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Toolkit: Approaches to Private Participation in Water Services
Module 5
Setting Service Standards, Tariffs, Subsidies & Financial Arrangements
Introduction:
Navigating through this E-Learning Module This is one of 9 Toolkit e-learning Modules. Each Module is created in PowerPoint, and you advance through the Module by pressing the right arrow or ‘Enter’ button. Core Module: The Module takes you sequentially through four or five major issues, depending on the Module. The progress through the Module is shown by the colored area on a logo on the top right hand corner of each slide. Here is an example: Supplementary Content: The Core module covers all key issues. However, you can choose to access additional information. These supplementary slides can be accessed by passing the cursor over colored buttons. The button colors relate to issues of various levels of detail:
Navigation through the supplementary material is also by pressing the right arrow or ‘Enter’ button. At the end of each section you will return automatically to the core Module. However, there is an extra button (to pass over) on the top right hand of each supplementary page that gives you the option of a shortcut back to the core Module:
Basic Concept Detail
Expert insight
Supplementary Information / Case studies
Back to Module
E-learning design: [email protected]
Elements of the Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
5Standards, Tariffs, Subsidy, Financials
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
General Outline of Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
Module 5
5Setting Service
Standards, Tariffs, Subsidies &
Financial Arrangements
Module 5Setting Service Standards,
Tariffs, Subsidies & Financial Arrangements
Module 5 - What will we learn?
What are the issues to get effective private and public financing for Private Participation?
Can we define realistic, affordable targets for Coverage and Quality of Service?
Management Contract for
Jordan Valley Authority,
Irrigation Water Supply, may be
the first of its kind.
What are the key issues
in establishing a mix of
Tariff and Subsidy?
What is the importance of Cost
Recovery?
How are Levels of
Services, Cost,
Tariffs and
Subsidies
interlinked?
Balancing Service Standards, Tariffs & Subsidies
‘In this Module we describe an iterative process, to answer the question “How can we afford better services under a new Arrangement”?’
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NOIMPLEMENT• Design• Finance
START
There is a need to balance Level of service with Level of Tariffs.
Better service costs more.
Governments have the task to decide what is affordable.
The diagram illustrates the elements and the process followed in this Module
There is a need to balance Level of service with Level of Tariffs.
Better service costs more.
Governments have the task to decide what is affordable.
The diagram illustrates the elements and the process followed in this Module
Balancing Service Standards, Tariffs &
Subsidies
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
Setting Level of Service is an iterative process.
First, having chosen a proposed Level of Service, then there is a need to Specify the Services technically.
Setting Level of Service is an iterative process.
First, having chosen a proposed Level of Service, then there is a need to Specify the Services technically.
Then it is necessary to Estimate the Cost of the level of service and of any related investment.
Then it is necessary to Estimate the Cost of the level of service and of any related investment.
‘In this Module we describe an iterative process, to answer the question “How can we afford better services under a new Arrangement”?’
‘In this Module we describe an iterative process, to answer the question “How can we afford better services under a new Arrangement”?’
Balancing Service Standards, Tariffs &
Subsidies
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
STARTThe Government then has decide:
whether the Cost of this level of service can be supported, and
what Tariff Levels need to be set for effective cost recovery.
if any Subsidy has to be used to make an
affordable service to the customer including Type of Subsidy).
The Government then has decide:
whether the Cost of this level of service can be supported, and
what Tariff Levels need to be set for effective cost recovery.
if any Subsidy has to be used to make an
affordable service to the customer including Type of Subsidy).
‘In this Module we describe an iterative process, to answer the question “How can we afford better services under a new Arrangement”?’
Balancing Service Standards, Tariffs &
Subsidies
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
Estimating the Trade off between Level of Service and Tariff/Subsidy is best done with a financial model such as the one provided with the Toolkit.
If the Cost of Services proves too high then the process is iterated, amending the elements, until a satisfactory balance between Level of Service and Tariff is found.
Estimating the Trade off between Level of Service and Tariff/Subsidy is best done with a financial model such as the one provided with the Toolkit.
