio-economic segments o f society, equity and interregional solidarity. Reconciling these diverse objectives is not always an easy task given that drinking water supply i s a public service, citizens sensitivity to tari f f readjustments, and difficulties in targeting households deserving to be subsidized.

SONEDE tari f f system makes the distinction between the non-tourist use (domestic, commercial, industrial and administrative), tourist use, and supply by terminal fountain. For the first type o f use, tariffs are progressive. Tariff structure was simplified during 200. Readjustments with only one tarif/m3 applied to each bracket o f consumption, whereas in the former system two tar i f fs were applied to each bracket except for the f i rs t unit. Water invoices have two components, a variable component that depends on the volume o f consumed water, and a fixed component. The variable tari f f structure is very progressive, the highest tariff being six times superior to the lowest one. However, taking into account the fixed component in the user fee, the charge per m3 within the highest bracket i s less than twice the lowest one.

ONAS distinguishes between water consumption for domestic, tourist, and other uses. The tariff structure applied to domestic use i s even more progressive than that o f SONEDE, the variation being twenty times more important than the lowest and highest tariffs. However, taking into account fixed costs, the variation i s only three times (between approximately 0.150 DT and 0.450 DT/m3). The tourist sector pays the highest tari f f (0.979 DT) and the tari f f applied to other activities varies according to the degree o f pollution (between 0.521 DT and 0,814 DT/m3). Once again, the tariff structure i s such that consumers in the consumption bracket 21-40 m3/quarter, and not those o f the lowest bracket, which are the most subsidized.


The Tunisian tariff system, known as a "progressive" tar i f f system, i s also used in several other countries, though OECD countries, for example have a uniform tariff system. Indeed, in countries like France, Hungary, Holland, Sweden and Australia, the totality or the majority o f water and sanitation companies charge their customers the same volumetric rates. Other countries, such as Spain and Turkey, have a progressive system, while Japan and the United States have more diversified tariff systems, with some companies/municipalities using progressive pricing systems and others flat rates. Moreover, the tendency i s to base pricing on marginal costs considered by economists as the best-cost indicator for additional drinking water resources. The Tunisian system has not yet integrated this indicator, and uses only the average cost.

With regard to drinking water, tari f f readjustments done o n a more or less regular basis allowed SONEDE to recover i t s operating costs and make some profit. The operating income, primarily from water sales and connections, exceeded running costs consistently (see Graph 3 above). Moreover, SONEDE generated significant other financial income (from financial products), which helped strengthening its position. However, because o f regular and structural increase in operating expenses, the surplus margin is very fragile and SONEDE i s likely to have difficulties covering these expenses if tar i f f readjustments are insufficient. Although the 2005 tariff reorganization has generated substantial income, increases in tariffs are becoming increasingly necessary to maintain SONEDE's financial balance.

ONAS' financial standing has been more alarming given the persistence o f i t s deficit that began some years ago. This imbalance originated because o f a considerable increase in operating costs, in particular relating to personnel in the beginning o f the 2000s, but the lack o f tari f f readjustments over the past 10 years has exacerbated the situation considerably. In spite o f cost-cutting initiatives, the lack o f tariff increase i s increasingly negatively impacting the quality o f sanitation services.

The tariff structure includes cross subsidies, and about 92% o f al l customers take advantage o f it. For drinking water, these subsidies benefit more (in both relative terms- and absolute terms) those customers consuming between 40 and 70 m3 quarterly, compared to those consuming less than 20 m3 quarterly (which represents more than 40% o f the total number o f customers). In rural areas (managed by SONEDE), the combined effect o f higher costs and lower fees due to lower consumption in these areas, means that consumption in rural areas i s largely subsidized. The objective o f cross subsidies between consumption brackets i s solidarity between the various income categories. However, the distinction between brackets o f water consumption doesn't coincide with a difference in income. Indeed, thousands o f shopkeepers, small manufacturers and craftsmen consume small quantities o f water and benefit from subsidized tar i f fs. In addition, thousands o f secondary residences also benefit from the same tariffs. Moreover, several l ow income households pay the tar i f f that applies to the 20 to 40 m3 brackets because they share the same connection as they live in the same building or housing development. Another factor not taken into account i s the size o f the households, which should be based in principle on the volume o f water used per capita, and not on the volume consumed by the whole household.


These are the main limiting cross-subsidies as a means o f social solidarity. These limits could be avoided if there are alternatives that allow directly for targeting o f low-income households. Unfortunately, such alternatives are expensive and difficult to manage. They require reliable means o f identification o f the poor population and are likely to lack transparency in implementation. Some countries succeeded in targeting the poor without using differentiation through tariffs; the best known case i s Chile where many poor people are helped by municipalities that subsidize the water and sanitation bills (more than 500,000 beneficiaries). In Belgium, for example, a minimum o f water i s provided free o f charge to users, beyond which they pay a standard rate that i s not subsidized. Although direct targeting constitutes the most effective policy, implementation conditions in Tunisia are yet not in place. The Ministry o f Social Affairs keeps a large l i s t o f needy families, but it i s far from including al l the households needing subsidies. The targeting o f subsidies for basic foodstuffs, which are even more important than water and sanitation, has not yet been developed.

The Tunisian tariff system is also characterized by interregional solidarity and i s applied uniformly to the whole country without distinction between rural and urban areas. Thus, differences in supply cost between regions are not reflected in tariffs. This situation has led to regional cross subsidies. The attempts at regional cost accounting by SONEDE show that operation deficits are usually recorded in governorates with weak incomes and surpluses in the governorates with relatively high incomes. The estimates for 2005 show that the ‘deficit districts’ are those o f Kairouan, Beja, Jendouba, l e Kef, Zaghouan, Siliana, Mddenine, and Tataouine. These imbalances are likely to increase in the future with the increase in investments toward improving drinking water quality in the South through seawater desalination.

In addition, tariff differentiation between economic activities and domestic use are not l ikely to improve revenues from water and sanitation in an important way, considering the l o w number o f consumers belonging to the lower brackets o f water consumption (an amount lower than 2 MDT for water, in total). The negative reaction expected on the part o f these operators would be indeed too strong compared to the modesty o f additional revenues that the increase in user fees would generate.

$

Once again, direct subsidies are preferable f rom an economic point o f view to tariff subsidies because the latter create distortions compared to costs and do not inform and sensitize users on the real cost o f drinking water. However, targeting poor households and transparency remain the main issues o n the regional and households levels. O n the other hand, in the case o f water for economic use, in particular tourism, regional differentiation is feasible and fair. The establishment o f hotels in seaside resorts i s very important for tourist activity. If i t i s accompanied by an improvement in water quality (desalination), the hotel industry should pay their share o f the extra cost. Fear that such a pol icy is likely to harm the industry’s international competitiveness tends to be exaggerated. Indeed, on the basis o f water consumption o f approximately 400 l/day/person, the extra cost would be about 0.3D with 0.4D by bed per day, which would be a relatively modest and bearable increase.


Cost recovery & tariffs in rural areas (AIC/GIC/GDA).

DRINKING WATER SUPPLY cost recovery in rural areas must be put in i t s context. It i s initially necessary to determine the size o f the AIC/GIC/GDA. The distribution o f the turnovers generated by the AIC/GIC/GDA (from a sample o f more than 800 AIC/GIC/GDA) i s as follows:

- 16% generate a turnover (( CA ~<1,200 D/year (id less than 100 D/month) 50% generate a turnover (( CA ))< 3,000 D (id less than 250 D/month) 69% generate a turnover <6000 D (id less than 500 D/month) 3% are important GIC/GDA with a CA> 60,000 (5000 D/month)

Consequently, this i s essentially a very small AIC/GIC/GDA with very small revenues.

The tariff system applied by the AIC/GIC/GDA i s either a function o f the consumed volume or a monthly flat rate appraised without metering. A fixed amount determined without consideration o f the level o f consumption i s sometimes added to the system based on real consumption. In addition to tariffs, the beneficiaries sometimes pay an annual subscription fee to AIC/GIC/GDA between 500 Millimes and 5 dinars. The average subscription fee i s 2 dinars.

The average tariff applied by AIC/GIC/GDA varies in broad proportions; i t i s on average 0.687 DT/m3; the lowest tariff being 0.094 dinars/m3 and the highest 2.330 dinars/m3.

The price o f water depends on many factors such as the origin o f the water resource (SONEDE or not), topography, energy expenses, and management methods (optimization o f staff costs, etc.).

Water prices are in general much higher than those practiced by SONEDE for the low brackets of consumption (0-20 m3 and 20-40 m3), which relate to this category o f consumers. (SONEDE tariff i s 0.140 DT/m3 for the 0-20 bracket, and 0,240 Dinars/m3 for the next bracket (21-40) + fixed fee o f 3.300 DT/m3/quarter.

Water tariffs are fixed annually for each AIC/GIC/GDA, based on an estimated budget. Generally, CRDA services provide their assistance to the AIC/GIC/GDA to prepare the budget. The AIC/GIC/GDA inform regional authorities and the CRDA o f the new tariffs. Legally, the AIC/GIC/GDA do not need the authorities’ agreement to implement the raises, but they usually await the authorities and CRDA’s reaction before doing so. The AIC/GIC/GDA does not always apply the tariff o f the estimated budget especially when it means higher tariffs.

AIC/GIC/GDA financial statements financial statement analysis for year 2005 indicates that only one AIC/GIC/GDA generates water sales revenues slightly lower than operating expenses without increasing maintenance costs carried out during the year, and only 5 AIC/GIC/GDA do not cover their operating expenses plus maintenance costs through their revenues.


On the other hand, if the AIC/GIC/GDA carry out the necessary maintenance activities, calculated on the basis o f the investment ratio generally admitted for appropriate maintenance, half o f these AIC/GIC/GDA wi l l not have enough resources to cover their operating expenses.

For an AIC/GIC/GDA to be completely independent and financially autonomous, it must not only have enough resources to pay for i ts operating and maintenance expenses, but also generate enough annual cash-flow for the renewal o f facilities already amortized. Generally, the tariff should be 2.5 times higher in order to be able to fund the amortization and carry out the necessary maintenance.

In conclusion, the AIC/GIC/GDA manage to cover their operating expenses without problems when facilities are s t i l l new, but they wi l l be very quickly confronted with breakdowns due to insufficiency in maintenance, and after ten years, they will lack the resources necessary to renew their equipment and even parts o f civil engineering works. Currently there i s no sanitation fee in rural areas, because collective services are not developed. As for individual sanitation the owner pays for expenses or might even

’ perform the activity himself.

Financing investments

In addition to investments in rural projects, drinking water services were financed entirely by SONEDE resources from user fees. Thus, for a long time SONEDE operating costs were financed without state intervention. The state has, however, contributed to the water sector regular and stable development. Although SONEDE’s programs funding l ies within the scope o f the country’s economic and social development plans, financing by users contributed to the expansion o f the sector and the improvement o f services in a way largely independent from the country’s macroeconomic situation and public finance. The financing o f SONEDE investhents i s ensured primarily through i t s gross self-financing margin, and secondly, foreign loans, contributions fiom third parties, and the state with regard to rural projects.

External loans, in addition to SONEDE own resources, have contributed to finance mainly new drinking water supply capacity extension projects in large urban areas (in Sousse and Sfax in particular). With regard to investments for rehabilitation and renewal, SONEDE policy was to ensure their financing through i t s own resources only, after deduction o f the share necessary for new projects. SONEDE financing priority i s thus for new projects, while financing for rehabilitation and renewal i s made residually, according to the urgency o f the works.

Sanitation investments are financed mainly by the state and external loans, ONAS self- financing capacity hardly exceeding 8% in the last few years. Considering the extent o f i t s operating deficit, ONAS may not be able to ensure i ts self-financing capacity in the very near future.

Investments in rural DRINKING WATER SUPPLY are entirely financed by the state, and are either managed by SONEDE or the AIC/GIC/GDA. Some collective sanitation


systems set up by ONAS on behalf o f the state, as pi lot projects, were also financed by the state. As to individual sanitation, the beneficiary finances it.

Regulation, autonomy and operators performance incentives

SONEDE and ONAS are respectively under the official authority o f the Ministry o f Agriculture and the Ministry o f the Environment with whom they collaborate regularly. The two operators consult with the relevant Ministries and the Government about their activity and investment plans.

With regard to tariffs, SONEDE and ONAS submit proposals for readjustment to the government, who takes the decision, generally taking into account price trends and the macroeconomic situation, as well as the prices o f the various services and basic commodities that are under its controlling authority. The Ministry o f Finance discusses costs itemization when submitting requests for tariffs increase.

The two operators are in a monopoly position, each one in i t s sphere o f activity, which results in the absence o f competition. To remedy this situation the state launched the ‘program contracts’ which lay down performance objectives such as the distribution networks coverage rate for the country, labor productivity, etc., in exchange o f government obligations, in particular regarding tariff increases and mobilization o f investment resources. These contracts encourage the two companies to better define their objectives, which are generally in line with the five-year development plans objectives. However, these program contracts represent, in fact, a framework for discussion and negotiation between the state and the operators, and do not replace the commitments that partners would make to an actual regulatory authority. The performance incentives solution remains valid as long as an independent regulatory authority i s not in charge o f overseeing the operators’ activities, and in evaluating tar i f f proposals and following the operators’ relations with private sector partners.

Constraints and limits in SONEDE and ONAS management autonomy

The two companies were created to provide more flexibility in sector management and to better meet the citizens’ needs in terms o f service quality and time. An analysis o f SONEDE and ONAS operating processes shows that in fact their autonomy has narrowed through the years.

Prior approvals by relevant authorities and other ministries exerting a de facto specific supervision became more and more the rule. The room to maneuver in terms o f management became, consequently, increasingly limited.

Indeed, the companies cannot recruit employees with the required profile, without prior approval. In practice, they can’t f i re a jobholder who became a burden the way a private company could (even by providing compensation to that employee).

Water and Sanitation Strategy in Tunisia. Final Report ‘50

Beyond a certain amount, the company cannot enter into a business contract without the Markets Higher Commission (Commission Supe‘rieure des March& -CSM) prior authorization. This amount i s extremely l o w for studies (200,000 TD). However, as a [feasibility] study i s the f i rs t stage o f a project, the implementation o f a project depends then on prior authorization by the CSM. This i s a multi-stage process. The fol lowing stages are necessary, as donors (rightly) request a restricted l i s t o f consulting f i rms: approval o f the ‘demonstration o f interest’ documents, approval o f the pre-selected consulting firms l i s t and tender documents, and then a report o n examination o f the tenders.

Both SONEDE and ONAS don’t have the possibility o f recruiting any particular expert/consultant recognized for his competences in a specific area o f concern for the company. Both must, instead, choose between three experts and the lowest bidder among them. Thus, they must already know three qualified experts for the issues at hand, and the lowest bidder i s not necessarily the most qualified. Moreover, this procedure requires that the amount o f the consulting fee doesn’t exceed 15,000 TD, VAT included. This amount i s already very restrictive for the recruitment o f a high level expert, especially taking into account the current parity o f the Dinar with the Euro. SONEDE and ONAS are thus limited to work with in-house consultants who usually have only a partial view and knowledge o f some issues, or they resort to consultants that donors would be willing to hire for them (this i s not always possible).

I t seems that management executives in both companies are generally too busy with their daily management tasks to be able to devote enough time to reflect o n a vision for the future and on the policy and strategy to implement it.

Both companies are in a difficult situation. Indeed, they sign contract programs for five years with their respective supervisory authority making many commitments in terms o f performance and objectives to meet. These contracts are not balanced. O n a fifty page contract, only one page, sometimes hal f a page, i s devoted to engagements o f the other contracting party, which i s the state, and sometimes in vague terms, especially compared to the precise objectives that the company must accomplish. Moreover, both companies have little managerial autonomy and control, in particular regarding project completion dates and objectives.

Tariff readjustments are subject to the relevant authority prior agreement, and other de facto supervisory entities. The refusal o f a tariff readjustment request i s generally based on external reasons. This can be understood, but the refusal i s not accompanied by a revision o f the program-contract objectives. Moreover, commitments made the state within contract programs concerning tar i f f readjustments are not implemented, or partially only.

Limited participation of the private sector

The participation o f the private sector in drinking water works and sanitation operations remains weak, but to various degrees according to each company.


SONEDE contracts private companies to perform civil engineering works and supply equipment and others. SONEDE staff performs most studies; only some specific studies assigned to consulting f i rms. Recently SONEDE assigned some secondary tasks to private companies such as guarding and cleaning SONEDE’s main administrative buildings. Some specific connections are entrusted to .the private sector without SONEDE being really convinced o f the usefulness o f this approach. An attempt was made to involve the private sector in leaks detection, but SONEDE concluded that i t could perform a better job and has already ended private sector employment in this domain. SONEDE prepared a study to identify potential activities that can be assigned to the private sector, but i t s conclusions are rather limited in this regard.

In fact, SONEDE does not appear to be convinced o f the benefit it can draw from private sector involvement, and questions the capacity and competences o f the private sector. SONEDE reluctance was confirmed by some non-conclusive experiments. SONEDE prefers to perform most tasks i tse l f rather than to make some efforts in order to contribute developing the private sector.

In addition, SONEDE i s preparing a Build, Operate, Transfer (BOT) project for a desalination station in Djerba (the first o f i t s kind in Tunisia). The invitation to tender has not yet been launched.

For more than ten years, ONAS was interested in the participation o f the private sector in sanitation operational activities. The first contract signed by ONAS with a private operator was in October 1996. ONAS has only used sub-contracting; the other forms o f private sector participation (operation and management contracting, leasing, concession, etc.) have not yet been tested. On the whole, the private sector operates 1512 km o f network (that i s 12% of the total, 7 wastewater treatment plants, and 40 pumping stations. Current contracts are based on means and not on results, an approach that limits the private sector innovative capacity and attempts to achieve cost reduction.

In August 2004, the law concerning ONAS was amended to allow the state to entrust a private operator with a concession and operate sanitation works; and an implementing decree was issued in December 2005 fixing the conditions and procedures for granting concessions for the financing, building and operation o f sanitation systems to private entities.

In June 2007, another addition was made to the law on ONAS authorizing it to grant concessions for the exploitation o f i t s sanitation systems and for certain services which i t provides within the framework o f i t s mission, for a 30-year maximum duration.

This legal arsenal was necessary for ONAS to consider new forms o f PSP involvement other than subcontracting.

