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Session - Promoting Strong Utilities: Governance, Size and Scope Matter
Utility Governance and Good Practices
by
Jan G. Janssens Managing Director JJC Advisory Services
WB – IAWD DANUBE WATER PROGRAM
Kick-off Event for Policy Pillar
Smart Policies for Strong Utilities and Sustainable Services
25 September 2013
Bucharest (Romania)
Performance Gap & Root Cause Analysis
Defining the problem
-- before jumping into a reform process …
What is wrong with the existing arrangements?
(“do not fix what is not broken”)
o operational efficiency?
o deficient investment?
o fiscal impact / government exposure?
What are the main improvement goals?
What are the city/country’s strengths and weaknesses?
o administrative capacities
o country’s rating, macroeconomic stability etc.
What is the legal & regulatory environment?
What are the political constraints?
o labor, tariffs, views on foreign investors etc.
Framework of Assessment:
Causality Chain
Enabling Environment governance, regulation, policies, politics, incentives
Utility Performance management, operations, asset management,
NRW, finance, HR, customer accountability
Service Coverage and Quality
Improving Utility Performance
for Better Quality Service
Disabling
External
Environment
Policy, Governance
Adjustments
Enabling
External
Environment
Poorly
Performing
Utility
Well Performing
Utility
Better Service
Increased Access
Utility Strengthening
Capacity Building
Understanding the Reasons
for Apparent Performance Gaps
Understanding the current accountability
framework
Who are the actors ? (identifying)
What are their mandates, functions ? (clarifying)
What are the contractual arrangements between
actors ? (clarifying)
What are the instruments used ? (reviewing)
The Flow of Funds
The Institutional Relationships
The Contractual Relationships
The Regulatory Framework
Analytical Framework
Utility Performance Analytical Framework
Development Objectives
Health (human, environmental)
Quality of service
Corporate
governance
Tariffs
(level & structure)
Strategic Asset
Management,
Including NRW
Financial health
Creditworthiness
HR
development
Performance
benchmarking
Organization
Planning & Discipline
Consumer
orientation
U.S.O.
access to the poor
5
4
3
2
Utility Performance Assessment
Development Objectives
Health (human, environmental)
Quality of service
Corporate
governance
Tariffs
(level & structure)
Strategic Asset
Management,
Including NRW
Financial health
Creditworthiness
HR
development
Performance
benchmarking
Organization
Planning & Discipline
Consumer
orientation
U.S.O.
access to the poor
Utility Performance Improvement
Action Plan (“FOPIP”) Development Objectives
Health (human, environmental)
Quality of service
Corporate
governance
Tariffs
(level & structure)
Strategic Asset
Management,
Including NRW
Financial health
Creditworthiness
HR
development
Performance
benchmarking
Organization
Planning & Discipline
Consumer
orientation
U.S.O.
access to the poor
Utility Governance & Organization
Key Conditions
Enabling Utility Good Performance
Utility
Performance
Management
Autonomy
Market
Conditions
Customer
Orientation
Human Resources
Capacity
Tariffs
Financial Viability
Creditworthiness
Oversight
Accountability
Utility
Management
Sector Governance
Politics Attention
to the poor
The Modern Utility
Utility
Mgmt.
Staff
Government
Customers
Private
Sector
IFIs
Donors
NGO
s
What Makes a Modern
Utility?
External Environment
Internal Accountability
Corporate Governance
Market Orientation
Client Orientation
Commercially and professionally run; making
decisions on a technical basis
Insulation from political interference, patronage
Empowered to do the job efficiently: financial viability,
enabling human resource policies, capacity
As public monopoly, service provider accountable to
government, => regulatory framework
Management Autonomy,
Prerequisite for Utility Performance
Factors in a Water Utility that influence
Effective Autonomy
Degree of Effective Autonomy of the Utility
Assumption
of debt Setting tariffs Procurement
Availability &
quality of natural
resources
Political
commitment &
support
Regulation
Policy framework
Access to
financial
resources
Conditions of the
labor market Legal authority
Effects of the External Environment
Disabling External Environment
• Weak sector organization
• Insufficient utility autonomy
• Lack of proper incentives
• Restrictive tariff policies
• Human resource restrictions
• Excessive political management
(interference)
• Weak external support:
consultants, contractors, etc.