If the Cost of Services proves too high then the process is iterated, amending the elements, until a satisfactory balance between Level of Service and Tariff is found.
When the Balance between Cost of Service and Tariff is satisfactory, then we can proceed with the design and Implementation of the chosen arrangement
When the Balance between Cost of Service and Tariff is satisfactory, then we can proceed with the design and Implementation of the chosen arrangement
In the final sections of the Module we discuss:
Implications for Design of PP Arrangements
Guidance on Structuring Finance for the Arrangement.
In the final sections of the Module we discuss:
Implications for Design of PP Arrangements
Guidance on Structuring Finance for the Arrangement.
Specifying Service Levels
‘To start the process we need to choose preferred Levels of Service and define the technical and operational basis needed to reach these service levels.
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
First we look at how service goals are set for the Utility under the proposed Private Participation Arrangement
Two main issues to be defined:
Coverage of service
Quality of service
Specifying Service Levels
‘To start the process we need to choose preferred Levels of Service and define the technical and operational basis needed to reach these service levels.
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
First we look at how service goals are set for the Utility under the proposed Private Participation Arrangement
Two main issues to be defined:
Coverage of service
Quality of service
Service Coverage Targets
Service Quality Targets
Estimating Cost of Services
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
‘Once initial objectives have been set, Government should estimate the cost of providing the service.’
Cost of Service
“When a Utility cannot cover its cost, service will suffer”
Estimating Cost of Service:
Once initial objectives have been set, Government should estimate the cost of providing the service. Average costs are used as an effective basis.
This is an important step, since it will be important to determine to what extent Cost Recovery can be achieved by the chosen Tariff level.
The reasoning behind this assessment of the level of Cost Recovery is that : "When a Utility cannot cover its cost, service will suffer”If you cut back on essential expenditure (Examples: Chemicals, Pump replacement or
expansion of the network) the services suffer. Similarly reduction in maintenance, renewal or expansion of the system may also increase the costs of operation in the medium term
Cost estimating is difficult and technical, but need to look at three main elements:● Operating & Maintenance Expenses● Depreciation ● Return on Capital
Essential to first have a clear idea of total costs, then you can separately decide whether the tariff should cover all of those costs, or whether tax payers should subsidize the service.
Estimating Cost of Service:
Once initial objectives have been set, Government should estimate the cost of providing the service. Average costs are used as an effective basis.
This is an important step, since it will be important to determine to what extent Cost Recovery can be achieved by the chosen Tariff level.
The reasoning behind this assessment of the level of Cost Recovery is that : "When a Utility cannot cover its cost, service will suffer”If you cut back on essential expenditure [Examples: Chemicals, Pump replacement or
expansion of the network] the services suffer. Similarly reduction in maintenance, renewal or expansion of the system may also increase the costs of operation in the medium term
Cost estimating is difficult and technical, but need to look at three main elements:● Operating & Maintenance Expenses● Depreciation ● Return on Capital
Cost of Service
“When a Utility cannot cover its cost, service will suffer”
Essential to first have a clear idea of total costs, then you can separately decide whether the tariff should cover all of those costs, or whether tax payers should subsidize the service.
Operating & Maintenance;Depreciation; Return on Capital
Depreciation:Capital Maintenance
Cost recovery and tariff implications
‘Can we afford to pay for better services?’
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
“To be viable: Tariffs + Subsidies = Total Cost of Service”
Service Quality
Service Coverage
COST OF SERVICE
TARIFF INCOME
Cost Recovery and Tariff
INCENTIVES
SUBSIDY
Cost of Service tells Government how much it will cost to provide the service.
In addition to Service Coverage and Quality costs, Governments need to consider:● Annual cash needs of the utility and
financial ratios required by lenders (e.g. debt repayment rates)
● Environmental or social costs that the government decides should be borne by the Utility
Cost of Service tells Government how much it will cost to provide the service.
In addition to Service Coverage and Quality costs, Governments need to consider:● Annual cash needs of the utility and
financial ratios required by lenders (e.g. debt repayment rates)
● Environmental or social costs that the government decides should be borne by the Utility
Next step is to determine how much should be recovered through Tariffs.