ONAS has issued a notice o f pre-qualification for a BOT concession regarding the two treatment stations o f El Attar I1 and El Allef. The pre-qualification process i s s t i l l ongoing.


ONAS experience with private sector participation i s conclusive, but remains very limited in terms o f scope (1 1% o f the network only) and type (subcontracting).

This experience has already resulted in the reduction o f operation costs by 15 to 20%, according to an ONAS preliminary evaluation. However, i t i s necessary that ONAS personnel be involved and that a reduction o f ONAS manpower be implemented, for this policy to be successful.

Given ONAS long experience, PSP policy must be an integrated pol icy that takes into account al l aspects o f the problem, and should not an isolated and limited policy. It must be the expression o f a genuine strategy aiming at drinking water supply and sanitation costs reduction. Appropriate solutions must be found for SONEDE and ONAS personnel in order to carry out the reduction o f personnel costs. Moreover, SONEDE should make some efforts to change the current prevailing culture with regard to the private sector.

Strengthening customer relationships

SONEDE and ONAS customer relationships are primarily about requests for connection, billing and collection, as wel l as complaints. There i s practically no customer satisfaction survey (the f i rs t survey o f this kind i s currently being conducted by SONEDE). Reports about complaints are succinct and lack analytical substance, in particular with regard to the degree o f customer satisfaction, response time as wel l as the lessons to be learned in order to reduce the number o f complaints and increase the satisfaction level.

Since these companies are often perceived by the citizens as a (government) administration rather than a business, collective requests for network extension are often channeled to the supervisory, regional, and/or local authorities for their transmission to SONEDE and ONAS. The two companies should fo l low a pol icy that i s more customer- oriented pol icy than i s presently the case.

REFORM OPTIONS

Many challenges await SONEDE and ONAS in the years to come, and we may be entitled to ask: A r e the institutional and organizational settings appropriate to able to face them?

Challenges also await the drinking water and sanitation sector in rural areas.

The following is a non-exhaustive list o f challenges:

Challenges for the drinking water sector (managed by SONEDE)

SONEDE, which i s responsible for drinking water supply to the whole country, will see i t s level of activity increase in the future. In 2005, drinking water consumption was 325


million m3 per year and accounted for only 10% o f all uses o f water. In 2010, 2020 and 2030, it will respectively reach 380, 450 and 500 million m3 per year, which corresponds to 14%, 16% and 18% o f all uses. I t i s estimated that by, 2030, the number o f costumers wi l l reach 2.6 million and the volume o f water consumed would exceed 500 million m3. Since i t s creation, SONEDE has multiplied the number o f i t s customers by seven to now reach the figure o f two million.

Sources o f water, which were physically closer, are now more distant and water needs to be transported on longer distances that can reach hundreds o f km and necessitates more treatment.

Consumers’ way o f l i f e underwent a radical change in turban and rural areas. Thus, after having achieved the goals in terms o f quantity, SONEDE must meet the needs for quality and safety in the near future. Consequently, the most important challenges awaiting SONEDE in the years to come are:

Increasing cost o f water resources because o f longer transfers; Introduction o f desalination to increase resources but also to improve water quality; Securing supply, particularly to large urban centers; Renewalhehabilitation and extension o f existing infrastructure capacity; Supply to peri-urban neighborhoods; Meeting the needs for quality required by increasingly well-informed customers; Dealing with overstaffing and human resources management issues; Managing demand; Modernizing SONEDE management; Autonomy and management tools; Putting in place new information and communications technologies (NICT) as well as new management tools. Supplying least cost services; Tariffskosts recovering and their mode o f regulation; Financing the sector in the future; Long delays for project completion which prevent better phasing o f projects and consequently a better use o f financial resources; and Management o f water extremes (droughts) and potential impacts o f climate change;

VII. I Challenges for the sanitation sector (managed by ONAS)

ONAS was created to take care o f sanitation in all urban areas, and in spite o f sanitation service, good coverage rate in cities (87,8%), ONAS’ service rate for the total urban population i s only 76%. Indeed, ONAS hasn’t yet reached small cities. ONAS’ precarious financial situation will worsen when it reaches these cities because they are spread throughout the country, and the size and standard o f living o f their population reveal that water fees won’t cover the cost o f the service. A solution must be sought to solve the sanitation problem o f these cities.

’


ONAS will have to strengthen its presence in popular peri-urban districts (included in the 1 lth plan). Customers in these districts require higher than average operating costs (low water consumption and thus less self-cleansing) and generate less revenue than average.

In addition to making up for the lost time with regard to sanitation, ONAS must accompany urban, industrial and tourist development generated by economic development. This requires investments that are currently provided by the state. The question that emerges i s how long the state would continue to provide this support, in sufficient amounts, to accompany the development o f the sector that the country’s economic development would need?

Taking into account the geographical location o f large urban centers (on the coast or along large rivers), discharges are usually to fragile receiving environments, and especially impact tourism and water resources. Thus, respecting the standards for discharge quality becomes a pressing requirement. On the other hand, other environments are less fragile with discharge standards unnecessarily strict, which constitute an expensive burden on the state without a valid environmental reason. It is thus urgent to revise these standards.

The quality o f treated water i s often poor because industrial wastewater discharges are not in conformity with discharge in networks standards. Industrial plants don’t perform wastewater pretreatment, or their treatment facilities don’t function appropriately. Incentive mechanisms (FODEP) for industrial plants to set up pretreatment systems have only partially solved the issue. The improvement o f the quality o f purified wastewater can be performed only with an adequate and effective pol icy to resolve industrial waste problems.

Water sub-products from treatment (treated water and sludge) are considered economic resources if they are re-used, but harmful if not. Neutralizing harmful effects to preserve the water resource and protect the ecosystem generates additional expenses (sea outfall for treated water, sludge transport and discharges, etc.). The prerequisite to any water re- use i s to provide quality water with continuity in quality and quantity. This would o f course imply additional costs.

In 2006, ONAS was managing a significant number o f treatment stations (95). This number will continue to grow with future investments included in the 1 lth Plan. Treatment stations generate spending (amortization and operation expenses) but do not generate any additional resource (if there is no incidence on user fees). This situation will lead ONAS to optimize the choices made in terms o f treatment processes, the location o f WWTP sites as well as their mode o f operation; otherwise the quality o f treated water will be altered.

The time spent by used water in the pipes, poor self-cleaning conditions, and high temperature at certain times o f the year, cause nauseating gas emanation for nearby residents and road users bordering the works. In future projects, ONAS will have to take into account these environmental constraints, which will also result in additional costs.


ONAS carries out many tasks that are not part o f i ts official mission (rain water, rural sanitation, household waste, mosquito control, etc.). In principle the cost o f these activities are paid to ONAS by the state, but this i s rarely the case. This situation deserves to be clarified and codified.

In the old investment plans, ONAS gave priority to infrastructures development rather than to facilities renewal and capacity extension. However, most facilities built during ONAS’ first years are now saturated and they are sometimes ineffective. ONAS has to raise enough funds to finance the renewal o f i t s facilities.

ONAS’ amount o f activity wi l l continue to grow and extend geographically; SONEDE customers are prospective ONAS customers. In 2006, ONAS had 1.34 million customers, and SONEDE 2 million.

Discharge o f wastewater has increased, with a more complex pollution attacking a smaller and more vulnerable receiving environment, and seriously threatens groundwater resources, surface water, and the beaches.

In 2030, the volume o f water treated and recycled for agriculture i s estimated at 300 million m3 per year, this water needs to be transported and stored.

One can also ask the following two questions:

Will current ONASJinancing schemes that date back to more than 30 years ago, still be valid in the future, for ONAS itself and for the State? Some important choices have to be made.

Are the current tariffpolicy and regulatory systems viable for the sector or should they be revised for improved visibility, for the company and the State?

In short, challenges faced by ONAS can be summarized as follows: .

Extending sanitation coverage to small cities, which will cost more than expected corresponding revenues; Rehabilitating and extending sanitation systems, in particular treatment and pumping stations; Solving the overstaffing problem; Implementing without delay new information and communications technologies (NICT) as well as new management tools. Addressing issue o f tariffdcosts recovery systems and their mode o f regulation; Supplying least cost services; Addressing the issue o f subsidiednational solidarity and how to better target the beneficiaries; Sector financing in the future; Dealing with industrial pollution that saturates water treatment plants (WWTP) and hampers their operations;


Meeting the needs for quality required by increasingly well-informed customers (odors, mosquitoes, etc.); Increasing the re-use rate o f treated water and ensuring least cost discharge retraction o f treated water for health reasons, and for the sake o f economic activities (tourism); Finding technical solutions to water treatment sub-products retraction (sludge, gas, etc.); Pursuing the development o f sanitation infrastructure in un-serviced areas and new developments; Shorten project completion timeframe, for a more efficient phasing o f projects and consequently a better use o f financial resources; Addressing issue o f management o f extremes (floods); and Addressing issue o f activities performed by ONAS that are not part o f its mission.

WI.2 Drinking water and sanitation challenges in rural areas

With the achievement o f a high rural drinking water supply rate, future projects will have to target isolated and dispersed populations where the cost o f service is higher. The rural population already supplied with drinking water aspires to the SONEDE standard service (in terms o f design as wel l as management) with individual connections and a tariff based on the SONEDE tariff structure.

Even if, for the moment, the problem o f rural sanitation i s not as acute as for drinking water, the same public health hazards observed a few years ago in urban areas will be reproduced in rural areas when the level of consumption and residential concentrations increase.

Even though rural sanitation i s not part o f the ONAS mission, authorities invited the utility to pi lot projects in a certain number o f rural centers. Once realized, these projects have been operated by ONAS given the lack o f adequate institutional solutions. But ONAS cannot even reimburse i t s expenses through sanitation fees, because i t i s not allowed to collect them in rural areas. A recent study within the framework o f PISEAU I suggests that regional councils should be in charge o f rural sanitation, assisted by ONAS. This option deserves to be considered if regional councils are provided with the means to assume the task in question. Otherwise, ONAS will be pressured to take care o f rural sanitation, as was the case with some past activities (rain water, for example). Rural areas will be confronted with the fol lowing challenges:

Financing the maintenance and renewal o f rural drinking water and sanitation works; Changing the drinking water supply mode to individual connections, and applying SONEDE standards involving more investments; The transfer of rural DRINKING WATER SUPPLY systems will create a financial imbalance in the accounts o f SONEDE if it is not followed by adequate tariff readjustments; Difficulties in managing the GDA when the DRINKING WATER SUPPLY system reaches a certain size;


The need for rural inhabitants to assume responsibilities for the GDA; Assisting the GDA in modernizing its modes o f management and reporting; The management o f sanitation systems, in particular treatment and pumping stations as wel l as the collective network; The institutional problems in operating sanitation systems; and The financing o f sanitation services, particularly their operations.

WI.3 The need for reforms

Since their creation, SONEDE and ONAS have in general maintained the same structures and organization. Changes have comprised minor adaptations to the extension o f their interventions, and partly to the emergence o f technological innovations and new management procedures.

The current organization o f the sector on the institutional and financial levels prevent it from addressing the challenges above, which may involve risks o f deterioration in current assets. State support for the rural water and sanitation sectors cannot last indefinitely at the current rate. I t will be unable to meet needs for renewal (burdens on the compensation fund continue to r ise due to the prices o f hydrocarbons, cereals, milk and i t s derivatives, building materials, etc.), and for development.

Tariff increases have been very l imited or absent during the ten last years. Without these, and given the current organization, sanitation services cannot grow at a rate to meet future challenges. The current tariff pol icy for sanitation is not connected to the aims o f this sector. The poor financial standing o f ONAS has already had unfavorable effects on sanitation services in terms o f worsening quality.

Similarly, so that SONEDE can respond to the challenges to come, it needs tariff increases more substantial than those in the past. Indeed, SONEDE’s future challenges are l ikely to increase its costs, especially as the quality o f services has to improve through secure provisioning and improved water chemical quality. These increases are likely to be difficult to obtain under the current regulatory model.

The operators’ reaction to new needs tends to be slow, particularly in realizing projects. This i s due to several internal and external factors, such as the complexity o f the procurement system, the problems o f land, difficulties in ANPE authorizations and the centralized nature o f decision-making.

A reorganization o f the sector is essential for more efficient operation and sustainable financing.

Reorganization must address overstaffing, the modernization o f sector management through more concerted use o f new technologies (SIG, data processing, and teleprocessing), a revision o f heavy administrative procedures with costs that cannot be


justified, an improvement in responsiveness to emerging project needs, and a clarification o f the role o f ONAS with regard to activities outside i t s mission, such as rain water.

I t i s thus essential to proceed to a readjustment to reap maximum benefits from technological and management innovations, to develop the capacity o f human resources, and especially to draw maximum profit from private sector knowledge. I t is also necessary to maximize synergies between drinking water and sanitation. In most countries, these two sectors are managed by the same entity.

The development o f rural drinking water supply and the problems that will result in a few years for sanitation require an institutional adaptation to better meet the challenges above.

Any possible reform o f the drinking water and sanitation sector institutional system must take into account the existing system and the difficulties o f transition. Five options for reform are presented below, adapted to the Tunisian context.

VIII.1 Regional water and sanitation companies with a national company for production and supply

Given the great number o f consumers and the extent o f the territory covered by SONEDE and ONAS, one would wonder whether or not the optimal size has been exceeded, and consider reorganizing the sector in regional water and sanitation companies with a national company for water production and supply.

This option presents several advantages:

0 Improved needs identification;

0

Decentralization and bringing services closer to consumers;

Regional tar i f fs that better reflect the costs o f services and promote more efficient allocation o f resources; Competition between companies that gives incentive to improve performance; Direct responsibility to users is l ikely to improve operators responsiveness; and Joint management o f water and sanitation encourages synergies between the two. Common management can be established for studies, works, user accounts, etc. The effects on costs and productivity could be significant.

However, this option also poses some challenges:

0

I t requires substantial information to develop regional policies, in particular with regard to tariffs; It would go against the system o f cross-subsidies that currently exists between consumption brackets and regions;


Regional companies would be relatively small in terms o f drawing advantages from economies o f scale; Regional companies would have more difficulties than the existing national companies in mobilizing external financial resources; Regional companies would be more dependent on their regional environment than the current system with i t s regional departments; Regional companies would have greater difficulties in collecting fees f rom public administrative structures; Regional companies be more or less isolated from each other and may not benefit from the exchange o f technical and managerial experience; and Since ONAS and SONEDE have currently two distinct supervisory authorities, questions would arise about designating an official authority for the new companies, with their jo int water and sanitation responsibilities.

The production o f water resources from dams, and the treatment and transfer o f water to the areas o f consumption would be carried out by a national entity (for example, the SECADENORD). This would ensure the distribution and sale o f water to the various regional companies. The national company will assure water mixture, improved quality, and the maintenance o f water reserves and security, and will be able to ensure transfers and storage o f treated water before distribution.

A preliminary distribution o f the areas o f operations for these regional companies could be as follows, although a finer analysis should be made to determine the viability o f this distribution:

Drinking water supply company for the northwest (Governorate o f Jendouba, Beja, Siliana, L e Kef); Drinking water supply company for the northeast (Governorate o f Grand Tunis, Bizerte, Nabeul); Drinking water supply company for the center (Governorate o f Sousse, Monastir, Mahdia, Sfax, Kairouan, Sidi Bouzid); Drinking water supply company for the southwest (Governorate o f Kasserine, Gafsa, Tozeur, Kebili); and Drinking water supply company for the southeast (Governorate o f Gabes, Mednine, Tataouine).

WII.2 Merging SONEDE and the ONAS is possible and makes more sense than regrouping electricity and gas in the same company.

This formula was considered during the creation o f ONAS, and was discarded.because o f the disproportionate size o f the company in relation to the size o f the country, and because the sanitation sector was underdeveloped. SONEDE was concerned that the burden o f providing sanitation services would delay the development o f drinking water systems.


A merger has unquestionable advantages with regard to integrated management, the harmonization o f actions and tasks, and the joint use o f resources.

In the short term, the impacts o f a merger would be modest, although productivity would improve over time.

In the short run, the burden o f staff salaries will remain constant or could increase through the alignment o f SONEDE and ONAS wages. The latter are higher due to allowances specific to sanitation. In the medium term, this burden will decrease through the mutualization o f human resources in the two companies.

The benefits are:

Cost reductions, despite some additional initial expenditures from staff reductions. This advantage can be concretized in the long run; The integration o f water and sanitation in investment plans; Synergy between the two generating activities o f substantial benefits; A harmonious tariff policy better balanced between the two sectors; The integration o f the two activities will reduce the cost o f private sector engagement; Economy in regional and local representation; Mobilization o f more substantial financial resources; and The possibility o f subsidies across sectors.

On the negative side:

The company will be very large in the short run (approximately 12,000 employees); There may be problems between personnel who come from different organizations; Financing schemes are different for SONEDE and ONAS. ONAS receives many subsidies, but SONEDE does not receive any (except for activities in rural areas). The alignment o f the two schemes i s l ikely to involve important tari f f increases for sanitation; and Without rigorous cost accounting, transparency in the accounts o f the two sectors will diminish.

WII.3 Maintaining the two enterprises but with more thorough decentralization, improved management efficiency and in creased private sector participation

Another alternative i s to maintain the two companies with more thorough decentralization and efficient management, and the greater participation o f the private sector. This can also be a f irst stage for al l the options mentioned above.

Indeed, productivity and a good knowledge o f customer-related issues constitute the base o f any action to improve the quality o f services and reduce costs.


The first recommendation i s to decentralize al l regional and local activities with a direct link to customers, local and regional authorities, and those activities related to operating works. The last relate, in particular, to maintenance, renewal and extension. It i s necessary to delegate powers to qualified regional executives to achieve this mission.

The capacity o f regional services will be improved through modern data processing that makes it possible for management systems to be efficient and well controlled.

Decentralization constitutes a permanent action and will require the review o f al l operating procedures, tasks and missions. I t is necessary to define the areas o f intervention on a regional scale and to put in place a follow-up and coordination system designed to achieve gains in time and costs.

Decentralization and effective management require a strategy comprising action plans and engaging al l personnel. The strategy must take account al l anticipated changes, such as the mass retirement o f personnel that have worked during crucial years in the history o f ONAS and SONEDE. It i s also necessary to integrate new technologies, particularly for information systems, and to take advantage o f the emergence o f powerful capacities in the private sector.

In addition, the increase in the cost o f energy, the scarcity o f water resources and spaces for the discharge o f effluents, the increase in the renewal rate o f infrastructure, and development dynamics in various regions will constitute mobilizing factors for decentralization.