Positive External Environment
• Strengthens governance
• Limits corruption
• Enforces Regulation
• Opens new opportunities for
financing
• Improves services among
stakeholders
• Promotes sustainability
Managing the External Environment
Government
Need to achieve an optimal balance of
autonomy and accountability
Utility
Mgmt.
Staff
A close-up on external accountability…
Key Indicators
of External
Accountability:
Clear performance
targets
Information sharing
External auditing
External groups
represented in Board
Appropriate regulation
Owners
Customers
Regulators
Policy makers
Financiers
Moving center of gravity
Importance of Balancing External
Accountabilities
Accountability
Incentive structures
Corporate Governance/
values
Internal Accountability and Corporate
Governance
Utility
Mgmt.
Staff
Internal Accountability
Internal
Accountability
for Results
Procedures
Tools that support internal accountability
for Results
Processes Standards
Structures
Systems Policies
Plan services that match
consumer demand
Involve customers in
decision making
Encourage complaints or
other feedback on service
standards
Use of information to better
address consumer
Customer orientation
Customers
Utility
Mgmt.
Staff
Modern Utilities operate as if they
had “other competitors” and will
treat customers as if they can
choose other providers.
Client Orientation
Set of values, beliefs, and relationships between
individuals and functions that guide the decisions
of the company in order to achieve its objectives
Key elements include:
Well-defined MISSION STATEMENT
Institutionalization of Performance Reviews
Introduction of Incentives at all levels of Staff
Decrease on Personnel Turnover
Positive Effects of a Corporate Culture
Ladder of Financial Sustainability
Public Finance
Marginally Creditworthy
Sustainable Cost Recovery
Cost Recovery
Pay-As-You-Go
Recovery of Cash Outlays
Unviable Loss Making
Utilities
Creditworthy in Tested
Country Conditions
Capital & Operational
Subsidies
Capital
Subsidies
Profitable in Any Given Year
But Not Sustainable in Long Term
Anticipates Long Term Cost
Impacts (I.e. FX, asset revaluation)
Reliable Refinancing Sources &
Security for Loans
Country Conditions and
Developed Financial Markets
Private Finance
Guarantees
& Intl. Donors
Elements of Utility Reform
Connection &
NRW Programs
Improved
Commercial
Management
Fixed Asset
Management
Operating Cost
Containment
Customer
Orientation &
Business Models
Policy Reform Institutional
Development
Performance
Management
Financial
Restructuring
Autonomy
Corporate
Governance &
Ownership
Values
Economic
Regulation
Sector
Restructuring
Sector
Financing
Capacity Building
Reorganization &
Management
Change
Incentive
Systems
Management
Systems
Crisis Financing
Debt
Restructuring
Equity Infusion
New Financing
Instruments
Interventions
Crisis Mgmt.
Leadership
Change
Crisis Cash
Management
Debt
Restructuring
Current Asset
Management
Organizational
Restructuring
Better Utilization of
Existing Fixed
Assets in Core
Areas
Tariff Restructuring
Equity Infusions
Recovery
Introduce
Systems & Mgmt.
Improvements
Capacity Building
Institutional
Development
Stability
Expansion of
Coverage to Less
Attractive Areas
Diversification in
Sanitation and
Sewerage
Major
Investments with
New Debt
Expansion
Demonstrated commitment of top management in NRW reduction
programs
Established and operationalized cross-departmental NRW unit
Water audit published in annual report
Marked improvement in the operational efficiency of the utility
based on a revolving business plan
Continued measurable efforts in NRW reduction
Proven capacity in project implementation and supervision
Elements of water utility Governance as possible eligibility criteria
for a NRW reduction investment program
The Way Forward ?
The pressing need of developing financially viable
service providers and their creditworthiness to allow
access to financial markets.
Hence, facilitating a corporate outlook to urban water
services as an avenue to efficiency, effectiveness and
efficacy.