Next step is to determine how much should be recovered through Tariffs.
If not full cost recovery from the Tariff (if Cost of Service exceeds Tariff income) :
either Subsidies will be needed, or Services need to be lowered.
If not full cost recovery from the Tariff (if Cost of Service exceeds Tariff income) :
either Subsidies will be needed, or Services need to be lowered.
“To be viable: Tariffs + Subsidies = Total Cost of Service”
Service Quality
Service Coverage
COST OF SERVICE
TARIFF INCOME
Cost Recovery and Tariff
INCENTIVES
SUBSIDY
Willingness to PaySocial AcceptabilityExternal Benefits
Tariff Setting:Three reasons why a tariff for full cost recovery may be considered too high:
● Willingness to Pay: The extent to which people are unwilling to pay the full cost of service● Social Acceptability: People are willing to pay but it is considered socially unacceptable to pay
what the service costs require● External Benefits: Environmental or Public Health issues make it beneficial to charge less
Tariff Setting:Three reasons why a tariff for full cost recovery may be considered too high:
● Willingness to Pay: The extent to which people are unwilling to pay the full cost of service● Social Acceptability: People are willing to pay but it is considered socially unacceptable to pay
what the service costs require● External Benefits: Environmental or Public Health issues make it beneficial to charge less
Use of Subsidies
‘If Cost of Service exceeds Tariff income, then a Subsidy will be needed’
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
OUTPUT BASED
INPUT -BASED
Paid to Money from
Customer to help pay the bill
Utility/Operator for outputs
Utility/Operator for inputs
Utility or Operator as implicit or ad hoc support
Customer Revenue
Government Revenue
Development Agency grant or loan with concessional element
Types of subsidy
‘Private Participation can involve suitable subsidy arrangements’
Who Subsidy paid ToWho Subsidy paid To
Whe
re S
ubsi
dy c
omes
F
rom
Whe
re S
ubsi
dy c
omes
F
rom
This Table illustrates some of the main categories of Subsidies. Subsidies can be categorized:
Where the money comes from?:● Customer Revenue● Government Revenue● Development Agency Grant or Loan with concessional element. (These are generally used to make structuring a subsidy fund
easier, or for easing in a new tariff structure in the short term)
Where subsidies are paid to and for what?
This Table illustrates some of the main categories of Subsidies. Subsidies can be categorized:
Where the money comes from?:● Customer Revenue● Government Revenue● Development Agency Grant or Loan with concessional element. (These are generally used to make structuring a subsidy fund
easier, or for easing in a new tariff structure in the short term)
Where subsidies are paid to and for what?
Types of subsidy
OUTPUT BASED
INPUT -BASED
Paid to Money from
Customer to help pay the bill
Utility/Operator for outputs
Utility/Operator for inputs
Utility or Operator as implicit or ad hoc support
Customer Revenue
Government Revenue
Development Agency grant or loan with concessional element
Donor
Financed Output–based
Aid
Customer bail-out
Implicit subsidy or bail-out
Cross-subsidy
Social security provisions
Input subsidy
‘We will look at some specific Input and Output Subsidy forms….’
Input Based Subsidy
Traditionally subsidies were paid to help utilities recover their costs (Input Based Subsidy).
However, this supports the costs, not the results.
Input Based Subsidy
Traditionally subsidies were paid to help utilities recover their costs (Input Based Subsidy).
However, this supports the costs, not the results.
Output Based Subsidy
A better approach (and especially where a Private Operator isinvolved) is to make payment contingent on specific outputs, or Output Based Subsidy.
Output Based Subsidy
A better approach (and especially where a Private Operator isinvolved) is to make payment contingent on specific outputs, or Output Based Subsidy.