Considering the size o f these companies and the amount o f their activities, managing them will be difficult without responsible decentralization and true transfers o f power. Indeed, SONEDE will have 4 mi l l ion customers by 2030 and will distribute a volume o f water 1.72 times more than it does currently. By 2030, the volume o f treated and recycled water will reach 300 mi l l ion m3, 10 times the current volume.

b Maintaining two separate companies must be accompanied by increased participation o f the private sector in water and sanitation services. Private sector participation must exceed the stage o f simple subcontracting, and assign the private sector more important responsibilities. The maintenance of two companies, decentralization and the future volume o f activities will make it impossible to optimize costs without the increased use o f integrated information systems in management. The search for synergy between the two companies, the establishment of permanent dialogue and increased collaboration are also necessary.

The benefits are:

Reductions in costs; Improvements in the quality o f services; Improvements in financing capacities; Lightening o f burdens on the state;


No social problems. Better synergy between the two companies; and

O n the negative side:

Financing costs are likely to be higher than for the public sector; Cost reductions are less important than in the other alternatives; and Employment inertia requires mechanisms to reduce the workforce.

4 io

Among the various forms o f delegated management to the private sector, the concession i s the most advanced. The ‘concessionaire’ i s responsible for al l aspects o f utility operations, including operating costs and investments. Since investments are relatively heavy compared to annual revenues, it is necessary that the concessionaire i s able to recover costs over a long period o f time to avoid excessively high tariffs. Consequently, the concession period i s generally at least 25 years. The length o f this period represents a considerable risk for the concessionaire because it is difficult to predict economic and financial changes, as wel l as future political conditions.

As for the government, a concession provides considerable benefits, as it no longer needs to allocate portions o f the budget to investments, or to provide loans to drinking water and sanitation public companies. Moreover, the government can use the concessionaire knowledge to manage and improve human resources, as wel l as keep track o f new technological developments occurring within the water and sanitation sector. These undeniable benefits explain the preference for the concession option by the governments o f many developing countries.

Examples o f successful concessions are found in Morocco, the Philippines, and Chile, although the reasons for each success case are different. In the case o f the Morocco concessions, their success i s explained by the concessionaire’s ability to reduce expenses and subsidize the drinking water and sanitation sectors costs, given that the concessions include both sectors. The success o f the Manila case is explained by the innovative approach to the supply o f drinking water and sanitation services adopted by the concessionaire, as wel l as i t s real-estate profits. The success o f the Chile case i s explained by the sectors regulations that made it possible for the concessionaires to recover their operating and investment costs without risk.

On the other hand, the concessions in Buenos Aires (Argentina), L a Paz (Bolivia), and Jakarta (Indonesia) were unsuccessful, although they had a successful start. These eventually failed because the concessionaires couldn’t secure compensations for their losses due to the economic and political changes in these countries. Thus, the Argentina concessionaire, Aguas Argentinas, stopped i t s activities after massive currency devaluation resulted in the impossibility to pay interest and amortization in foreign


currencies, and after the Argentinean government refused an increase in tariffs to compensate for a fal l in the concessionaire’s revenues.

The L a Paz, Columbia, concession failed because o f the election o f a president who campaigned against foreign investments in the country. The situation o f the concession in Jakarta, Indonesia, was always precarious given the absence o f a sanitation system and the relative poverty among most o f the population. The transition from the government o f President Suharto, with which the concessions were signed, to a new government, increased the risks for the two concessionaires operating there. Poor sector regulation also contributed to the lack o f profitability to compensate for high risks.

A concession can be interesting if it i s wel l carried out, and if the public authority negotiating the agreement is as technically as knowledgeable as i t s private sector interlocutor.

A concession contributes to improved service quality because a private company has to apply the contract specifications that i t signed. Customer relationships will most l ikely improve because the private sector i s usually very sensitive to customers’ reactions.

However, a private company will be unable to mobilize more financial resources than those currently granted to ONAS and SONEDE with very favorable conditions. This will be reflected in the cost o f water and sanitation.

Given current l o w tar i f fs for water and sanitation, it will be difficult to get the necessary quality o f service from a private company without substantial tariff increases.

VlII.5 Water and sanitation holding company

As mentioned above, there are many synergies between SONEDE and ONAS that are not exploited.

In addition, any institutional reform should take into account the current organization and feasibility o f the shift from one scheme to another. I t i s also necessary to take into account the social aspects and the specific mode o f organization o f each company.

The creation o f a holding company could be envisioned. It would be responsible for both SONEDE and ONAS, and its main task would be to define a water and sanitation sector policy and constantly adapt it; and then proposing the said policy to the government and implementing it while keeping track o f performance indicators through the two subsidiary companies. This holding company will bring together some SONEDE and ONAS activities with significant potential for synergy (such as their commercial system). The holding company will be disengaged from daily tasks in order to deal primarily with policy, the future o f the companies, and to bring necessary corrective measures on time. This kind o f company i s being set up in Egypt.


The benefits presented by this optioa are that a holding company will:

Promote synergy between water and sanitation (mobilization o f funds, tari f f policy, common SIG, etc.); Facilitate staff redeployment among both companies; Provide private sector partners with opportunities for more consistent and diversified activities; and Facilitate SONEDE opening to the private sector.

On the negative side the fol lowing issues should be mentioned:

The issue o f the supervisory authority; The management cost o f the new structure; and The holding i s likely to add another level to the decision and control process.

Independently o f any option, operators should focus their attention o n the weaknesses and challenges identified in this study in order to better implement reforms.

These reforms include the creation o f a regulatory authority, increased participation o f the private sector in drinking water supply and sanitation sector, as well as various actions to modernize sector management in order to improve performance.

X.1 Creation of a regulatory entity

Sector regulation i s currently performed in Tunisia through various mechanisms and on many levels. Recruitments are regulated by the government on the basis o f the needs expressed by the two operators. Expenditures are submitted for approval to the ‘Internal Markets Commission’ (Commission interne des march&) if they do not exceed a certain amount, beyond which an authorization from the Higher Markets Commission i s needed. Water and sanitation services must also abide by national standards for hygiene and the environment. Consumer fees are determined by the government after reviewing requests for readjustment or reorganization o f the tariff structure submitted by operators. As to partnerships with the private sector, they are regulated through the contracts signed between the public operator and its private sector partner, and national legislation has been amended to facilitate these new contractual relations.

The main objective various mechanisms i s to avoid financial problems help the water and sanitation sector to mobilize the needed human and financial resources to function effectively. Moreover, monitoring performances i s done through five-year contracts programs that lay down objectives in terms o f the provision o f services to the population,


productivity and other indicators o f service quality. These regulations have certainly contributed to the considerable development o f the sector in the past decades, as well as to foster accountability o n the part o f operators in a position o f national monopoly in their respective sub-sector. However, the kind o f regulation mentioned has shown i t s limits, inherent to the politico-administrative nature o f the decision-making process. Tunisia has reached a stage where requirements for quality and the costs o f services have become increasingly important; a situation that calls for more coherence between these requirements and cost recovery. ONAS’ financial difficulties demonstrate the necessity to urgently establish this coherence.

Indeed, operators need this coherence and increased transparency to be able to respond to the needs o f the citizens and the nation’s economy. Currently, the consultation and decision-making processes are very slow, which i s due to the nature o f the politico- administrative process. An example i s the lengthy delay for the revision o f sanitation tariffs. Insufficient tariff adjustments combined with the obligation to perform, may encourage the operator to reduce costs and improve i t s performance, but this approach will eventually affect the quality o f the service. Macroeconomic considerations as well as the need for balance between the cost o f various basic services and primary products, have certainly been responsible for these delays for a large part, but the absence o f stable and transparent decision-making rules in order to ensure coherence between quality o f service and cost recovery has constituted a substantial handicap as well.

This “vacuum” can be filled with the creation o f a regulatory authority that would establish the sector’s rules and standards, in order to ensure coherence between quality o f service, national objectives, and cost recovery. Historically, a regulatory agency became necessary to arbitrate between public operators and their private partners with regard to the contracts and agreements they signed. International experience has inspired the creation o f this type o f authority even when water and sanitation was dealt with only by public entities. In Tunisia, the water and sanitation sector has become complex to a point that a regulatory authority becomes necessary for more effective and transparent sector management. This entity will be in charge o f reviewing tariff systems and technical standards, and to ensure effective implementation o f contract-programs by the government and the operators, as well as contracts between public operators and private partners within the framework o f the BOT, and management contracts. This entity authority can also be extended to the electricity and possibly transport sectors. I t must have sufficient independence from both the official authority and the operator, in order to make recommendations in a transparent and objective manner o n the quality o f services and the tariffs. This does not mean that the social or macroeconomic considerations won’t be taken into consideration. The regulator recommendations would contribute to clarify the decision-maker choices about tar i f fs in relation to service quality, and ensure the follow-up o f these recommendations. The government may choose to subsidize the operator, in which case it should provide it with the necessary resources to implement the required objectives.


The proposal made for the creation o f a regulatory entity constitute an answer to a situation that may be described as characterized by misunderstandings between official authorities and the companies, especially with regard to water and sanitation tariff policy.

Indeed, the two companies complain that they don’t get the tar i f f readjustments they need to be able to perform effectively, and sometimes for many consecutive years (case o f ONAS); while the government believes that the management o f the two utilities i s not optimal and that it would be possible for them to save money.

Indeed, the technical and financial data about the sector, and their operations, are generated by the companies themselves in preparation o f tariff increase requests. As to the relevant ministries, they don’t have the needed resources in terms o f sufficient information and data, as well as on the sector’s activities, to perform a thorough monitoring o f performance objectives.

The suggested regulatory entity will play a different role than a similar entity, operating in an environment where management i s performed only by the private sector. The entity suggested here will not have the power to make decisions concerning tar i f fs and subsidies, which will remain the exclusive prerogative o f the government, as i s the case with other primary products (such as bread, electricity, fuel, etc.). The role o f the regulatory entity is to provide the government with objective information on the situation o f both companies with regard to management efficiency, and the financial resources necessary to achieve the goals stated by the government. It will also be required to make proposals for tariff readjustments. The regulatory entity, which will be small, will have trusting and collaborative relationships with the government, thanks to i t s independence and the professionalism o f i t s staff. The fact that it doesn’t have the power to make decisions on tar i f fs can only strengthen i t s independence. If for an unspecified reason, the government is not inclined to increase tariffs, the regulatory entity can recommend other measures (such as a reduction in investments).

The regulatory entity must enjoy a relationship o f t rust with the government and the operators. The entity’s activities are permanent, and cannot be assigned to an occasional consultant. On the other hand, when needed, the regulatory entity may hire a consultant to perform a specific task that the entity is not equipped to deal with.

A specific department within a ministry cannot perform the regulatory entity functions. Indeed, the companies are under the supervision o f two different ministries (and electricity under a 3rd ministry). I t i s thus diff icult to create a specific department within a ministry to carry out the regulatory activities described above. Moreover, the process o f tar i f f revision depends on several ministries as well as on the Council o f Ministers; it is thus necessary to have a higher-level authority as a regulatory entity, than a simple department within a ministry.

The size o f the regulatory entity must be small and i t s operational costs limited, especially because it may generate some benefits for the companies and the state.


The regulatory entity wil l encourage the companies to utilize appropriate management and monitoring tools as well as performance indicators. The entity will validate the effectiveness o f these tools and the results they contribute to achieve.

X.2 Private sector participation

The participation o f the private sector in water and sanitation activities i s in fact recommended for al l the options, this i s why it i s not fully considered as an option itself.

The participation o f the private sector in the operational and financing activities o f the drinking water and sanitation sector will bring more flexibility in terms o f management and responsiveness, to better meet the needs in infrastructure and financing, and will improve service quality. The private sector participation may also contribute to cut costs.

The participation o f the private sector can be envisaged at various levels, such as:

Financing (private capital); Financing plan; Design of the study; Construction; Operation; Maintenance; Renewal (of equipment); Rehabilitation; Extending the works to respond to increased demand; Ownership of the works; Assuming certain risks (particularly commercial risks), etc. ; Users’ relations; and Increasing drinking water targs and sanitation fees and collecting them.

Sanitation works concerned by private sector participation are:

Water treatment station; Treatment plant; and Sanitation connections.

Collection and transfer of used water and rainwater network;

Water supply works concerned by private sector participation are:

Pumping station;

Connections to drinking water.

Water production and water treatment plants, including desalinization plants; Water supply network and water transport;

Distribution networks and distribution works (reservoir, etc.); and


Private sector participation in drinking water and sanitation works operations

Even if the private sector contract for sanitation works operational management (treatment planthetwork) i s the most elementary level o f private sector participation, there can be several levels o f involvement, such as:

The operation by the private sector o f drinking water and/or sanitation works. This i s indeed the most elementary level o f private sector participation, since i t only relates to operating, and maintaining the works for a relatively short period o f time. Even if the agreement regarding the operation o f drinking water and/or sanitation systems (treatment plant and/or network) with a private entity constitutes the most elementary level o f private sector participation, there can be various levels o f involvement on i t s part. Private sector involvement may take the form of:

Simple subcontracting agreement

The private entity performs tasks based on public authorities’ instructions, without taking part in the definition or design o f these tasks, and without being irresponsible for the outcomes.

The obligation o f the private entity i s to mobilize and use the human resources and equipment needed to carry out these tasks effectively. Sometimes, even the needed resources are explicitly requested in the agreement.

Operation and management agreement

The private entity is responsible for the provision o f a public service whose quality i s defined in the contract.

The private entity must bring the know-how, as wel l as the adequate human resources and equipment needed, in order to be able to design, organize and’carry out the tasks specified in the contract.

In this case, the private entity must achieve given results (“obligation de resultats’y, and i s not under the obligation o f best intents (“obligation de moyens ”). The other contracting party (public authority) will ensure that contract objectives are met. If not, the contract clauses specified for this purpose apply. This kind o f agreement allows the private entity to choose the resources it will need to meet contract objectives. The benefits o f management agreements are;

Reduction in operating costs; Improvement in quality of service; and More transparency on transactions for both contracting entities).


Activities that can be managed more effectively by the private sector involve repetitive tasks, such as:

All the connections; All connection repair tasks; Pumping stations; and Electric equipments.

For sanitation, the activities that can be performed by the private sector are:

Sewer cleaning; Water treatment stations; Pumping stations; and All the connections.

BOT (Build, Operate and Transfer)

In this type of contract, the private entity builds the sanitation and/or drinking water works (treatment plant, desalination station, networks, etc.), and funds and exploits them for a given period o f time (usually more than 20 years). The private entity remuneration can be either direct, through the collection o f tar i f fs or fees, or by the delegating company (ONAS or SONEDE). The property o f the station is transferred to the delegating company (ONAS or SONEDE) either immediately after being built or at the end o f the contract.

The benefits o f this type o f contract are:

More efJicace management; Improved service quality;

Reduction in public investments and easier financial resources mobilization;

Improved observance of standards because the operator is distinct from the controller.

Disadvantages o f B O T contracts include:

Possible increase in tariffs; 'e Risk of litigation and non-respect of specijkations because of differences in

obligations interpretation by the two contracting parties.

The activities that may be performed according to BOT contracts are:

Future water treatment stations;

Desalination plants; Treatment plants.

Large water supply systems and works (basins, reservoirs, etc.) to increase water volume;


Several examples o f private sector participation in water and sanitation in various countries l ike Morocco, Senegal, Spain, the United Kingdom, Chile, Colombia, are provided in the annexes. Other examples o f public utility management by the private sector with a high rate o f subcontracting activities are also presented, such as in Japan.

X.3 Common reform actions to all institutional options

Common actions to drinking water and sanitation

Create a SONEDE-ONAS commission including representatives o f the two relevant ministries in order to identify possible synergies between the two operators, and determine methods o f implementation;

Replace prior approvals by operating rules and establish a posteriori control. Give more autonomy to operators to avoid hindering their responsiveness, in order to achieve the goals stated by the government;

Increase the number o f studies to be presented to CSM, with the purpose o f implementing projects faster;

A l l ow the operators to call upon experts/consultants recognized for their competence in a specific field when needed, without being obliged to choose with the lowest bidder.

Delegate daily management tasks to qualified employees so that head offices can devote more time to strategic aspects and sector development;

Improve contract programs to better balance the companies commitments with those o f the government (contract programs should be revised each time one o f the two signatories does not respect i t s commitments);

A detailed study o f actual needs in terms o f personnel for each o f the two operators could be conducted, and a solution negotiated with the concerned parties, which would contribute to solving the overstaffing problem. A transfer o f personnel between the two operators could be considered when possible; Implement promptly the N I C T (ERP, SIC, SIG, GRH; telemetry, remote monitoring, teleprocessing, etc.) for modern and efficient management. The two operators and the concerned parties should endeavor to solve any issue that slows the prompt implementation o f these systems;

Re-examine procedures to reduce project implementation delays to comply with the needs o f effective responsiveness, and allow prioritization and phasing o f investments;


Take advantage o f the introduction o f N I C T to reduce the number o f internal and external procedures, in order to decrease administrative and management costs (number o f signatures, etc.); Conduct more strategic studies and studies dealing with main management aspects; and

rn Introduce cost accounting as an actual'management and decision-making tool.

Actions specific to drinking water (managed by SONEDE)

SONEDE will be able to benefit from the massive retirements that will occur over the next 10 years, to redefine i t s operating process and increase private sector participation. An action plan could be developed for this purpose;

Establish an action plan to optimize the cost o f drinking water supply;

While continuing to support urban and economic development by providing water services, it is recommended that SONEDE conduct a detailed study about the rehabilitation o f i t s works. Indeed, SONEDE needs a plan for the renewal o f its works and operation tools; Develop master plans for drinking water supply for al l cities, as the basis and reference for any planning project;

Conduct a technical and economic feasibility study prior to any project implementation in order to optimize technical choices;

Increase private sector involvement in the conduct o f studies and in operation; and

Tarif f readjustments pace and levels should be established in direct correlation with SONEDE's commitments in terms o f investments and performance indicators.

i

Actions specific to urban sanitation

I t i s recommended that ONAS prepares a detailed study, including a program for i t s works rehabilitation, renewal, and capacity extension. If necessary, it i s advised to slow down the rhythm o f investments for new projects, and give priority to safeguarding existing assets and maintaining existing works;

rn Prepare a study to solve the issue o f the 109 communes not yet benefiting from ONAS services, including a financing plan;

Solve the environmental problems not yet completely solved to increase the re-use rate o f treated water and sludge (integrated project with the Ministry o f Agriculture, improve dialog with the said ministry, industrial waste water, odors issue, etc.);

Review discharge standards;


Tasks carried out by ONAS on behalf o f the state or other public structures (communes, governorates, etc.) must be part o f a contractual agreement, and be actually remunerated (including personnel costs);

Include alternative sanitation and least expensive technologies in investments and operations;

Set up an institutional system for individual sanitation;

Tariff readjustments pace and levels should be established in direct correlation with ONAS’ commitments in terms o f investments and performance indicators.

ed as

XI.1 Institutional aspects for rural drinking water

The population concerned by drinking water supply in rural areas has reached 3.2 million in 2006. Half o f this population i s supplied by SONEDE, and the other half through the AIC/GIC/GDA. The latter are in need o f permanent consolidation while they continue to grow.

