Restructuring Cities for Efficient Service Delivery

Vivek SrivastavaWSP-SA

ASCI-WBI Program on “Strengthening Urban Management - Unlocking the Potential of

Indian Cities”Hyderabad January 24 2003

Productive Cities as Centers of Growth

The Context

• A New Global Setting Urban Millennium

• A New Management ChallengeCreating World Class-

Cities

Share of Cities in GNP

Level of Development

Share of Urban Areas in GNP

Low-income 55%

Middle-income 73%

High-income 85%

Important Implication

• Municipal service delivery cannot be seen in isolated context;

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

• Managing cities to be credit worthy • National economic growth and poverty

reduction efforts will be increasingly determined by the productivity of cities and towns

Models of Urban Governance

Which Model of City Governance?

• Metropolitan Government• Metropolitan Government with

Economic Decentralization • Metropolitan Government with

Political Decentralization

Key Differences• In the politically decentralized model,

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

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

Similarities• Fiscal and political power is

devolved to city governments.• Both models adopt corporate

structures for the financing and delivery of municipal services with user-charges.

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

• Danger of political deadlock.

Evaluating Decentralization

•Political Stability•Quality of Public Services•Equity

–Horizontal (inter-state/city)–Within state/city

•Impact of Macro-economic Stability

Issues in Service Delivery

The Problem

• Chronic poor performance is the rule rather than the exception in many publicly run municipal services

• Technical losses• Poor cost recovery• Subsidies do not reach the poor

Current Situation - Water

• Technical and commercial losses•“filling the leaking bucket”

• 3 hour connectivity

• Poor quality of service

• High coping costs

• Low Tariffs

• Fiscally and financially unsustainable

Why?The Judge, The Jury and the Executioner are the Same!

Policy

Regulation Delivery

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

• Define the Rules

Enforce the Rules– Monitor Compliance– Regulate Pricing

Deliver the Service Play by the Rules

.

Goals

• 24 hour delivery• coverage for by all: geographic

and household• quality• pressure

Elements of Separation

• Government ownership of some form– Public good nature of water– Sustainability as a resource: time and

quality– Attacking poverty

• Business approach to delivery– Private good nature of water– Demand driven; customer responsive

• Independent regulation

City Restructuring:Johannesburg Example

Johannesburg’s Original Structure

• 4 municipalities and one metro• Fragmented: no economies of

scale• Duplication of service delivery• Typical line function responsibility• No integrated planning

IGOLI 2000• Program A: Utilities

• Water and Sanitation, Power Distribution, Waste Management

• Program B: Agencies• Roads and Stormwater, Parks and Cemeteries

• Program C: Privatize• Metro Gas, Airport, Stadiums, Power Generation

• Program D: Corporatize• Zoo, Bus Co., Market, Property and Project

• Program E: Traditional Governance• Admin, HR, Planning, Budget, Finance, Community

Services, Welfare, etc.

Restructuring of Johannesburg

Delivery

Contract

Fiscal

Surplus

Water & Sanitation

Waste

Electricity

IT

Transport/Roads

•Slum-upgrading

•Primary Health•Peoples Center

R1

R2

R11

•Spatial Planning•Fiscal Budget•Local Economy

Metropolitan Government

PSP Options for Service Delivery

Why PSP?• Efficiency

• Flexibility in procurement

• Appropriate incentives

• Technology

• Investment

• Accountability

The Basic Options Compared

Option Asset

Ownership O&M

Capital investment

Commercial Risk

Management contract

public private public Public/ Shared

Lease public private Public/private Public/private

Concession public private private private

Large City Utility

The potential PPP

• A public asset holding corporation (AHC) with – state and municipal shareholders

• A private operating company (PO) with– with shareholder agreement with domestic and

international partners– holding a concession contract with AHC

• Appropriate mix of public and private finance• Appropriate division of risks between AHC and

PO• A competent autonomous regulator

Asset Holding Company

Operating Company

State Govt. Municipalities

shareholders

contract

Regulator

Service delivery obligations

Access by poor

Pricing and subsidies

O&M

Human resource management

Investment expansion

Medium and Small Towns

Need of Alternative Management Model

• Too big to be managed by communities– Large and dense enough to benefit

from economies of scale offered by piped water systems

• Too small and dispersed to be managed by a conventional utility

Possible option

• Regional or multi-town utilities• Advantages

– Economies of scale in management– Minimize transactions costs of

contracting– Viable volumes of business

Criteria for Clubbing

• Large enough population base Clusters of 1-2 million

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

International Examples: UK

• Economies of scale up to population of 1 million

• 10 large utilities with population of 2-10 million

• 15 smaller utilities with population base of 250,000 to 1.2 million

• Jurisdiction based on watershed boundaries

International Examples: France

• WSS responsibility of Local Governments

• Voluntary “Syndicates”• 15500 undertakings for 37000

municipalities – 2/3 per grouping• SEDIF manages water services for

144 municipalities and about 4 million customers

Regional Utility

Shareholders:ULBs, State government

ASSET HOLDING COMPANY

Contract

Private sector operator

Town 1 Town 2 Town 3

Rules of Engagement

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

amendment

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

Governance

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

• Share ownership proportional to asset value

• Voting rights possibly allocated on a more equitable basis

• State government as shareholder, coordinator and arbiter

• Rules of entry and exit

PSP and the Poor

Current situation: Status of the poor

• How are the poor being served today?– Free water through stand posts and

tankers (10 -20 lpcd)– 15% of population not covered by public

system• Is Water Really Free?

– Poor quality water with adverse health implications

– Time, physical energy, drudgery and space costs

PSP and the Poor

• A sound and competitively procured PPP will benefit the poor through efficiency gains

• In addition, benefits to the poor can be further enhanced by specific contractual design

• The Manila example:– 600,000 poor connected within two years– The poor now consume three times more water

at half the price– The poor now have more time for productive

work and more living space

Maximizing the benefits for the poor

• Designing Pro-poor Contracts:– Service expansion obligations designed to

include the poor– Some form of subsidy (or finance) for one-

time connection fee– Gradual phasing of prices: transition finance– Concessionaire responsible for providing

water by alternative means where private connections are not feasible or during a transition period

Thank you