Now we will look at the various forms of Input and Output based subsidy in more detail
Now we will look at the various forms of Input and Output based subsidy in more detail
Types of subsidy
OUTPUT BASED
INPUT -BASED
Paid to Money from
Customer to help pay the bill
Utility/Operator for outputs
Utility/Operator for inputs
Utility or Operator as implicit or ad hoc support
Customer Revenue
Government Revenue
Development Agency grant or loan with concessional element
Donor
Financed Output–based
Aid
Customer bail-out
Implicit subsidy or bail-out
Cross-subsidy
Social security provisions
Input subsidy
‘Private Participation can involve suitable subsidy arrangements’
Output Based Subsidy Input Based Subsidy
Output Based Aid:Expert Insight
Subsidy:Targeting the Poor
Balancing Service Standards, Tariffs &
Subsidies
‘This is an iterative process. Can we afford better services?’
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
“Develop options, looking for an acceptable trade-off between tariffs, services and subsidies”
Finalizing Tariff, Subsidy and Service Level
INCENTIVES
COST OF SERVICE
TARIFF INCOME
SUBSIDY
4. Now we have reached the point where we have to consider if we have reached a Balance between Costs and Tariffs. If the tariff/subsidy revenues are not sufficient then we can look at various alternative ways of adjusting our tariff/cost of service arrangements, for example:
Adopt cost recovery tariffs for all customers Set Tariffs below cost for some customers and apply a subsidy Reduce costs (and thus necessary tariff levels) by reducing coverage and service levels
Balancing the cost & tariff issues
Once we are happy with the balance between Cost, Tariff and subsidy we can proceed to incorporate them into the design of the Private Participation Arrangement.
Following our Process, we have:1. Arrived at Cost of Service
Following our Process, we have:2. Looked at acceptable Tariff scales
Finally we have:3. Evaluated any necessary subsidies
‘What key issues should we include in the Private Participation Arrangement design?’
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
Design & Implement:Design Issues
Design Issues
The Arrangement has to cover various issues:
– Cost of Service = Management Costs + Operations + Capital Investment
– Operator’s fee in a Management Contract may be financed by others, and payment linked to outputs.
– Investment elements in lease and management contracts can be partially financed by governments, investors and operators
– Concession models have been developed that can include subsidy, such as using Output Based Aid, retaining Government control of how the subsidy is used
“PP is possible even if Tariffs don’t cover costs”
The Private Participation Arrangement has to be clearly defined to show where the funds to cover all costs of service will come from. These costs include the cost of Management and all necessary Capital Investment as well as the Operational Costs needed to provide the Service.Examples:
Guyana Management Contract: Donors finance the Operator’s Management Fee Operator not affected by financial health of utility
Amman, Jordan : Performance-based Management contract Operator’s performance links to a profit sharing incentive
Design Issues
The Arrangement has to cover various issues:
– Cost of Service = Management Costs + Operations + Capital Investment
– Operator’s fee in a Management Contract may be financed by others, and payment linked to outputs.
– Investment elements in lease and management contracts can be partially financed by governments, investors and operators
– Concession models have been developed that can include subsidy, such as using Output Based Aid, retaining Government control of how the subsidy is used
“PP is possible even if Tariffs don’t cover costs”
Comment: Use of Aid in Concession models
For Concessions it was sometimes though that either the tariff had to have full cost recovery or the government was committed to increase tariffs accordingly. This is because in a concession the operator has to cover all costs, including investment, from revenues. However, subsidies can be combined with concessions, and Output based Aid can help to recover costs as well as improve services
Example: Partial Investment by Operator: Senegal, ONES : Affermage- lease contract with Operator used to transfer substantial responsibilities to
the Operator but with only a limited investment Total investment too large to be financed by the private operator, covered by
Government. The Government asset holding company took remaining major investments in bulk water transport and distribution
Design Issues
The Arrangement has to cover various issues:
– Cost of Service = Management Costs + Operations + Capital Investment
– Operator’s fee in a Management Contract may be financed by others, and payment linked to outputs.
– Investment elements in lease and management contracts can be partially financed by governments, investors and operators
– Concession models have been developed that can include subsidy, such as using Output Based Aid, retaining Government control of how the subsidy is used
“PP is possible even if Tariffs don’t cover costs”
Example: Amman Management ContractCost Recovery for O&M
Design & Implement:Financing Implications
‘How to involve private and public finance?’