Drinking water supply in rural areas i s essential to economic and social development. Rural drinking water i s characterized by high level o f investments, which may become unsustainable if the beneficiaries’ expectations are not met.

Thus, the strategy adopted in this area was based on a participative approach, which created a sense o f ownership by the population for the systems that were put in place. This strategy made it possible to improve the ‘service rate in rural areas (91% in 2006), without generating a heavy burden on SONEDE financial situation. Consequently, it i s recommended to maintain this approach and to consolidate it by encouraging existing groupings to change and move from collective distribution towards individual distribution, when possible.

This participative approach remains however fragile and needs government support. Thus, i t i s recommended that the government remain in charge o f important repairs (replacement o f drillings and their equipment, replacement o f pumping stations equipment, etc.) as well as training and supervision o f management staff. Government agencies such as the DGGREE should also continue to contribute to the creation o f new AIC/GIC/GDA for the new rural drinking water supply systems.

When the number o f AIC/GIC/GDA beneficiaries will exceed their management capacities, management could be transferred to SONEDE, under certain conditions and after rehabilitating the infrastructures. Thus, each year SONEDE could be put in charge o f a limited number o f highly capable groupings. However, this policy must be accompanied by the necessary tariff readjustments. It i s also necessary to define


SONEDE and the AIC/GIC/GDA roles in rural areas in the medium and long terms. Moreover, an adequate financing system accepted by al l parties involved should be created.

Drinking water supply systems for very dispersed residential areas, and whose cost would exceed a certain fixed cost, per capita, will continue to be supplied by individual systems using individual water points directly, as well as fixed and mobile individual tanks, etc. These areas include approximately 5% o f the total rural population.

For this population, it i s however recommended to develop a subsidy and financial incentives system to keep at its disposal enough good quality water, in order to provide for i t s needs and the needs o f i t s livestock. DGGREE would, in this case, ensure technical supervision in relation to the needed water works construction. The Ministry o f Public Health provides health control for individual drinking water systems. This control comprises analyses o f the quality o f water and the determination o f sources o f pollution as well as the dissemination o f water protection methods (chlorination, use o f l ime to protect tanks, health education, etc.).

Most rural drinking water projects are implemented as main components o f various integrated rural development projects designed to improve living conditions (irrigation, farming, training, etc.). A result o f these projects i s an accelerated urbanization around water points, which contributes to improving beneficiaries’ incomes that will then be able to j o i n SONEDE networks, and afford i t s services, through their own groupings.

It i s necessary to adapt the new rural drinking water supply projects designed to answer new expectations on the part o f rural people. The design o f new projects must take into account the centers transfers to SONEDE in the mid-term term, in order to avoid expensive rehabilitation and adjustment works to comply with SONEDE standards.

The drinking water supply mode o f distribution (BF and bracket) must be re-examined and less generalized. The rural drinking water supply projects are designed to supply the target population through collective systems (standpipes and derricks). Given the evolution o f some drinking water supply systems towards individual connection, i t should be possible within future projects, to introduce other choices than the BF and the bracket, such as individual connections; when sociological investigations shows that there i s a demand for this system and that the population can afford it (cost o f the individual connection). I t is also necessary to find out if alternative resources are available.

Water distribution by the “keeper manager” substantially increases the price o f water and considerably limits the duration o f water availability, and should be replaced by the system o f individual connections placed along drinking water supply pipes.

The state’s investments in drinking water supply systems are substantial, and these systems are provided to the GIC (GDA) at no cost to operate and maintain them. Being the owner o f these infrastructures, the state i s entitled to a systematic and complete reporting through the DGGREE on the operating condition o f these infrastructures.


DGGREE human and material resources must be adapted to perform this task, and using electronic transmission would be beneficial.

XI. 2 Institutional aspects of rural sanitation

A sectoral technical and implementation study regarding an institutional and organizational framework for the management o f sanitation systems in rural areas has been conducted within the framework o f PISEAU I. The study recommends entrusting regional councils with the management o f sanitation systems, with ONAS providing technical assistance. A more detailed analysis i s needed in this case as wel l as a reflection o f the resources available to regional councils to perform this task.

The rural areas sanitation strategic study (1 999) proposes an institutional framework for rural sanitation, and the following:

Sanitation studies and building o f sanitation collective works performed by ONAS or DGGREE; Operation and maintenance o f water collection works to be entrusted to the AIC/GIC/GDA; Operation o f treatment stations and pumping stations to be entrusted to ONAS or to the AIC/GIC/GDA; Individual sanitation works carried out and operated by the beneficiaries themselves ; ONG’s in charge o f sensitization/public awareness; and Technical assistance provided to AIC/GIC/GDA by ONAS, C R D A and DGGREE according to the need.

The approach in the sectoral technical and implementation study for rural sanitation would appear to be more realistic, even if it needs to be actualized and detailed. It is recommended to better refine the proposed scheme, and to implement it as a pi lot in the beginning. The study’s technical conclusions concerning the pi lot scheme are being implemented, while the institutional aspects have not been tested.

The drinking water sector financing policy i s based on the distinction between rural and urban areas. With regard to urban areas, according to its statutes SONEDE must ensure i t s financial balance by covering al l i t s costs through consumer water fees, including depreciation and interests on loans. Although the investment financing plan through self- financing and loans must take into account macroeconomic considerations, the totality o f financial expenses is recovered through fees and SONEDE has, consequently, fulfil led i t s financial obligations in this way

O n the other hand, investments made in rural areas by SONEDE or the Rural Engineering Department are financed by public subsidies. SONEDE applies its national tariff system


to customers in rural areas, while the AIC/GIC/GDA operate areas that are not covered by SONEDE, and i ts tariffs are adapted to the specificities o f each one o f them.

In addition, ONAS i s also supposed to ensure i t s financial balance. In reality this balance i s maintained artificially thanks to government subsidies. ONAS hasn’t been able to recover the totality o f i t s costs through consumer’s fees for a few years. These fees were readjusted only twice since 1997. I t s operating deficit has increased considerably from 1998 to 2004, when it reached more 36 M TD. This deficit persisted in 2005 and 2006, though lower than in 2004. ONAS i s now in a situation where i t s revenues, government subsidies not included, are not sufficient enough to cover depreciation expenses. Contrary to drinking water, practically all sanitation investments are financed by the state. ONAS has very limited financing capacity, representing approximately only 7,5% in 2004 and 2005 o f all investments, the remaining 92.5% were financed by the state directly or indirectly through foreign loans.

These important financial differences between the two companies are due to several factors. ONAS’ burden has increased with i ts reorganization in several regional departments, starting in 1999. The reorganization involved considerable staff increase, from less than 4200 employees in 1998 to 5550 employees in 2002, with subsequent increase in the wage bill. With regard to revenues, it i s worth noting that water tar i f fs were readjusted much more frequently during the ten last years than sanitation tariffs. The consequence o f that was an important increase in running costs for ONAS compared to i ts operation revenues, with annual rates respectively o f 6.4% and 9.2% on average during the 1998-2006 periods. Important efforts have been made since 2004 to slow spending increases by ending the organizational reform o f 1998, and by reducing the number o f regional departments from thirteen to four departments. The number o f employees has also been reduced. These actions contributed substantially to reducing ONAS operating costs. On the other hand, the last increase in sanitation tariffs goes back to 2003, which created a great difference between revenues from fees and costs.

With regard to tariff adjustments, it i s clear that the government gave priority to drinking water rather than to sanitation, indicating that except for rural areas, all expenses related to drinking water supply must be paid for by users and that investments in sanitation should be paid for by public funds. In doing so the government has tried to attenuate the effect o f water fees increase on consumers’ bills. I t seems, however, that the government considers water as a private good that must be paid for entirely by users, and sanitation ass a public service whose cost must be paid for by the community. The combination o f fees on used water poured in ONAS networks and public subsidies shows that two principles in terms o f environmental policy have been adopted: the pollutant-payer principle and the beneficiary-payer principle.

SONEDE activities are entirely self-financed, except for investments in rural areas, which are financed by the government. The future tariff policy must aim at maintaining SONEDE’s financial balance. The creation o f a regulatory authority i s likely to contribute to better evaluate requests for tariff readjustments and encourage the two operators to better contain their costs. With regard to the tariff structure, it i s important to


keep in mind that cross subsidies benefit 92% o f consumers. It would be difficult to implement a new tariff structure limiting subsidies to a smaller segment o f the population, but a structure that better targets those who deserve this help should be possible in the future. As for water supply in rural areas, the state must continue to subsidize SONEDE’s investments to a certain extent, and the AIC/GIC/GDA will also have to continue to play an important role there.

With regard to sanitation, added deficits don’t help the sector development and the improvement o f service quality. Sanitation i s an activity as important as drinking water supply given the fragility o f the environment and i t s importance for both the quality o f l i fe and economic activities. While the state finances a large part o f investments in this sector, ONAS must also develop its self-financing capacity from users’ fee, for two reasons. First, even if the beneficiaries o f a healthier environment are very dispersed, pollution originates primarily from drinking water consumption, and the application o f the pollutant-payer principle implies that he/she should pay for de-pollution costs. The second reason i s that the financing o f this activity must be protected from the macroeconomic situation and the state o f public finances. In the long term, users should finance sanitation. This objective can be achieved only gradually, but tar i f fs must be readjusted so that ONAS can f i rst o f al l avoid falling into serious financial difficulties, and then begin to build i t s financing capacity.

SONEDE and ONAS have borrowed limited amounts o f money from commercial banks to finance some equipment.

On the other hand, both companies did not contract loans from local banks to finance investments or purchase equipment. Borrowing only f rom local banks might be considered by ONAS and SONEDE because that would remove the exchange rate risk.

As state-owned enterprises, SONEDE and ONAS are not quoted on the stock exchange, and thus can’t raise funds using bonded loans. ONAS, as an environmental protection organization that contributes to reducing greenhouse gas emissions, will be able to mobilize carbon funds, particularly for its treatment stations projects.

For the financing o f rural drinking water supply managed by the AIC/GIC/GDA, the fol lowing plan may be considered:

For rural drinking water supplv

Investments and renewal o f works and collective equipment continue to be dealt with by the state, taking into account rural peoples limited capacity to pay for water and sanitation services; Connection to drinking water supply expenses should be paid for by consumers; Operating costs should be paid for by consumers on the basis o f a tariff system that contributes to maintain balance in the company’s accounts, and tar i f fs should be revised annually; and


State funds could be put at the disposal o f the AIC/GIC/AIC to cover large repairs expenses.

For rural sanitation

Collective works investments will be the responsibility o f the state (treatment stations, pumping stations and collective networks); Individual connections will be paid for by the beneficiaries; Individual sanitation systems will be paid for by the owners. An operating costs recovery system similar to that o f rural drinking water should be established.

In conclusion, we will sum up the sector reorganization objectives as'follows:

Create a framework allowing the development o f a vision for the future with a

Ensure a more effective coordination between the two activities; drinking water

Develop synergies beneficial to both activities; Create attractive opportunities for private sector participation by combining

Establish transparent relations between the government and the operators, with a

Introduce a performance and good management incentives system; and Maintain own resources while taking into account the interests o f the poor.

strategy for the whole sector;

and sanitation;

drinking water and sanitation;

sense o f accountability o n the part o f the actors vis-a-vis one another and vis-a-vis the users;

Considering the above-mentioned objectives, three types o f reform could be implemented, namely: taking measures for the optimization o f two companies' management (SONEDE and ONAS); setting up a regulatory entity; implementing an institutional reform. A few thoughts about tariffs and finances are presented below:

Measures to optimize SONEDE and ONAS Management

Before implementing institutional reforms, a certain number o f actions may be taken to optimize SONEDE and ONAS management:

Reduce staff costs: Help the two companies reduce their staff to what is really needed to carry out their respective activities, through negotiation with the concerned parties and to their satisfaction;

Involve the private sector in the activities of the two companies: This action can be carried out along with the first one. Indeed, i t i s necessary to benefit from the staff reduction plan in order to develop private sector participation, in particular by subcontracting operation or other activities (such as, in the case o f SONEDE, studies,


connections, etc.). The use o f the BOT agreement for the realization o f new projects such as purification or treatment plants should also be encouraged;

Modernize management: Introduce promptly new information and communications technologies in the management o f the two companies (ERP , Commercial Information System (SIC), Geographical Information System (SIG), teleprocessing, telemetry, etc.). It is necessary to accelerate the setting up o f the systems already identified by the companies.

Reform of the regulatoty system

The creation o f a regulatory entity (authority) will help solve the issue o f asymmetry o f information between the state and the operators, as wel l as the difficulties encountered by the government in monitoring operators’ performance, using reliable information established by an independent structure. Clear and transparent terms o f references will be established by this structure, contributing to solve the current impasse within the sector. A regulatory entity will also help operators determine the resources at their disposal to achieve the objectives la id down by the government, to reassure them on their future, and to institute more transparent relations with the government and their customers.

A regulatory entity would ensure more coherence between the quality o f service requirements and costs recovery, and reduce the time used to make decisions about tari f f revision and subsidies. The authority will set the rules for establishing tariffs, monitor the quality o f services and help instituting more transparent relations between the state and the operators on the basis o f objective information and regular monitoring.

The creation o f a regulatory entity doesn’t mean an additional level in the decision process; on the contrary, when the authority will start measuring and monitoring the companies’ performance, it will be possible to reduce if not to remove prior approvals, and it will be possible to give more autonomy to these companies. To insure its success, the regulatory authority must be independent and be endowed with the technical and managerial skills needed to achieve i t s mission. It will be able to communicate effectively with the state, and give opinions supported by reliable and independent information for decision making.

Considering the current situation o f the sector, it i s recommended to create this authority in priority, notwithstanding the institutional option selected.

Institution a1 re forms

The most promising options must improve the system s efJiciency while preserving social benefits.


For urban areas

Water and sanitation regional companies: SONEDE and ONAS activities are concentrated in the greater Tunis area. The option o f water and sanitation regional companies would involve the creation o f a lar-ge company supplying the greater Tunis area, mid-sized companies for Sousse and Sfax areas, and very small companies for the other areas. A large company for the production, treatment and drinking water supply will also be created. The viability o f this new structure would require substantial tariff increases in the regions, which would be in contradiction to the objective o f national solidarity. Moreover, the regional companies are l ikely to undergo pressures, in particular for social reasons. This option would also involve additional expenses to implement the new structures, and would challenge the notion o f sharing experiences between regions. The sector needs high-level competences that are not currently available in sufficient number and that would not be used efficiently taking into account the size o f some regional companies. This option could be interesting if the orientation i s towards the development o f concessions. The international experience shows that private companies make better offers when water and sanitation are managed joint ly rather than separately.

Merging two national companies: The other extreme option i s the fusion o f the two national companies, SONEDE and ONAS (currently with 12,000 employees), and i s not recommended because o f the large size o f the new company. Moreover, merging is l ikely to generate social and staff management problems, given staff regulations differences between the two companies. Merging can improve effectiveness and reduce costs only if it i s accompanied by an appropriate structuring o f the new entity and a reduction in personnel costs that usually results in an important reduction o f personnel, which i s not possible in the current context.

Water suppiy and sanitation concession: The concession o f water and sanitation services for a long period o f time to a privately-held company might not be the optimal solution for Tunisia, given the existence o f two relatively efficient but certainly perfectible state-owned enterprises. The concession option for water and sanitation services can be conceived in the case o f a country where these services are failing to perform adequately, which i s not exactly the case in Tunisia. The participation o f the private sector will certainly improve service quality and customer relations, but this will certainly result in a substantial increase in water and sanitation tariffs. Indeed, a private entity won’t be able to mobilize as many financial resources as those currently granted to ONAS and SONEDE. Moreover, a private entity won’t make substantial benefits in improving water loss rates since this rate i s currently rather high with SONEDE.

Maintaining the current system and improving management efficiency: The option o f maintaining the two existing companies with increase decentralization and significant reforms to improve effectiveness requires however real delegation o f some powers, which would facilitate decision-making and improve responsiveness with regard to users needs. This option also requires the introduction o f administrative and


technical management modern methods, and the use o f cost accounting as an instrument o f management. The creation o f a jo int structure, regrouping ONAS and SONEDE, will make it possible to exploit al l the synergies that exist between water and sanitation, and coordinate the policies to be carried out in two similar sectors. The two companies will have to adopt a more proactive policy and better coordinate their activities, and in particular an integrated policy aimed at strengthening private sector participation in several areas (especially operations). This structure may prepare the two companies in order to regroup them within the same holding company, if this option i s not retained in the short run.

Creation of a holding for the sector: The holding allows a better coordination between water and sanitation services by promoting their synergy. I t would also allow a more harmonious and coherent thriff pol icy that takes into account both the interests o f the two operators and those o f the beneficiaries. It would also be responsible for the development o f strategic options for these services, in particular with regard to the application o f new technologies and technology watch, the participation o f the private sector, the optimization o f financing conditions, the coordination o f the services necessary for the development o f the mega projects, and, technical and financial planning. The option o f a holding company would make it possible to achieve the goals stated above, without calling into question the two operators acquired benefits and their cumulated experiences. The holding must have a light structure with highly qualified personnel. I t must be the source o f innovation, search for niches o f productivity and profitable opportunities for collaboration with the private sector. I t must facilitate decision-making and should not become an additional stage in the hierarchy o f decision. The creation o f a holding and a regulatory authority i s the first step towards the corporatization o f the sector. This option deserves to be developed and requires good preparation and changes in the current legislation. Without new laws, the decision-making mechanisms may become too complicated and i t will be difficult to delineate responsibilities. The holding will not constitute an additional step in the decision-making process, but, with the regulatory entity, will replace several other existing steps. Moreover, it will ensure a better coordination between water and sanitation policies and foster synergies between them. For many international institutions, drinking water and sanitation are managed by the same entity, which i s justified by the synergy between the two sectors. With the holding option, the two sectors will continue to be managed by two companies, the existence o f a tariff for water and another one for sanitation i s not called into question. Consequently, each sector will have i t s accounting system and costs will remain identified for each sector. Thus, if there will be crossed subsidy between the two sectors, this will be done in a transparent manner and will be required. Consequently, the disadvantages, because o f the creation of a new structure generating new expenses or mixing both water and sanitation accounts, would disappear.