Quote: the efficiency effect of ownership was much lower than effect
of good governance in the sector (source: Estache et al., World Bank
2004)
Towards the Public Limited Cy ? - public ownership
- private operation
Department Ring-fenced
Department
Statutory
Body
Government-
owned PLC
Ownership
Corporate
oversight
Service
Provision Service
Provision
Ownership
Corporate
oversight
Service
Provision
Corporate
oversight
Ownership
Service
Provision
Corporate
oversight
Ownership
Under
company law
Under
public law
Getting the Institutional & Legal Framework
right
there are good & bad performers in each category…
What is corporatization?
Corporatization is the process of restructuring a
publicly owned business into a corporate
structure legally distinct from the parent local
government
Corporatization of public utilities
The guiding principles of corporatization is the intent to capture the
advantages of a privately run company — including:
Impetus for cultural change
Decision making autonomy – effective internal governance structure
Professional management
Commercial outlook
Efficiency and productivity
Flexibility in employment and remuneration
Incentives – business-like planning and performance monitoring
Financial sustainability
— while retaining government accountability.
Corporatization: Key principles
Each corporatization process
should be designed to ensure a
balance of:
• Autonomy. Each characteristic
has to be designed to give the
utility the autonomy to make
sound corporate decisions.
• Incentives. The characteristics
should be reinforced by a
system of targets and
incentives.
• Accountability. The company
should be externally
accountable for achievement
against each of the
characteristics.
Corporatization: Key characteristics
The transformation would typically include three ring-fencing
activities:
1. Establishment of a distinct legal identity under which the
government’s role is clearly identified as owner;
2. Segregation of the company’s assets, finances, and
operations from other government operations; and
3. Development of a commercial orientation and managerial
independence while remaining accountable to the
government . Source : USAID, Good practices in Public utilities corporatization
Corporatization of public utilities:
main ring-fencing activities
1. Corporatized utilities should be more transparent than
municipal departments, making the costs of service delivery
easier to establish
2. Assets remain under the control of LG
3. Flexible option which allows to implement a wide range of
partnership options with other public or private parties
4. A utility corporatized under company law tends to be more
insulated from unwarranted political interference
5. Cost recovery and operational performance is generally
significantly better than that of their public counterparts
6. Municipalities generally have no interest in profit
maximization
The “pros” of corporatized water utilities
1. The process of corporatization can be costly and time
consuming
2. There can be a negative impact on labor relations
3. LG may not have the capacity to properly govern / oversee
corporatized water utilities
4. High levels of managerial autonomy can lead to over-
engineering or gold-plating, especially where staff are
strongly engineering-oriented
5. Utility managers can be captured by political interests
6. Depending on the manner in which they are established, this
can have a negative impact on access to investment capital
The “cons” of corporatized water utilities
Corporatization is not privatization. Municipalities are
generally required by law to provide basic services to
members of the community. In many legal systems
municipalities are not allowed to divest themselves of this
core responsibility.
At the same time municipalities are generally not allowed by
law to sell assets or any infrastructure that is required for the
provision of basic services
What corporatization is not …
Element 1: an Effective Legal Structure Key
Characteristics
• A legal framework comparable to that of non-
government owned commercial companies
• Boards of Directors
• Clarity of corporate objectives
• Transparency of obligations of each party
• Documented targets and performance
expectations.
• Is the core of corporatization – the model of governance chosen to emulate a private corporation
• Is implemented at three levels:
o At the national level (the commitment to corporatize)
o At the local level (LG – owner) (the relationship between corporatized utility and its owners)
o At the utility level, establishing (i) the associated powers & capacity of the Executive Board, (ii) the utility’s integrity among consumers, investors and civil society, (iii) system of personnel incentives and motivation to support corporate objectives
Element 2: Corporate Governance
Contract - license, performance or shareholders agreement –
is defined by:
• ownership structure, legal environment, and local precedent
• agreed obligations of each party
• reporting and monitoring requirements measuring achievement against
objectives for credibility, accountability, transparency
• channels of accountability and the degree of autonomy
• business plan/performance contract with monitorable performance targets
Element 3: Contractual Relationship
between LG (Owner) and Utility
• A documented and demonstrated commitment to achieving (long term) financial sustainability.
• Revenue generated through core services as a key source of financing
• Goals defined to recover, at least, O&M and possibly investment costs, depreciation, and debt service.