Multi-sectorat integration between drinking water, sanitation, electricity and gas: In many countries the activity o f distribution o f electricity and sometimes that o f gas i s entrusted with the drinking water and sanitation operator. This multi-sectoral integration allows a certain synergy, in particular at the commercial and customer


relations’ levels, and even in relation to some technical interventions on the ground. The regrouping o f these sectors under the banner o f the same operator i s appealing to the private sector. For example, in Morocco (in Casablanca, Rabat-Sale and Tangier- Tatouane) the three sectors (water, sanitation and electricity) were entrusted, for each three concessions, with the same operator. In Morocco, the drinking water sector accounts balance, the electricity sector i s profitable and i s used to subsidize the sanitation sector, which i s having a deficit.

For rural areas

I t i s recommended to maintain the participative approach and the management o f drinking water supply systems by the Agricultural Development Groupings (GIUGDA). I t i s necessary however to consolidate them and encourage them to adopt the individual distribution mode, instead o f the collective distribution mode, when possible. The participative approach remains however fragile and needs government support. For this purpose, it i s recommended that important repairs (replacement o f drillings and their equipment, replacement o f pumping stations equipment, etc.) remain under the responsibility o f the government, as well as training and management supervision. Each year, and under certain conditions, a limited number o f efficient GIC/GDA could be placed under SONEDE responsibility. This transfer should not generate a burden on SONEDE finances. Appropriate measures should also be taken (tariffs readjustment, operating subsidies for rural drinking water supply etc.).

Very dispersed residential areas, for which the investment for a drinking water supply system exceeds a certain fixed cost per capita (Le. 600 DT/capita), will continue to be served by individual systems through direct individual water points, and fixed and mobile individual, etc. These areas include approximately 5% o f the total rural population.

For sanitation in rural areas, i t i s advised to avoid linking this activity to ONAS, because it will worsen i t s financial position. It i s more appropriate to set up specific institutional and financial systems using the experience o f rural drinking water and the conclusions o f the sectoral strategic study on sanitation in rural areas.

Pricing and f i n an ce

The Tunisian tariff system objectives are: cost recovery, efficiency, solidarity between income categories and interregional solidarity; With these objectives in mind, the Tunisian tar i f f structure has been designed as a progressive structure, a characteristic that is shared with several countries. While the tar i f fs ensure costs recovery covering for water, for a number o f years they have been insufficient for sanitation.

Cross subsidies between brackets o f water consumption and regions, have resulted, in spite o f insufficiencies in targeting beneficiaries, to carry out the government social objectives. The ideal pol icy would consist in direct transfers to households considered poor; instead o f having them pay l o w tariffs, with an unreliable targeting. Some


countries succeeded in establishing mechanization o f direct transfer, but conditions don’t seem appropriate in Tunisia just yet for a successful direct targeting.

The current tari f f system for water does not make distinctions according to the use of water, being domestic or economic, except for the tourism sector. The same tariff, as the highest bracket for domestic use, i s applied to the tourism sector. Thousands o f small businesses benefit from l o w tariffs. However, the application o f new tar i f fs specific to these users i s not recommended because additional revenues that that would be generated would be very modest and would not be worth the negative reaction that would follow.

Tunisia i s increasingly demanding in terms o f coverage and quality o f drinking water and sanitation services. Financial resources must follow, coming exclusively from users (urban areas for water), or partly from users and partly from the state (case o f the sanitation). In establishing a pricing policy, one must ensure that water supply continues to be self-financed and that operating costs recovery i s maintained in sanitation, in a sustainable manner. A regulatory entity is likely to better evaluate costs in relation to the set objectives, in particular regarding quality; and to propose tariff revisions established in a more transparent way.

During the December 11-12, 2007 workshop held in Tunis for the presentation and discussion o f the f i rst report by World Bank experts, a consensus has emerged with regard to the holding option. It i s thus recommended to undertake a detailed study about this option in order to better specify i t s outline and implication. The merger option implying a complete integration o f the two sectors also deserves to be studied in greater detail. It i s thus recmmended to undertake a detailed study o f these two options prior to making a choice. However, the creation o f an independent regulatory authority was well received by al l those who attended the workshop, in particular by representatives o f the operators. The creation o f this structure appears to be a priority and i s urgent, and it i s not necessary to wait for the results o f the comparative study on the various options. In the mean time, some reforms could be implemented to improve effectiveness. They are stated in paragraph VIII .3 “Various reform actions”.


ANNEX

PUBLIC-PRIVATE PARTNERSHIPS IN WATER SUPPLY AND WASTEWATER

AND THE INTERNATIONAL EXPERIENCE OF DIFFERENT SECTOR MODELS

This survey of public-private partnerships (PPP) in water supply and wastewater in selected countries concludes that PPP's remain a valid option. However, PPP's s t i l l remain a distant second to public management as indicated by a bird's-eye survey of five developed countries (France, Japan, Spain, United Kingdom, and USA) and five developing countries (Chile, Colombia, Morocco, Senegal, and Turkey).

OBJECTIVES AND EXPERIENCE FROM PUBLIC-PRIVATE PARTNERSHIPS (PPP)

The earliest forms o f private sector involvement in the provision o f water date back to the late 18" century in France. Subsequently, modem water supply services were developed and operated by private operators in many cities in Europe, Latin America, and Africa in the late 19" and 20th centuries. These early private concessions did not prove sustainable for a number of reasons, including that o f the arrival of a development model where the government went beyond just supervising the performance o f private operators and instead took over the actual provision o f services. Over time, the public sector model in developing countries lagged expectations in terms of efficiency and quality. Starting in the early 1990s, PPP was promoted as an alternative for the development o f the water supply and wastewater sector in developing countries. This phenomenon seems to have been inspired by the privatization o f these services in the United Kingdom in the late 1980s. Following the closure o f a number o f high-visibility PPP's in water and wastewater, the interest in PPP has flagged as shown by the decreasing number of projects as of late:

Water utilities with private participation in developing countries by main sponsor type

. Rojects

35 1 30

25

20

15

10

5

0 1990 1995 2000 2001 2002 2003 2004 2005

Source: The World Bank and PFIAF, PPI Roject database.

The use of PPP as a way to assist the sector in developing countries should not be based on development model fashions but on each country's calculated self-interest. From this point o f


view, there are three reasons why PPP remains a valid option for countries to improve the performance of their water and wastewater sector:

0

0

The desire to improve service quality; The wish to raise the efficiency of services; and The substitution of private financing for public financing or publicly guaranteed borrowings.

The Evidence of Better Service Quality as a result of PPP

There are few systematic cross-country surveys tracking the effect o f PPP on service quality. However, one such study2 was carried out in 2006 and comprised eight PPP’s with management and lease contracts where the financing was provided by the government. The survey tracked indicators such as connection rates in water and wastewater, the bacteriological quality of water, and the hours of supply, al l before and after the entry o f the private operator. The bacteriological quality of water improved with the arrival o f private operators, in part because of the greater transparency and accountability that accompanied the contracts. Another two such indicators that measure access and constancy of service are shown below and indicate a largely positive impact from the PPP contract. The one exception to the positive changes i s Gaza where the political turmoil made reversed earlier advances under the private operator.

City Water coverage before/after Hours of supply befordafter

Amman Antalya B arranqu i 1 la Cartagena Gaza Gdansk Senegal Zambia

90% 93 % 60% 74% 5 8% 100% 59% 100%

100% 95% 89% 95% 5 6% 100% 73% 100%

4 9 19 23 19 23 17 24 8 N A 24 24 16 22 13 18

The Evidence of Greater Efficiency

The same survey tracked efficiency parameters such as non-revenue or unaccounted for water, popularly called water losses. Here again, data before and after the entry of the PPP showed a positive effect of PPP’s as illustrated in the graph below. The reductions in NRW were often well below expectations however and in some cases NRW did not move appreciably. Another indicator i s staff productivity, of particular interest since overstaffing i s often an explicit reason for creating a PPP with a private partner. Here a PPP i s often successful in increasing productivity through programs of voluntary early retirement. For instance, the concessionaire in a large concession in Buenos Aires was able to halve the number o f employees through such simple measures as paying al l employees in person, controlling daily attendance, and through monetary incentives for early retirement or retrenchment. The potential for higher staff productivity i s high if one considers that utilities with private partners can have staff productivity of 1.0 employees per thousand water supply accounts, versus typical staff ratios of bloated public sector agencies with 5.0 employees per thousand water accounts or even higher.

“Using management and lease-affermage contracts for water supply”, Klas Ringskog, Mary Ellen Hammond, and Alain Locussol, Public-Private Infrastructure Advisory Facility, Gridlines, September 2006 2

Water and Sanitation Strategy in Tunisia. Final Keport 85

Non-Revenue Water Before and After PPP

80

70

80

50

40

30

20

10

0 Annm AntEtya BarranquSla Magene Oeza Gdansk Smegd Z a M

The Evidence o f Private Financing

Investment levels under water and wastewater PPP’s are tracked by the PPIAF Private Participation in Infrastructure (PPI) Projects Database (ppi.worldbank.org). The evolution over the last 15 years i s shown below:

I hveshnt comntrirents w3-S hi(lIm1 RORCtS

l2 1 T 45 40

35

30

25

J: 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 MOO 2001 2002 2003 2004 2005

Ixy---- L *---- I --, _-_----I-- - Other investrrent cMITRtmentS - Large comrdrnents - Ropcts

The PPI statistics must be viewed with caution since they represent a mixture o f promises or commitments of investment during the concession period, as was the case of the concessions in Buenos Aires (1993), Manila (1997), Johor (2000), and Syabas (2004), and payment for publicly owned shares, as was the case for the Chile privatization in 1999. Investment commitments may or may not be realized during the concession period but will most certainly not take place in the year of the signing o f the concession as the PPI data imply.

In contrast, the purchase o f the shares previously held by the Government holding company C O W 0 in Chile does represent an actual private sector investment in the sector although not in


water supply and wastewater investments per se. The private purchaser of the shares, in the concessionaire in the capital city o f Santiago was willing to pay the agreed price in relation to the perceived net profit o f the operation in the future. The price reflected the private investor’s conviction that the regulatory system in Chile wi l l continue allowing a l l water and wastewater concessionaires a sufficient return on assets.

Actual privately financed investments in water and wastewater PPP’s are not available and would require a large effort to track. The weakness of the regulation in the developing country i s such that i t would be unlikely that the private partners in PPP’s would wish to divulge such information in many cases. As a result, it i s not possible to state with any degree of assurance what the effect o f PPP in the sector has been in terms o f private financing. It should be noted that only the investments realized under many forms of PPP such as management and lease contracts are financed by the government, and not by the private partner.

Operational Financial Sustainability of PPP’s

Related to the private partners’ willingness to invest at their own risk i s their ability to succeed in bringing about operational cash surpluses. Such surpluses depend, in part, on the tariff policies for each specific contract and even more on the private partner’s capacity for metering consumption and billing and collecting on the basis of the meter readings. The adjacent graph shows the financial working ratio before and after the PPP contract for the same cities contained in the PPIAF study. The financial working ratio i s defined as the ratio between cash operating costs (with depreciation excluded) and cash revenue, i.e. collections. A financial working ratio below 1.0 means that a cash surplus i s generated which can then be used to pay for debt service and/or for financing investments.

Financial Working Ratio Before and After PPP’s in Selected Cities

2

1.5

1

0.5

0 Amman (6 yrr) Anlalya (6 yrs) Earranquilla (15 yrs) Cartagena ( I O yrs) Senegal (1Wrs) Zambia (5 yrs)

A common objection or suspicion of PPP’s i s that the contracting with a private partner i s invariably followed by tariff increases. Tariffs may indeed be increased in such cases where they were previously far too low in relation to costs and in relation to the financial needs of the utility. However, this i s not always the case when the tariff i s expressed in constant prices, i.e. when the inflationary effects are taken out. Instead, it i s not uncommon to find increasing collections and decreasing tariffs in constant prices. One example i s the performance of the management operator


that managed the Amman water supply and wastewater system for seven years. The adjacent graph shows the efficiency gains made possible by savings in operating costs and by better collections o f billings: The graph reports on financial improvement, measured by the inverse of the financial working ratio (Le. cash collections/cash operating costs) as compared to the average tariff level, measured in constant prices with the inflationary effect eliminated. Had the working ratio grown only at the pace of tariffs, i t would imply that there were no gains in the form of higher productivity from resources deployed. In the event, the graph shows that the management contractor was able to achieve substantial productivity gains as demonstrated by the rising curve o f the inverse o f the financial working ratio and the dropping curve of constant value tariffs.

Efficiency Gains under the Amman Management Contract (2000-2005) General Experience from PPP’s

In conclusion then, it would seem that properly drafted and well supervised PPP’s can offer improvements in service quality; in service efficiency; but less so in terms o f providing long-term

150%

1 AWL ,P ’ 1 7 1 , ”

130%

120%

110%

100%

90%

, Efficiency Gain

/’ I ,/ I

80% 4 2000 2001 2002 2003 2004 2005

I -+ Average Tariff 4- Inverse of Wolking Ratio

financing at their own risk. The somewhat tentative conclusions must be attributed to the fact that PPP’s comprise a wide range of options where the risks and incentives for the private partner vary enormously. The public partner in a PPP must learn to understand the private partner’s way of assessing risk in order to jointly find risk mitigation that will make PPP’s into win-win scenarios from which both the public and private partners will gain. The public partner or employer in a PPP should be at least as knowledgeable as the private partner in order to find and adequately supervise a sustainable PPP. This has often not been the case in PPP’s in developing countries. Instead, the government partner may have faced the issues of PPP for the f i rst time while the private partner may have had experience from a number o f contracts elsewhere. Suffice it to say that the starting point to test the sustainability o f a potential PPP must be the risk reflection that the private partner will routinely undertake. Such a simplified risk analysis with the appropriate mitigation and allocation of risks i s shown in Annex 1.

Options o f Private Sector Participation (PSP)

Based on the reflection of how much risk the private partner will be willing to assume, the first decision to consider i s the kind of PPP option that i s best suited to the particular situation. The adjacent table summarizes the most common PPP options but it i s possible to design hybrid forms


of the basis PPP options to match the appetite for risk o f the public and private partners. The three key parameters are ownership; financing o f new investment; and operational responsibility. The risks for the private partner increase with the responsibility for financing and reach the maximum with three options: concession, build-own-operate-transfer (BOOT) schemes and full divestiture. Given that the water supply and wastewater sector i s capital intensive in relation to annual collections the necessary period for these three high-risk options are necessarily the longest since tariff levels would otherwise be so high that the political acceptance would be in jeopardy. However, with longer time periods necessary to recover investment costs the political risks of changed tariff policies increases.

Sustainability of the contracts requires the perception o f an equitable sharing o f the efficiency and financial gains between public and private partners. The same PPIAF study identified the existence of sufficient funding o f investment as another prime explanation o f success. The funding should ideally be in the same currency as that of the revenue being collected to avoid the cost of managing the foreign exchange risk. Part of the explanation of the relative success o f the Morocco hybrid concessions in water and electricity (See Box) was local currency liabilities on the capital account. In al l instances, it i s important that the public sector partner has realistic expectations of what a private partner can achieve within a given time period to improve the coverage, quality, efficiency and sustainability o f services. As PPP deepens through allowing the private sector to maintain and operate distribution assets the synergies will remain strong. There are considerable economies of scale between the two services such as for planning, construction, overhead costs and asset management but particularly in the commercial area. Creating and updating consumer databases, and meter readings, billings and collections are al l reduced in cost through the combination of the two services under one enterprise. The combined economies have been estimated to reach about 20% o f costs in the Casablanca concession.


EXPERIENCE FROM INDIVIDUAL COUNTRIES

Only a handful o f countries have opted for a broad use o f PPP to manage their water supply and wastewater sector. As a general rule, PPP has greater chances of success in wealthier countries. The four countries with the widest use o f PPP are Chile (national income USD 11,500 per capita) France (USD 30,500 per capita); Spain (USD 25,800 per capita) and the United Kingdom (USD 32,700 per capita), a l l expressed in terms o f purchasing power parity. However, there are outliers such as two high-income developed countries, Japan (USD 39,000 per capita) and the United States (USD 42,000 per capita) with minimal PPP. The remaining four developing countries surveyed, Colombia (USD 7,400 per capita), Morocco (USD 4,400 per capita), Senegal (USD 1,800 per capita), and Turkey (USD 8,400 per capita) have introduced limited but promising PPP’s. The latter four countries have reached a level o f socio-economic development that i s most akin to Tunisia’s where the per capita national income i s USD 7,900. The table below provides an overview of the levels o f service coverage, quality, efficiency, and tariff levels for water supply and wastewater. It can be seen that better performance i s not necessarily associated with either public or private management. The underlying determinants for good performance must be sought deeper and deal with explicit performance criteria, effective systems for monitoring and regulating compliance with them, and incentives and sanctions for managers depending on results o f service provision.

Coverage, Efficiency, and Sustainability of Selected Countries’ Water Services

In order to gain a ful ler understanding of the policies, regulations and traditions that help explain each country’s development a fuller analysis i s given below. In a few instances, particular cases are provided and that might assist Tunisia in distilling the relevant lessons for i t s own sector development strategy.


Chile -Public Corporate Utilities with Subsequent Privatization

The Chile model of PPP i s arguably the most elaborate. The country adopted four cornerstone laws in 1989 that set the sector on the path to greater efficiency and sustainability:

A concession law whereby each operator would have to sign a concession agreement with a regulator, with clear performance criteria in terms of coverage and quality of service; A law creating the regulator; A law stipulating that each operator would be obliged to charge the full cost o f service to all consumers, and with detailed instructions on how the full incremental costs should be calculated; and A law establishing the principle o f subsidies to low-income, eligible households in order to enable them to pay the full costs o f service.

The starting point o f reform was a sector with publicly owned share corporations that had the initial concessions. After two rounds o f successful application of the tariff law, with five years apart, the Chilean government felt that the main political, regulatory risk had been reduced to a level where prospective private partners would offer attractive prices to purchase the publicly owned shares. A series of share sales was successfully concluded where private companies paid share prices equivalent to about USD 400 per water and wastewater account. The sale of 42% o f the publicly owned shares in the Santiago de Chile concession brought in close to USD 1 .O billion to the Government coffers. Subsequently, the now largely privately owned companies continue to operate in accordance with the rules of regulation. The sector has complete coverage of urban water supply and sewerage and the level of treatment o f collected wastewaters i s rapidly approaching 90%. Annex I provides a more detailed description of the Chilean sector.

Colombia -Municipal and Regional Public Utilities with Increasing PPP

The organization o f the Colombian sector has been shaped by the country’s relatively large size and by a difficult topography that made communications difficult. The result has been a tradition o f municipal and regional autonomy that was subsequently enshrined in the 199 1 constitution. The subsequent LAW 142 of 1994 vested the responsibility for service provision with the municipalities and, for rural and some peri-urban areas, with communal water boards. There are about 12,000 individual service providers in the country. Among the larger providers 73% have direct municipal service, another 17% have private provision, and the remaining 10% have mixed public-private management.

A Vice-Ministry o f Water and Sanitation, created in 2006 within the Ministry o f Environment, i s in charge of setting sector policy. The regulation that public and private service providers comply with policies i s vested with two bodies: the Comisibn de Regulacibn de Agua Potable y Saneamiento (CRA) and the Superintendencia de Servicios Publicos Domiciliarios (SSPD). CRA defines criteria for efficient service provision and sets tariff policies, while SSPD regulates the actual quality o f service. The dichotomy has created tensions since the CRA tends to try to keep tariffs to a minimum while the SSPD demands high quality of service, at times without considering that such higher quality may require sufficient tariff increases. Tariff policies have the peculiarity that tariffs increase progressively with cadastral values o f the property served. The assumption i s that real estate values are a proxy for the income of the owner o f the property.

Colombia i s proof that both public and private management can be successful. The major public utilities as in the capital Bogota and in Medellin, have provided efficient quality service for decades. Private providers have grown rapidly in numbers. At the present time, there are about


120 fully private service providers and 50 mixed public-private providers. Two of the latter PPP’s are of the Spanish model “empresa mixta” and has achieved impressive results.

Colombia Shows the Way in Better Use of Existing Capacity

Barranquilla, a city o f 1.5 million on the Caribbean coast, was under private operation from 1925 to 1960. Universal coverage and good service quality made the city’s water supply the best in Colombia. However, the municipal government took over operations in 1961 and in three decades operations and service quality deteriorated to rival the worst in the country. The crisis reached a climax in 1991 when the World Bank suspended disbursements under an existing loan. The central government and civic organizations in the city rallied around reform that resulted in the creation o f a new company. A Spanish private operator, AGBAR, assumed operational control in 1996 to be followed in 2002 by another Spanish operator, Canal Isabel 11. A capable manager was successful in boosting water coverage from 78 percent to 97 percent in five years and sewerage coverage from 68 percent to 88 percent. Service quality improved rapidly. The positive achievements were possible mainly through a better use o f existing facilities and firm management that sharply reduced undocumented connections and unmetered consumption. Annual water production actually dropped from 17 to 15 million cubic meters although annual consumption rose by a third from 7 to 10 million cubic meters and the number o f connections grew by 44 percent from 180,000 to 260,000. As a result, the percentage unaccounted water decreased fiom 55 percent to 38 percent in five years.

France -Fluid Private Sector Participation with Contract Regulation

PPP in France i s of a long tradition. Its top two private operators, Veolia (ex Compugnie Gknkrule des Euux) and Ondeo (ex Lyonnuise des Burn) each serve directly about 130 million worldwide but considerably more when including the private operators and contracts where Veolia and Ondeo hold a controlling interest. I t i s probable that these two operators serve directly and indirectly close to half of the 700 million people worldwide with service from private operators. The French model at home rests on five principles:

First, the responsibility for the provision of water supply and wastewater services i s with the individual municipalities. Specifically, it i s the mayor in each municipality who i s responsible for providing services; Second, the municipalities may chose to provide services with their own personnel (gestion en rkgie) or indirectly through contracting with a private operator (gestion dklkguke). It i s the mayor in each municipality who wil l sign the contract with a private operator. A minority of the 3 7,000 French municipalities have signed PPP agreements with private operators but the largest municipalities with the majority o f households are indeed served by private operators; Third, France lacks central economic regulation. Instead, regulation i s by contract, i.e. each PPP i s regulated on its own merits by the courts when disputes arise. Such contract regulation reduces the sector overhead, but at the same time introduces the risk that contracts may be misused as a source of income for political parties. On the other hand, public scrutiny and ultimate accountability at the periodic municipal elections go a long way towards ensuring regulation through the forces o f private operators competing for the contract of providing services in ultimate competition with the possible self-provision of each municipality (gestion en rkgie); Fourth, France relies on the three key directives o f the European Union for quality regulation o f the services provided. I t i s the Ministry of the Environment that exercises the environmental regulation. The three EU directives are the Urban wastewater treatment directive o f 1991; the drinking water directive of 1998; and the water framework directive of 2000 that regulates the management o f each country’s water resources;


Fifth, in France, the water framework directive i s implemented by six water agencies (Agences de I’Euu, formerly Agences de Bassins) that bring together all stakeholders at the basin level in a “Water Parliament”. The principle of cost recovery i s upheld through levying water abstraction fees and wastewater discharge fees. Water and wastewater infrastructure i s then financed from the proceeds of these fees according to basin-wide priorities. The same principle of full cost recovery i s reflected at the municipal level where the presumption i s that user fees are sufficient to pay for al l operating and capital expenditure (OPEX and CAPEX).

Japan -Semi-Autonomous Public Utilities with little PPP

Water supply and sewerage are usually managed separately in Japan. Water supply i s provided by statutory semi-public agencies that report to the municipal councils who represent the municipal owners o f the systems. The councils appoint an independent Commissioner o f each water supply agencies and exercise control and oversight, made possible by the independent corporate accounting system that i s mandated. In contrast, sewerage utilities are simply departments within each municipal administration and the department head i s accountable to his mayor.

Water supply operations are subject to meeting the standards stipulated by the Waterworks Law (1957), which i s regulated by the Ministry o f Health, Welfare and Labor, whereas sewerage operations are subject to the Sewerage Law (1958) under the Ministry of Land, Infrastructure and Transportation. In total there are some 2,300 water uti l i t ies and 3,700 sewerage utilities. Interestingly, no distinction i s made between urban and rural water utilities.

In keeping with its semi-public character water and sewerage utilities attempt to strike a compromise between: (i) the high efficiency and financial autonomy that often characterize private sector operations; and (ii) the public oversight that i s made possible through public ownership and governance. The monitoring i s facilitated by well-defined performance indicators that refer to finance, production, and quality o f service, customer service and the like.

All water and sewerage utilities are assumed to raise sufficient operational revenue to pay for the full cost o f operations and maintenance. As for water supply the assumption i s also that customer fees will cover most or al l capital costs except for the very largest infrastructure works that may receive subsidies from the national government. Correspondingly, the working ratio of water utilities i s in the range from 0.4 to 0.6 in order to generate the necessary surplus. In contrast, it i s accepted that sewerage capital works are eligible for substantial subsidies, possibly in consideration of their character of considerable environmental and health external benefits. Accordingly, the Ministry of Land, Infrastructure and Transportation provide subsidies for a minimum of 55% of wastewater treatment plants, and for 50% of sewerage works. It should be noted that all households are obligated to install water-flushing toilets and connect them within three years o f the completion o f the sewerage system in their neighbourhood.

Japan offers three lessons that may be relevant to other countries: (i) even though the sector institutions and governance are clearly public, the agencies are still required to be financially autonomous and subject to considerable scrutiny; (ii) the water and sewerage agencies have attained high labour productivity with the combined productivity o f 1.8 staff per thousand water and sewerage connections. This productivity has been possible because of high capital intensity and by growing outsourcing. At the present time, waterworks outsource about 15% and sewerage works about 30$% o f their operational budgets; and (iii) the agencies’ finances are sound since they can count on a dependable mix o f consumer fees and national subsidies.


Morocco -Public Management with Growth of Power and Water Concessions

Between 1914 and 1970 water and energy distribution were managed by the private Lyonnaise des Eaux. After independence the country chose to replace the private concessions with public local water operators, “regies”. A special agency, Office National de 1 ’eau potable (ONEP), was made responsible for the provision o f most bulk water.

Starting in 1997 the Government chose to re-invite the private sector to provide water supply, sewerage and electricity services under quasi-concessions. Accordingly, in 1997, Lyonnaise des Earn returned to Casablanca under a directly negotiated contract. Subsequently, another French operator, Vivendi, took over the concession for Rabat and won a competitive bid for concessions in Tangiers and Tetouan. The four concessions account for about 40% of al l urban consumers and are favored by the fact that two thirds o f revenue comes from electricity services. The “concessions” are a hybrid of the French “afSerrnage”l1ease contract and a pure concession since the private companies are bound to finance less than one third of investments. The four concessions are entirely regulated by contract where there are explicit performance criteria for coverage, quality and efficiency o f service. The tariff i s a mixture o f price cap (with an annual cap on tariff increases), rate o f return (with a return sufficient to guarantee financial viability o f the cash flow; and pass through o f certain costs such as bulk water cost increases and of adjustments for inflation. The contracts are regarded as successful in terms of improved technical performance, better financial performance (in part because o f synergy between electricity and water services that have reduced operating and administrative costs by some 20%) and with favorable evaluation from consumers as to the quality of service. However, the concessions have failed to make much of a dent in service provision to the lowest income areas. Remarkably, the concessions have managed to finance much of their investments through local banks in local currency, thus eliminating the foreign exchange risk. Non-Revenue Water i s at present about 27% but i s contracted to drop to 20%.

Senegal-Adapting Private Lease Contracts to West Africa

At independence in 1960, the urban water supply and sewerage service was operated by the private Compagnie Ge‘ne‘rale des Earn du Se‘ne‘gal under a long-term “concession” contract with the Government. Increasing political interference culminated in the nationalization of the company in 1971. A state-owned public utility, SONEES, was then created to manage the water supply and sewerage service. SONEES capacity was somewhat limited by tariffs set by the Government at levels insufficient to fully recover operation, maintenance and capital costs. Also, large accumulated arrears, mostly from public customers and parastatals, affected negatively SONEES’ balance sheet and caused SONEES and the Ministry o f Finance to regularly write-off unpaid water bills against debt service obligations and tax liabilities. SONEES was a reasonably well performing operator, but the division o f responsibilities between the Water Ministry (Minist2re de 1 ’Hydraulique) in charge o f developing water supply and sewerage infrastructure and SONEES in charge of providing the water supply and sewerage service, led to a poorly performing sector that financing agencies were reluctant to support.

Senegal searched for reforms of the sector and studied the examples of largely successful private sector operations in neighboring: (i) CBte d’Ivoire, where the water supply and waste water service had been operated by an Ivorian private operator (SODECI) under an “affermage” contract since 1959; and (ii) Guinea Conakry, where a private operator (SEEG) had been successfully mobilized in the late 1980s to rehabilitate run down water supply operations under a ten-year “affermage” contract. The country chose to reform path with the following key features:


SONEES was liquidated and replaced by an asset holding company “Socie‘te‘ Nationale des Eaux du Se‘ne‘gal” (SONES) to administer and expand the water supply infrastructure; SONES contracted out the operation o f the water supply service and routine maintenance o f the water supply assets in Dakar and the other 55 cities and towns, under a 10-year affermage3 contract with a private professional operator; and A national sanitation agency “Office National d ’Assainissement” (ONAS) was created to develop and operate the wastewater collection and disposal.

Four international operators, all from France, expressed interest in operating the water supply service in Senegal: After a two-stage competitive bidding with technical and financial proposals SAUR presented the lowest evaluated proposal for an operator rate equivalent to 62% of the tariff prevailing at the time. Upon contract award, SAUR incorporated in Senegal the “Se‘ne‘galaise des Eaux” (SDE) to s ign the “aflermage” contract with SONES and the Government. SAUR held 58%of SDE’s shares, with the remainder held by private Senegalese investors (32%) and 5% each by the State and former SONEES staff. SDE’s operating performance has been positive. On the basis o f the operational and financial improvements, Senegal and SAUR renegotiated an extension o f the “aflermage” contract by five years without any external assistance, indicating that all parties, Le., the Government, SONES, the operator and the customers are satisfied that this “win-win” arrangement i s worth extending. The case study offers a number of lessons:

(i)

(ii)

Strong and sustained political will i s necessary to drive and implement sustainable reform o f which public private partnership i s just one element; The Government has the power to direct a private operator to whatever results it wishes to implement. The social goal of extending the service to the poor was achieved through the construction o f the operator rate (that did not distinguish between rich and poor customers) and through the allocation of sufficient funding to finance extension of distribution networks and building social connections in poor areas; The private operator contract was well prepared with substantial World Bank assistance and the use of highly experienced consultants; A significant capital expenditure program was implemented in parallel to the institutional reform to rehabilitate and extend infrastructure; the World Bank granted two loans of US$lOO million and US$125 million, respectively, and was joined by regional, bilateral agencies and even local commercial lending institutions. SONES contributed about 10% o f its capital expenditure program from the cash generated from operations; The World Bank provided significant technical assistance to improve the capacity of the public sector: this created equality between the private operator and i t s public clients. A more knowledgeable public sector client has contributed to a stable partnership for the benefit o f the sustainability of the contractual arrangement; and Successful and transparent public private partnerships can be implemented without an independent regulator. The use o f a commercial auditing firm to certify the operator’s performance and contract compliance and use o f a detailed financial model to make joint decisions on future investment and affordable financing conditions proved to be efficient substitutes to a more traditional regulator (performance o f individual regulators has often been unsatisfactory in Africa).

(iii)

(iv)

(v)

(vi)

Affermage and lease are fairly similar contracts that transfer a significant part o f the commercial risk to the operator. In a lease, the operator i s contractually obliged to pay a fixed lease fee to the asset holding company. In an affermage, the operator i s obliged to pay an agreed share o f the collections. The commercial risk o f a lease operator i s higher than for an affermage operator, but the collection risk remains substantial for the latter.


Spain -Public-Private Co-Existence through Joint Ownership Companies

Spain represents an interesting mix o f public and private operators of water supply and wastewater systems. The some 8,000 municipalities are formally responsible for providing the services but they have devised many ways for exercising their responsibility. All in all, different forms o f public management provide services to about 50% o f the population, private providers provide services to another 32%, “ernpresas rnixtas” service 12%, and the municipalities operate directly systems for only 7% of the population. The latter systems are usually in the smaller municipalities. The Spanish model of creating joint ownership companies (“ernpresus rnixtus”) attempt to reduce the political risk through the creation o f holding companies, jointly owned by the municipal government and the private partner. Such joint ownership models have proven successful in other countries as well, such as Colombia, and Mexico. Annex 3 provides a more detailed explanation o f the model. ”Ernpresus rnixtus” exist alongside other public and private management models, such as direct municipal operations, or concessions such as in Barcelona.

Turkey-The Historical Legacy Affecting the Governance of Water and Wastewater

The political importance o f water in Turkey i s growing. Water i s becoming scarce and by 2025 Turkey will only have 1,000 m3 per capita, the definition for water-stressed countries. At the same time, the negotiations for Turkey’s entry into the European Union will require the country to move towards greater efficiency in the use o f water. Legislation and operational practices that in some cases date back 80 years will have to change to meet EU directives to enable Turkey to comply and compete. I t i s not sufficient to simply build more infrastructures as in the past. The time has come to operate efficiently and maintain properly what exists. Allocation criteria must be modernized to maximize benefits from scarce water between competing demands.

The same amount of water must produce more wealth. At present, Turkey produces about USD 5 of Gross Domestic Product per m3 o f water used, well below the worldwide average of USD 9, USD 30 in the European Union, and USD 55 in Israel.

There are operational inefficiencies with non-revenue water in the order of 50% for most municipalities. Investment inefficiencies are driven by the fact that investments are subsidized. Cheap financing reduces the pressure on bulk water agencies and on the municipalities to invest as efficiently as they could. The variations in investment productivity, as measured by the average cost of connecting one person to piped water and sewerage, are quite large. The most efficient utilities have managed to connect the un-served at costs one third o f the average for al l utilities In the case of central government agencies, there has been the tendency to begin more new works before the started projects were finished with the inevitable result that at one time the average implementation period for projects exceeded 20 years.

Municipalities are responsible for providing potable water and wastewater services. Service quality varies widely, with the metropolitan areas being the best and the smaller cities and towns the worst managed. The absence of transparent economic tariff regulation has meant that consumers often pay for the inefficiencies o f public management, and that political meddling in the tariff setting has been excessive.

To date, the water supply and wastewater sector has signed three contracts with Private Sector Participation. The first was the construction of a bulk water system designed to supply the municipality of Izmit and was signed in 1993 with an international operator with a Turkish partner. The second was the contracting of operations o f Antalya’s water supply and wastewater


system that was signed in 1996 with another international operator associated with a Turkish partner. The third was the Cesme-Alacati operations contract that was signed in 2003 with yet another international operator, in association with a Turkish partner.

The Izmit scheme proved very expensive and the Turkish Treasury i s still paying for the annual minimum payment to the contractor even though litt le demand exists for the expensive water. The Antalya lease contract started out well. The private operator began operations in 1997 reduced costs and improved service quality initially but incurred losses, in part because o f its low and unchangeable bid prices. The private operator declared bankruptcy and the municipal water supply and wastewater company was forced to take back operations. The Antalya contract then became the object of international arbitration. The third contract in Cesme i s s t i l l operational. Historical reasons help explain some of the reluctance o f municipalities to use private operators, particularly if they are foreign. Additionally, municipalities do not wish to lose access to the revenue from water and wastewater operations, which are often used to pay for operational, and capital expenditure in other areas in the municipalities.