• Service levels established with consideration of the financial resources available to the utility (including customer revenue, loans, and government subsidies). “There is no financing gap”
• Channels to ensure that tariff setting and approval process is appropriate to the overall business, investment, and financing plans.
Element 4: Financial Management and
Accounting
Element 5: The Executive Board
an essential part of the Corporate Structure
• Independent Board highest organ of the utility
• Acts independently from the controlling shareholders in the best interest of ensuring the long term sustainability and value of the company
• Provides guidance and oversight to utility management without infringing on management’s autonomy and prerogatives
• Vets all key decisions
• Represents key stakeholders from different constituents: consumers, city council, unions, NGOs, private sector, etc.
Risk Management
Recent financial crisis => fiscal budgets tighter &
governments under pressure to do more with less
Investment decisions should be prioritized based on a risk-
based assessment o moving away from shopping lists that are based on conventional
long-term master-plans
o rationalizing cost-effective capital investments and identifying
lower-cost [less infrastructure intensive] alternatives
Incentivized regulatory frameworks to encourage priority
risk based future investment needs o e.g. U.K., Australia
Risk Management:
a water utility manager’s central function ?
The risk factor matrix
Severity or Consequence
Risk Factor Matrix:
Insignificant No impact / not
detectable
Rating: 1
Minor Compliance
Impact
Rating: 2
Moderate Aesthetic Impact
Rating: 3
Major Regulatory
Impact
Rating: 4
Catastrophic Public Health
Impact
Rating: 5
Almost Certain Once a day
Rating: 5
5 10 15 20 25
Likely Once a week
Rating: 4
4 8 12 16 20
Moderate Once a month
Rating: 3
3 6 9 12 15
Unlikely Once a year
Rating: 2
2 4 6 8 10 Like
lihoo
d o
r fr
eque
ncy
Rare Once every 5 years
Rating: 1
1 2 3 4 5
Linking
Risk Management and Business Planning
Risk
Management
The Business Plan
Financial
Plan
Infrastructure Plan building New Assets
Operation &
Maintenance Plan Renew, Repair, Replace
Asset
Management
Information
Skilled & paid
workforce
Prioritizing CAPEX based on risk analysis
water quality
quality of service financial sustainability
OPEX and CAPEX
conflicting demands and decision making ?
Risk Analysis Business Planning
Tariff Adjustment
regulatory
requirement iterative
process
Leadership
Successful Change and Reform
requires a personal touch …
Personal leadership was an element of success in a
number of case studies studied (and all other successful
reform processes)
There is a critical shortage of change management skills in the WSS sector
Manager or Leader ?
direction
support
5 5
1
1
Leader
Manager
interdependent independent
dependent
Can the same Person
both Lead and Manage Change?
Reduce risk
Create order
Plan, measure, control
Arrive at consensus
Short-term specific goals
Deductive process
Increase risk
Create disorder
Inspire, excite
Forge commitment (agree-
disagree-get out)
Fast moves with clarity of
destination
Inductive process
When you have a
relative growth… When you have a
turmoil…
Managing Change Leading Change
Patterns of Adaptation to Changing Context
Source: J.B.M. Kassarjian, IMD, 1991. Perspectives for Managers: Jolt your managers
out of their comfortable groove – they may learn to lead change
Political
infighter Enabling
leader
Loyal
soldier
Opportunistic
entrepreneur
High
Low
Low High
Rate of change in
organizational
context (internally)
Rate of change in competitive
context (externally)
New
opportunities/
old structure
Turf battles
Stable
environment
When you face a
relative growth:
Manage Change
When you face a
turmoil:
Lead Change
Conditions often quoted as key for a successful and sustainable
reform, include (a) the involvement of a private partner; (b) the
ability to operate under company law; (c) management autonomy;
(d) cost recovering tariffs; ...
However practice shows that efficient utilities occur without full
compliance with all these enabling conditions, which suggests that
they may be necessary but not sufficient. Charismatic leadership
seems to be a predominant feature of a successful utility.
Challenge: How to 'de-personalize' good utility performance? How
to anchor the good results of change and reform, and make them
robust and sustainable?
The “Leadership” challenge
What Comes First ?
Good Corporate Culture Efficient Utility
Leadership ?
Thank you