United Kingdom -Divestiture of Assets to Private Operators with Tightening Regulation

The United Kingdom model i s the most extreme form o f divestiture since it allowed private companies to purchase the physical infrastructure while at the same time being allowed benevolent treatment by the sector regulator, OFWAT, in terms o f tariff increases. In the first two five-year extensions, the privatized companies were allowed annual tariff increases over and above the rate of inflation. The fiscal effect of the privatization i s also disputed. Some estimates claim that the government actually paid the private operators to take over the infrastructure. The Government wrote off about 4.0 billion pounds in accounts receivable on the previous publicly owned companies, provided a “green dowry” of about 1.0 billion pounds, and paid investment bankers, 300 million pounds to arrange the sales o f the public companies. In return, the government received about 5.0 billion from the sales of public water supply and wastewater agencies to private operators, hardly a brilliant proposition. The United Kingdom privatization would seem to have been driven to a large degree by the ideological conviction by the party in power at the time that the public sector should be reduced in size. Questions about its sustainability can be raised now that the regulator i s less generous with granting tariff increases.

United States -Public Operators with Separate Price and Quality Regulation

Somewhat paradoxically, although the US economy i s perceived to be driven by free market forces, the provision of water supply and wastewater i s largely a municipal affair. There are about 54,000 public water systems in the United States. In urban areas, service i s provided either directly by towns or cities or indirectly by public utilities that are owned by the respective towns and cities. Privately owned water supply and wastewater utilities operating under concessions by local jurisdictions represent a rare exception.

The prevalence of municipal operations could conceivably be explained by a tradition o f municipal operations that will provide for significant public employment that could be a source o f political patronage. Another reason may be the fact that tax-free municipal bonds are an important source of financing of investments.

Economic regulation of water supply and wastewater tariffs i s carried out by state Public Utility Commissions. In contrast, quality regulation o f both drinking water quality and o f wastewater effluents i s the responsibility of the federal Environmental Protection Agency (EPA). EPA i s the

,


regulator of two important pieces of legislation: the Safe Drinking Water Act and the Clean Water Act. Water tariffs in the USA are among the lowest in OECD countries, partly because necessary investments in rehabilitation and renewal o f the aging infrastructure have been deferred. On the other hand, consumption levels are significantly higher in the USA than in Western Europe. As a result, the total consumption bills are quite similar. About one third of the tariff schedules favour conservation through increasing block rates, whereas one third favours increasing consumption through decreasing block rates. The remaining third i s linear and neutral.


Annex 1.1

The Potable Water and Sanitation Sector in Chili - Detailed Analysis

1. In Chili, potable water and sanitation services are provided by 18 regional concessions, created during the end o f the 1980s and subsequently privatized towards the end o f the 1990s, which serve almost four mill ion subscribers. Some international professional operators have interests these concessions in partnership with Chilean investors.

2. Chilean concessions are able to finance their infrastructure development solely through their water production surpluses, commercial loans and the issuance o f debt obligations with no government subsidies. This financial policy was implemented when service area coverage rates were already high, both for potable water and sanitation, and the substantial program o f wastewater treatment was not yet in place. Tariffs set by regulators were based on a production efficiency reference scale to encourage concessions to optimize their investment programs, and reduce production costs to ensure the sustainability o f their operations and the mobility o f capital at attractive rates. In 2006, sector investments reached US$285 million, o f which 70% was for sanitation. For the next eight years, total investments o f US$1,200 mill ion are planned, o f which 65% comes from water billing and wastewater treatment. According to the Regulator, the average returns on private capital invested in concessions had reached an average o f 16% in 2006.

Tariffs and Economic Regulation

3. Specialists agree that WSS tariff regulation in Chile i s one o f the strongest performers worldwide (see Section D). According to the tariff law o f 1988, WSS tariffs are set according to the following principles: (a) “dynamic efficiency” which refers to a model efficiency concession in terms o f production and investments; (b) “economic efficiency” which refers to the long-term marginal cost o f each WSS system5 ; (c) “intellectual clarity” to guide decision-making for production and consumption; (d) “equity” which eliminates subsidies between consumers within a same WSS system; and (e) “auto-financing” in the case where the model concession would not be auto-financed in the short term when applying marginal cost tariffs. Tariffs are set by regulators, for five years, for each WSS system within a concession on the basis o f an efficient production performance enhancement program. The tariff includes one fixed portion and two variable components for potable water and sanitation, which can be separated during high volume seasons. The tariff i s automatically updated to account for inflation. In 2005, average billing was equivalent to US$1.02/m3, o f which about half i s for sanitation. By the end o f 2005, average tariffs varied between US$0.91/m3 and US$2.38/m3 (the latter i s an extreme) for a monthly water consumption o f 20 m 3 .

Subsidy Arrangements

4. Chil i has implemented a targeted subsidy program to reduce WSS billing costs for low- income households. According to the region and type o f WSS system in place, subsidies account for between 25% and 85% o f water charges for the f i rst 15 m3 o f water consumed each month. Any additional consumption i s borne by the user at the regular non-reduced rate. Subsidies are administered by municipalities who verify household eligibility according to specific criteria

The 33% rate o f non-revenue water i s still relatively high, although performance indicators are satisfactory for all

The Regulator sets the tariffs for the 320 water networks and 270 sanitation networks managed by 18 concessions. concessions. 5


5. The central government also grants subsidies for electricity, telephone and gas consumption. In 2005, approximately 17.5% o f households benefitted from WSS subsidies for just over US$50 million, compared to a total billing amount o f approximately US$950 million. In areas where tariffs are high and the proportion o f low-income households i s substantial, almost a third o f all households benefit from these subsidies.

Organization o f the WSS Sector

6. It assigns urban WSS concessions and ensures the promotion o f WSS systems in rural areas through i t s Health Programs Unit. Control o f WSS’ regulatory service i s divided between the regulator o f the Health Services Commission (SISS) and the Ministry o f Health who sets the standards for potable water quality.

The Ministry o f Public Works oversees the WSS sector.

7. Until the late 1980s, WSS services were ensured by a national commission, i.e., a holding o f 1 1 regional associations and two autonomous organizations. However, sector revenues were not sufficient to finance production costs. In 1988, the General Health Services Law authorized the transfer o f 13s concessions to public, private or mixed capital enterprises in all regions. In 1988, the Health Services Tarif f Law and, in 1990, the creation o f the SISS Regulator were approved. Initially, most concessions were publicly owned. However, the enforcement o f the Tarif f Law, which aimed at charging the majority o f production and development costs to tariffs, facilitated the implementation o f performance enhancing programs


Description of the WSS Urban Sector (2005)

Subscribers Companies

Non- Subscribers Revenue Per Length

Production Sales Water Employer o f Network Water I Sanit.

Aguas Andinas ESSBIO

Companies

Esval Aguas Nuevo SMAPA Aguas Araucania Aguas del Valle Essal Small 11 companies Total

Network Size

8. In 2005, the urban WSS sector provided services for almost 3.9 million subscribers through i t s 35,000 km water network and 27,500 km sanitation network. Water production and sales represented 360 m /year/subscriber and 240 m /year/subscriber, respectively. Although the average ratio of 400 subscribers per employee (i.e., 2.5 employees per 1,000 subscribers) i s excellent, the performance of WSS companies can s t i l l improve the non-revenue water ratio which reached an average of 33% (equivalent to 36 m 3 per day, by network kilometer) and which represents an increase of four percentage points compared to the performance in 1999 (29%). A non-revenue water rate of 15% i s considered acceptable by SISS.

Investments

9. In 2005, US$288 million equivalent was invested in the WSS urban sector, of which almost 35% for wastewater treatment operations. An investment o f US$285 million was planned for 2006. For the periods 2007-201 1 and 20 12-20 16, investment programs have earmarked US$765 million and US$425 million for an average of US$153 million per year and US$S5 million per year, respectively. Table 5 shows the breakdown of investment programs. Between 2006 and 2016, investments totaling US$330 million (22.5%) for sanitation and US$625 million for wastewater treatment are planned. Five concessions (including Santiago, Concepcion and Valparaiso) plan on investing US$1,175 million, almost 80% of total investments. Based on an urban population growth of 2 million between 2006 and 2016, expected investments would cost US$750 per new household connection.


10. Investment Programs (US$ million)

Companies 2005 2006 2007-2011 2012-2016

Large 115 95 515 250 Medium 145 153 140 115 Small 28 37 100 60 Total6 288 285 765 42 5 Annual Average 153 85 Water 149 70 240 170 Sanitation 40 155 135 Wastewater treatment 99 160 355 110

Financing

11. following numbers were extracted from the 2005 financial analyses:

SISS publishes annually a detailed report on the global WSS global situation. The

0 Total invoices have reached US$950 million, representing an average o f US$ l .02/m30f billed water (an increase o f 7.1% compared to 2004). This amount does not include production costs o f US$407 mill ion (an increase o f 11 -5% compared to 2004). These numbers were prepared based on accounting data from non-production revenue, Le., US$340 mill ion (an increase o f 20% compared to 2004). Total sector assets represent US$350 mill ion (an increase o f 3.3% compared to 2004) o f which about US$3,500 in fixed assets. The debt ratio o f investment capital was 0.99 (a decrease o f 0.02 points compared to 2004). Average yields from investment capital reached 15.7% (2.2 points higher than in 2004). Investment capital yields have averaged 18% for large concessions, 10% for medium concessions, and 20% for small concessions.

0

0

0

Economic Regulation and Tariffs

12. impressive in the world. The Tarif f Law o f 1988 includes the following guiding principles;

According to sector specialists, WSS tariff regulations in Chile are some o f the most

0 Dynamic Efficiency. The tariff must be set based on an “efficient” company reference, Le., in terms o f production as well as investments. In the case o f concessions with a lower level o f performance than the “efficiency” reference, the dynamic efficiency principle can integrate indicator improvements over time.

0 Economic Eflciency. The tariff must be set based on the marginal long-term costs, which reflect the opportunity cost o f production for one additional m3 o f water, including external associated expenses such as the collection and treatment o f wastewater for each o f the 320 model water networks and 270 model sanitation networks. The marginal long- term costs are calculated by dividing incremental capital and production costs by incremental water sales.

Total investments also include expenses which are not related to water, sanitation and wastewater treatment.


a

a

a

13.

Intellectual Clarity. The tariff structure should provide incentives for producers and consumers alike for production and consumption decision-making. The tariff structure must take into account the different service phases (water production, water distribution, wastewater collection, treatment and elimination o f wastewater) for each system, as well as seasonal water demands. Equity. The tariff must be non-discriminatory, except for price variations in service provision. The tariff must eliminate all subsidies among consumers within a single WSS system: in other words, all subscribers, wealthy or poor, pay the same tariff within a single service area. Auto-financing. When marginal cost tariffs are applied, concessions will not be auto- financed. Here, the law acknowledges the need to set tariffs within an acceptable range for model societies to fulfill their short-term financial obligations.

Tariffs are set by SISS for five-year periods for each WSS concession, based on an efficient investment program and realistic performance improvement targets. Tariffs are automatically adjusted to include inflation. SISS i s currently preparing the fourth five-year tariff adjustment exercise. Average bil l ing rates were equivalent to US$l.O2/m in 2005. The tariff includes one fixed portion and two variable components for potable water and sanitation, which can vary according to seasons. Table 6, below, gives examples o f tariff structures for the Aguas Andinas Concession (Santiago) at the end o f 2005. Here, a typical invoice for a consumption rate o f 20 m per month was around US$18.2 (US$0.9 l/m 3) . For consumption rates o f 40 m /month and 60 m /month, average tariffs were US$0.89/m and US$l.O7/m 3 , respectively. The SISS website gives tariffs for all concessions. At the end o f 2005, tariffs ranged from US$0.91/m3 to US$2.38/m3 (extreme) for water consumption o f 20 m3/month, and US$0.92 m3 and US$3.57/m (extreme) for an average consumption rate o f 60m /month.

Example of New Tariff Structure Aguas Andinas Concession (Santiago)

End 2005

US$ eauivalent

Fixed rate 0.82 Variable rates Annual, non-peak Period Water 0.44/m Sanitation 0.43/m

Water 0.42/m Sanitation 0.43/m

Water 0.97/m Sanitation 0.43/m

Annual peak period

Overconsumption

Exchange rate US$l .O = Chilean $ 5 4 5


Capacity to Pay and Subsidy Mechanisms

14. In 1998, the Chilean National Statistics Institute estimated that water and sanitation costs represented 1.14% o f household expenditures, ranging from 0.77% for wealthy consumers to 2.35% for low-income households, clearly lower than the ceiling o f 5% set by the Regulator. More recent figures are not available. To lessen the burden on low-income households, the central government implemented a “targeted subsidy” program which covers between 25% and 95% o f the total invoice amount for the first 15 m3 o f water consumed. Any additional consumption must be entirely borne by the user at the normal rate. Subsidies are administered by the local governments, who are then responsible for assessing household eligibility according to specific criteria. The central government also allocates targeted subsidies for electricity, telephone and gas usage. In 2005, 573,000 households (approximately 17.5% of the total) received WSS subsidies, totaling some US$51 million (i.e,, 5.4% o f total WSS revenues). In areas where tariffs are high and there are a large percentage of low-income households, almost one-third of these families benefit from subsidies.


Annex 1.2

The Colombian Experience - Detailed Analysis

Background

1. Colombia covers an area o f approximately 1.15 mill ion km2. It faces the Caribbean Sea on one side and the Pacific Ocean on the other. I t s total population o f 44 mill ion in 2004 has recently increased at an average rate o f 1.8%. In 2004, the urban population made up 77% o f the total, Le., 34 mill ion people. The largest cities are Bogota (7.8 million), Medellin (3.0 million), Cali (2.8 million), Baranquilla (1.85 million), and Cartagena (0.85 million). In 2005, the gross national revenue per person was US$1,8 10, equivalent to US$6,820/person based on purchasing power parity. However, around 22.5% o f the population lives on less than US$2.0 per day.

Caracteristics of Urban WSS Services

2. In 2005 and according to the Residential Public Services Commissariat (SSPD, responsible for oversight by sector), urban WSS services were characterized as follows:

A potable water service coverage rate o f 94% (compared to 88% in 1993). Despite considerable progress achieved over the last ten years, WSS services are only o f good quality in the largest urban areas. A wastewater network connection rate o f close to 90% (compared to 82% in 1993). However, the quality o f service i s mediocre, as shown by frequent sewage overflows. A very low wastewater treatment rate (around 5%).

3. WSS services:

SSPD’s sector review has provided some additional data on the quality and efficiency of

Water supply services are constant in the large cities, e.g., Bogota, Medellin and Cali, but service outages s t i l l occur in medium-sized cities were services are provided 96% o f the time. This percentage falls below 80% for cities servicing between 2,500 and 25,000 water subscribers. Water metering i s basically universal in very large cities, reaching 95%, 85% and 78% for cities in groups 2,3 and 4. The percentages for sample groups who maintain quality standards are 95%, 91%, 93% and 76%, respectively, for cities in groups 1,2,3 and 4. Non-revenue water accounts for 38% o f production in very large towns, representing 50% more than in other categories o f cities. Only 36% o f wastewater i s treated in Bogota (1.36 mill ion water subscribers), 17% in Medellin and 46% in Cali. In smaller cities, the rate falls to nearly zero, and many treatment plants operate poorly.

Organization of the WSS Sector

4. The allocation o f responsibilities in the WSS sector i s defined in the 1991 Constitution, the law o f 1994 and i t s relevant decrees. Local governments oversee WSS services in their own jurisdictions. In 2006, 826 urban WSS service providers were registered with SSDP, although 2,O 10 were not.


Overall, the 349 service providers handling more than 2,500 subscribers and including 78% of the urban population, were responsible for WSS services as well as household waste collection. Certain operators, as in Medellin, also provide electricity and telephone services. O f these 349 operators, 11% were municipalities, 3 1% State commercial and industrial enterprises, and 11% were associations and other legal entities. Most service providers handling less than 2,500 subscribers were associations.

5. The Secretary o f State for Water and Sanitation defines the overall policies of the WSS sector. An urban WSS sector review was published by SSDP in 2006 and summarizes the main thrust o f these policies in the following areas: (a) social; (b) environmental; (c) regulatory, fiscal and cost recovery; (d) financing and sector incentives; (e) surveillance and control; ( f ) assistance to small local governments and indigenous communities; and (g) sector and land planning.

6. N o specific program exists for increasing the rate o f WSS service development, especially for wastewater treatment, but government provides important indirect aide through the legal and institutional framework, which it has implemented. For example:

WSS service access rights are outlined in the constitution, providing communities without WSS a legal basis for their demands; WSS service providers are requested to facilitate network connections by offering payment plans such as installments over three years’ time; Local governments receive tax breaks through the General Participation System7, SGP D; WSS service objectives are published in the National Development Plan; and Specific support programs for small service providers are implemented.

Investments

7. The sector review mentioned above does not include a breakdown of consolidated investment figures for the urban WSS sector as a whole.

Financing

8. The sector review shows, however, that for the period 2002-2005, total earnings of the largest 100 WSS service providers reached US$6,100 million, broken down as follows: (a) production revenues, 90%; (b) SGP contributions, 9%; and (c) other sources, 1%. SSPD has indicated that this revenue allocation represents the WSS sector as a whole. Based on data from the General Directorate of Planning, SGP contributions totaling US$1,300 million were allocated to the WSS sector between 2002 and 2005, averaging US$325 million per year.

9. Colombia was able to attract private infrastructure capital without a decrease in public financing. This private funding was channeled towards sector activities with direct investments rather than tax revenues through public enterprise acquisitions. SSPD has indicated that more than 20 urban WSS projects totaling US$400 million benefited from private financing during the period 2002-2005.

10. SSPD prepared an overview of the financial performance of the WSS sector which shows that total service delivery activities for water comprises 55% o f capital assets and 45% of debt obligations; the sanitation activities ratio becomes 59/4 1. On average, asset cost-effectiveness

Sistema General de Participaci6n. 7


stands at 1.7% for water activities and 3.7% for sanitation works, compared to 3.1% for telecommunications, 3.5% for energy and 13% for gas distribution.

Economic Regulations and Tariffs’

1 1. The Constitution of 1991 outlines the regulation of public services which were further strengthened by the law of 1994. This law i s an excellent example of public service legislation in Latin America. The Secretary of State for Water and Sanitation who defines the general policies for WSS, also oversees the WSS Regulatory Commission. One feature of the Colombian system i s the shared responsibility between “regulation” and “supervision”. The “Basic Commission for Potable Water and Sanitation - CRA” outlines the efficiency criteria for services and regulations for setting tariffs. SSPD, on the other hand, i s a multi-sector agency responsible for oversight of WSS companies, as well as energy, gas, telecommunication, and household waste collection operators, and the enforcement of anti-trust laws and the liquidation of bankrupt companies. SSPD also handles appeals and decisions regarding consumer grievances. However, one issue of concern under the current arrangement i s that SSPD has no authority in the selection of criteria which they are required to enforce. Moreover, since the WSS sector i s decentralized, it i s necessary to implement different regulatory arrangements according to the size of WSS service providers, Le., for large companies, serving half of the consumer base, for medium-sized enterprises, and for small operations for whom regulations could be replaced by technical assistance.

12. Water metering i s widespread. Cost recovery efforts have been maximized and this has led to a substantial decrease in domestic consumption from 34 to 19m3 per month between 1990 and 200 1. Considerable progress has been achieved in ensuring the financial viability of urban WSS service providers. This difficult task has required tariff adjustments from 100% to 300% for

’ consumers within the lower income strata. the larger WSS service providers essentially approved these adjustments. In smaller towns, heavily impacted by political pressures, there has been considerable resistance to tariff adjustments. The National Development Plan has recently frozen tariff adjustments for the most highly subsidized consumers. There i s also an ongoing debate on tariff level authorizations and setting rates of return for investment capital.

13. WSS tariff structures are often complex, and include six different types of domestic consumption, one category for commercial and industrial consumption, and another for administrative consumption.

14. Colombia has a long history of mixed subsidies for electricity, gas, telephone and WSS services. This system, which dates back to the 1960s, was legalized by the 1991 constitution, amended by the law 1994, and i s based on a common national framework. I t s guiding principle i s the reallocation of revenue on a national scale and uses poverty criteria for different neighborhoods, based on the quality and equipment of households. Consumers living in comfortable households pay a tax levied on their public service bills, whereas those from more modest dwellings receive a discount on their bills. Taxes and discounts are detailed in the bills. The law of 1994, however, entailed a decrease in these types of transfers, except in the case of WSS services where readjustments were a necessity.

15. The law of 1994, which introduced the principle of cost recovery, led to setting higher public service tariffs, resulting in a two-fold increase in the public service budget for households over a ten-year period. The average household allocates less than 5% of i t s budget, or US$20, to

Some data in this chapter i s derived from the World Bank Report on Colombia, REDI. See bibliography. 8


public service expenses. Without mixed subsidies, their bills would increase to US$35. For the poorest households, mixed subsidies play an important role: they spend 10% ( U S $ l l ) of their income on public service expenditures, whereas they would spend 17% (US$19) without subsidies. Electricity and WSS make up 75% on average of the total public service bill. WSS benefits from two-thirds of total subsidies received per household. Even if the justification for mixed subsidies i s not always apparent, the principle plays an essential social function in the WSS sector.


Annex 1.3

The Spanish Model of Joint Ownership Companies; “Empresus mklus” - Detailed Analysis

1, The mixed private-public ownership i s the “empresa mixta”, or “mixed ownership company”, and originated in Spain. Subsequently it has spread to other countries in Latin America. This management model i s relevant to individual municipalities of different size and will be the object of the subsequent analysis. The emergence of “empresas mixtas” followed the adoption of the 1966 National Plan o f Water Supply and Sanitation (WSS) that dictated that al l municipalities with more than 2,000 inhabitants should received improved services. By law it was the municipalities themselves that were obliged to should this responsibility. Subsequently, Law No. 7 of 1985 on Bases de Rbgimen Local (on Municipalities) codified the two alternatives for discharging this responsibility: either directly, or indirectly through partial delegation to specialized private companies, managing under concessions, leases, management contracts, or through “empresas mixtas”. Subsequently, Law No. 13 o f 1995 amends the previous Law 7/1985 and narrows the indirect management to three choices: concession, lease, or “empresa mixta.” Among other amendments, Law 13/1995 extended the permissible maximum duration of the contracts between the municipality and the private operator from the previous 50 years to 75 years considering the sum of contract extensions.

Ownership, Oversight and Operations

2. sanitation system with an “empresa mixta “involve a number o f steps:

The procedures for contracting the management o f a municipality’s water supply and

The municipal administration prepares a feasibility study comprising the legal, financial and technical analysis that will allow the Municipal Council to consider the creation o f an “empresa mixta”, a company set up with the role purpose of operating the municipal water supply and sewerage system, and co-owned by the municipality and by a specialized private operating company; Following the decision to proceed with this option, the public procurement procedures and bidding documents are prepared; The public competitive bid to select a private operator considers both a technical evaluation and a financial evaluation. The bid incorporates general instructions to bidders plus a draft copy of the bye-laws o f the “empresa mixta” to be set up; The bi-laws define the respective percentages of public ownership, exercised by the contracting municipality itself, and private ownership, exercised principally by the specialized private operator but leaving the door open for other non-public owners. Usually, the “empresa mixta” i s majority owned by the municipality with say 50% of the shares. The bi-laws will also specify the amount of equity and how new investment wil l be financed by the public and private co-owners. The remuneration of the private operator i s agreed upon and usually comprises a percentage o f gross revenue in payment for contributing technology, administrative know-how, and commercial and accounting systems. On the other hand, the municipality can negotiate an annual payment to be paid out o f revenue in return for handing over the fixed assets in the system to the “empresa mixta” for operations and maintenance. The public competitive bid i s awarded to the private operator that offers the most attractive proposal considering the financial and technical proposal and the private partner’s relevant experience.


The “empresa mixta” will then become operational under the bi-laws and contract contained in the bidding documents. Typically, the contract period in Spain may be at least 50 years and possibly up to 75 years considering extensions. The private owner/operator has full control over the daily operations. At the end o f each fiscal year, a portion o f each year’s profit i s distributed to the owners in proportion to their relative shares of ownership of the “empresa mixta”.

3. The oversight of the “empresa mixta” i s exercised at two levels. First, there i s the oversight exercised by the General Assembly o f Shareholders where both the public and private owners are represented. The General Assembly elects the Board of the “empresa mixta” that in turn appoints the General Manager. This level o f corporate governance and oversight i s analogous to that of any share company operating under the country’s commercial code. It affords the municipality full insight over the operations through i t s representation on the Board. Second, there i s the oversight exercised through the regulation of the country. The regulation takes two forms: (i) the quality regulation of the adequacy o f the water supply and wastewater services which i s exercised for instance by the Ministry o f Health and by the Ministry of the Environment; and (ii) the economic regulation of the level o f the tariff. In Spain it i s the municipalities that authorize tariffs under the general regulation of Price Commissions. With the creation o f an “empresa mixta” the Municipality both authorizes a tariff and i s a part owner of the regulated body, an ambivalent arrangement. In contrast, there i s no ambivalence as to who is responsible for the operations: it i s the private operator and he alone. The private operator proposes candidates for the post of a General Manager and lends it entire know-how to the daily operations. The incentives are clearly in favor of success since the private operator i s remunerated both for providing i t s know how, such as operating proficiency and information systems, and for helping generate a profit of which it receives a share in proportion to i t s share ownership.

Professional Support

4. One o f the common reasons for the municipality to form a joint venture with an experienced strategic private operator i s to professionalize the management by tapping the accumulated and updated know-how of i ts strategic partner. This motive gains importance when the quality regulation in the sector incorporates new requirements such as the treatment o f wastewater and demands for higher potable water quality. In Spain these two requirements seem to have encouraged municipalities to turn increasingly to private operators. In 2001, it was estimated that private operators provided approximately 47% of water supply services and 54% o f wastewater services. The main provider was Aguas de Barcelona through its affiliate Aquagest that has specialized in “empresas mixtas”. The fact that Aguas de Barcelona has other types of private sector contracts makes it possible to tap employees in a large number of cities in case a particular municipality with an “empresa mixta” requires specialized expertise. In Spain “empresas mixtas” account for 10% of al l privatized accounts, lease contracts account for 18%, concessions for 54% and other types o f private sector contracts for the remaining 18%. In terms o f number of contracts the share o f “empresas mixtas” i s likely to be higher since concessions and . leases are more common for the largest cities. Privately managed municipalities account for a surprisingly uniform share o f the municipalities in each population range with the exception of municipalities below 5,000 inhabitants where the private sector i s under-represented.

~~


Risk Analysis

Type of Risk Raw Water Quantity and Quality

Potable Water Quality

5. somewhat with the type o f bi-laws and operating contract o f each “empresu mixta”. However, the most common risk allocation and mitigation based on the common practice under “empresus mixtus” in Spain are shown below:

The allocation and mitigation o f the most common risks o f water supply systems varies

Risk Allocation Interregional rivers: the Central state Intraregional rivers: the Comunidad Aut6noma (regional body) “Empresa mixta”

Risk Allocation and Mitigation under “Empresas Mixtas” in Spain

Effluent Quality Land Rights

Demand Risk

Ditto “Empresa mixta”

“Empresa m ixta”

Tariff Regulation Risk “Empresa mixta”

Collection Risk “Empresa mixta”

Operating Cost Level

Risk Mitigation Explicit contract between “empresa mixta” and the Central Government or Region regulating quantities extracted

Quality requirements specified in the contract with the ‘Lempresa mixta”

“Empresa mixta”

Ditto The bidding documents and bi- laws will specify Complete metering and private partner experience wil l mitigate demand deviating sharply from projections Initial bid will be awarded on the basis o f the tariff. Subsequent tariff adjustment risk i s much mitigated by the fact that the municipality i s majority owner and also the authority fixing the tariff Experience, collections proficiency and strong financial incentives for private partner mitigate much of the collection risk Experience of private partner who controls operations mitigate this risk

Financing Risk

Construction Risk

The private partner provides financial know-how through its deep professional knowledge; the municipality provides the political influence to gain access to subsidized public financing Usually this risk i s much mitigated by sub-contracting with private contractors or directly with the private partner in the “empresa mixta”

“Empresa mixta”

“Empresa mixta”

6. The remarkable adaptability and stability o f “empresus mixtus” i s clear from the way risk i s managed and mitigated. Formally, most o f the risks affecting water supply and wastewater


operations are allocated to the “empresa mixta” the resilience due to the fact that it can rely on the respective strengths o f its private and public owners. Where operational proficiency and a thorough understanding o f risks are concerned, the “empresa mixta” can rely on its private owner. Where political support i s concerned, either with the local stakeholders or with the regional or central governments, it can rely on its public owner, the municipality and on its Mayor who i s the Chairman of the Board.

Autonomy and Accountability

7. The “empresa mixta” i s autonomous in the sense that it i s managed like any share corporation. None of its owners or managing staff has any statutory latitude to make decisions that would adversely affect the “empresa mixta” and the financial and operational soundness of the water supply and wastewater system. The performance o f i t s management i s registered in the annual report of the “empresa mixta” which i s a public document. In addition, the municipal council and in particular the Mayor are accountable to the consumers at large since they are part o f the decision to create an “empresa mixta” and since the Mayor i s the chairman of the board. A poorly performing “empresa mixta” may ultimately impact on the political fortunes o f both the municipal council and the Mayor since both are elected by the voters, who are also consumers.

8. The congruence between the financial and political fortunes o f the “empresa mixta” and the municipal administration i s also underpinned by the fact that the “empresa mixta” i s a local solution to local needs. There are no cross subsidies to other towns or to other regions. This will favor wealthy cities and towns and impact negatively on towns that are poor.

Regulation

9. The “empresa mixta” i s regulated like any service provider in the country. As noted in Spain, this implies that the contracting municipality monitors its operational performance, and that the statutory quality regulation i s exercised by the Ministry of Health and the Ministry of the Environment. Economic regulation and the setting o f tariffs i s exercised by the respective authorized bodies. The tariff i s set by the Municipal Council subject to the regulation and ratification o f the price commission within the regional Comunidad Aut6noma. In other countries, with “empresas mixtas”, notably in Colombia, the quality regulation i s exercised by the National Superintendencia de Servicios Pcblicos Domiciliarios and the tariff regulation i s under the National Tariff Regulator, the CRA. In addition, there i s the additional public scrutiny that the annual report o f the “empresa mixta” implies. Performance i s reported and audited financial statements are published. As for any share corporation, the “empresa mixta” must follow the requirements of external audits, in order to protect creditors and investors, but also to disseminate information to the public at large including to consumers and the media.

Competition

10. Competition for the market, i.e. for the opportunity of operating the system profitably, . takes place at the initial public competitive bid. The impression i s that this competition i s weak, at

least judging by the way “empresas mixtas” have been bid and set up in Latin America. Once the “empresa mixta” has been constituted with the particular private operator competition for the market will largely disappear for the duration o f the contract. As noted this period can be as long as 75 years in Spain and as long as 26 years outside Spain, such as in the contract in Cartagena, Colombia. As long as the “empresa mixta” operates normally while complying with the contractual service level targets and quality there i s no reason to dissolve the particular “empresa


mixta” and rebid. However, there i s some competition in the market in the sense that the highly professional management of the “empresa mixta” outsources functions where outside service contractors offer financial advantages.

Financing

11. The financing obligations of the public and private owners of the “empresa mixta” are specified in the bi-laws that will detail the amount o f equity and the public and private ownership proportions. This paid-in equity therefore i s the upper limit to the private partner’s financial exposure. Typically, the private equity i s not large and may initially be limited to a few millions US dollars, even in the case of large cities, such as Barranquilla and Cartagena that have 1.5 and 0.9 million inhabitants, respectively. The “empresa mixta” i s expected by i t s partners to finance replacement of assets and system expansions out of the surplus cash that i s retained in the “empresa mixta”. In addition, the “empresa mixta” attempts to capture any kind of financing available in the market. For instance, in Spain much of wastewater investments are financed with grants from the European Union. Similarly, in Colombia the “empresas mixtas” have financed much of investments with external financing, guaranteed by the Government o f Colombia.

Limitations

12. Given that the private partner in an “empresa mixta” assumes only limited financing risk an “empresa mixta” i s most suitable to improve on poor and inefficient operations in systems with limited investment needs. However, over time and with improved operations the cash flow surplus will be able to gradually support increasing investment programs. The financing requirements are relatively low in a mature country like Spain where demographic growth i s close to zero. Investments can be underpinned with a mixture o f operating surpluses and grants and long-term borrowings, available in a well-developed financial market.

13. The situation i s quite different in developing countries. High demographic growth and lagging service levels mean that investment needs are large. “Empresas mixtas” are also relatively complex to create. Experienced private operators like Aguas de Barcelona are scarce and will attempt to select those cities with the greatest potential for profit. These will typically be larger municipalities with good upside potential. Small towns are hardly prime candidates unless they are adjacent to already established “empresas mixtas”.

Replicability in Developing Countries

14. “Empresas mixtas” originate in Spain and have been replicated so far in Latin America only. Colombia has a number of “empresas mixtas”. The large city of Barranquilla presents an interesting example of an “empresa mixta” where the original private partner, Aguas de Barcelona, ceded management control to a management team, backed by local private owners who collaborate with the Barranquilla municipality. The severing of ties with the original backer, Aguas de Barcelona, does not seem to have impaired operational improvements. These have continued under an excellent General Manager who has strong incentives through a personal share ownership. The example shows that “empresas mixtas” can prosper in the absence of external private partners as long as the incentives for good performance exist. Other examples of “empresas mixtas” can be found in Campo Grande, Brazil and in Mexico (Cancun and Saltillo). All in all, these three countries have “empresas mixtas” serving about 4 million people. The fact that municipalities can become partners who share in the profits of an “empresa mixta” and that


they have full oversight in the management and strategic development through their representation on the Board i s attractive to local politicians. The political risks are substantially mitigated through this partnership and over time the “empresus mixtus” seem to become better accepted and more stable, at least in the three countries studied in Latin America.


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2002


Bibliography Drinking water tariffs study Statistics on drinking water / SONEDE

I Cost and management accounting report /200 1-2002-2003-2004-2005 / ONAS 1 - - I

Year 2004 2005

I Statistics Report: Water treatment plants operation / 2006 / ONAS 1 - 1

Documents pertaining to ONAS Financial statements / ONAS / 2000-200 1-2003- 2004 / ONAS Audit report ONAS / 2005 / ERNEST & YOUNG Annual report / 2000-2001 -2003-2004 / The national sanitation utility

Statistics report; Pipes and ancillary works operation / 2005-2006 / ONAS

Annual report / 2002 / ONAS

Statistics on consumers ANAS-SONEDE / 2004-2005-2006 / ONAS

Sanitation program / 9th Development Plan / 1997-200 1 / ONAS

2006

2006

I Sanitation program / 10th Development Plan / 2002-2006 / ONAS 1 - 1

Presentation note on sanitation works remote management / ONAS

Note on ONAS Information System / ONAS Statistics on customers claims / ONAS

I - I I Sanitation program / 1 1 th Development Plan / 2007-20 1 1 / ONAS

2006

2007

I Connection rate to urban sanitation network / 2005-2006 / ONAS I 2005 I I Contract- Program between Government and ONAS / 1997-2001 and 2002-2006 / ONAS I - I I Standard manual management conkol/ FMC I 2006 I

I ONAS organization chart / ONAS I_- I ONAS dissemination program / ONAS

Contract program implementation report 1997-2001 / ONAS

Number o f rolling stock by type / ONAS ~ ~ ~ - ~ ~ _ _ _ _ _ _ _ - ~ ~

Contract o f agreed objectives between Directorate-General & Regional Departments - Standard contract / ONAS

- ~~ -~

Water and Sanitation Strategy in Tunisia. Final Report . 116

Bibliography

Wage and salary costs table by college and by activity (3 1/12/2006)

I Analytical report 2005 - ONAS I I

Year

Rural sanitation sectoral strategic -GKW Consult I 1999 I

DGREE 9th, loth, and 1 lth plans

Laws and decrees pertaining to agricultural development groupings

Study on rural drinking water / SCET-IGIP

2007 Technical evaluation and implementation o f an institutional and organizational framework for the management o f the rural pilot project first part / SETUGE-Tunisie

2006 200 1

I

Law No 93-41, April 19, 1993, concerning ONAS

Other documents

Annual report on Infrastructure n09 / 20051 Institut National des statistiques

Making the most o f scarcity -World Bank Water Markets in Americas Larry Simpson and Klas Ringskog

PISEAU I Tunisia completion report -World Bank

Documents pertaining to DGGRE

Annual reports 2000-2005 DGGREE

Summary report on DRINKING WATER SUPPLY collective interest groups -2005- DGGREE

2005 2006

2008

I Documents on various investment programs I I

Water and Sanitation Strategy in Tunisia. Final Report, 117


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