IMPLEMENT
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NO• Design• Finance
START
Private Finance
“What might be the potential sources of funding for a prvately financed project?”
First we should be aware of some of the potential SOURCES OF FINANCE: o Equity from a project promoter o Equity from other investors o Loans – local or foreign banks o Bonds o Export Credit Guarantees Finance o Loans from development agencies o Grants from development agencies
The actual project funding could be a mix of various finance sources.
For example: The operator could put up 30% of the investment required, with the remainder from banks or other financial institutions.
The actual project funding could be a mix of various finance sources.
For example: The operator could put up 30% of the investment required, with the remainder from banks or other financial institutions.
Private Finance
What issues to consider when involving Private Finance?
The way that the arrangement is designed, and the security offered against risks will affect the perception of operators, investors and lenders about the level of risks involved and ultimately the viability and cost of the project . This in turn will affect the level of investment cost, and in this in turn affects the cost of provision of service under the Private Participation arrangement [Risk allocation is an important subject dealt with in Module 6 ]
- The cost recovery potential and tariff stability are issues that will have a direct bearing on this.
Need to consider the views of potential lenders at the arrangement design and bid stages to ensure that a viable project can be put out to bid, and that investors will be interested to be involved
The amount of investment required needs to be considered, to ensure that debt levels and risk are viable. The phasing and type of investment can be considered in order to rapidly increase cash flow, allow the operator to reduce costs and free up cash later for more investment
.
Arrangement Type Private Operator Public Finance
Management Contract
o Operator brings efficiencies
o Operating cost income needed
o Capital investment needed
o Operating costs by government
o Investment needed to support effective operational improvement
o Capital investment needs are defined by government
Affermage Lease
o Operator brings efficiencies’
o Revenues cover operational cost
o Insufficient cash flow to cover investment
o Operator can prepare investment program for needed improvements
o Investment for identified capital works
o Need to use operator’s insights in required investment
o Need to control size and use of investment
Concession o Revenues cover operational and investment costs
o Can mobilize substantial amounts of private capital
o Government finance can subsidize to meet water sector goals.
o Involving development agencies may lower costs through cheaper finance
Involving Public Financing
“There is still a place for Public Financing. The needs differ for each PP Arrangement type”
These three types of arrangement have an
increasing involvement from private sector finance, with a potential role for public sector finance in all three types:
These three types of arrangement have an increasing involvement from private sector finance, with a potential role for public sector finance in all three types:
Management Contracts bring focused management skills and efficiency to a utility. Where the utility is in financial difficulty , then public finance will be needed for operational and capital investment costs.
Public or development agency finance will be needed to support the reforms being implemented by the operator, for example replacing pumps, emergency works, training, as the major improvements will not be attained with management effort alone.
Management Contracts bring focused management skills and efficiency to a utility. Where the utility is in financial difficulty , then public finance will be needed for operational and capital investment costs.
Public or development agency finance will be needed to support the reforms being implemented by the operator, for example replacing pumps, emergency works, training, as the major improvements will not be attained with management effort alone.
Affermage- lease contracts:
Although the utility may be generating sufficient cash flow to cover operating costs, it may not be enough to service borrowings.
The operator can propose a capital works investment program that will achieve the operational and financial improvement targets to be funded by the public sector.
To be successful there is a need to ensure that there is adequate capital in the utility, but to ensure that there is not excessive borrowing or investment
Affermage- lease contracts:
Although the utility may be generating sufficient cash flow to cover operating costs, it may not be enough to service borrowings.
The operator can propose a capital works investment program that will achieve the operational and financial improvement targets to be funded by the public sector.
To be successful there is a need to ensure that there is adequate capital in the utility, but to ensure that there is not excessive borrowing or investment
Arrangement Type Private Operator Public Finance
Management Contract
o Operator brings efficiencies
o Operating cost income needed
o Capital investment needed
o Operating costs by government
o Investment needed to support effective operational improvement
o Capital investment needs are defined by government
Affermage Lease
o Operator brings efficiencies’
o Revenues cover operational cost
o Insufficient cash flow to cover investment
o Operator can prepare investment program for needed improvements
o Investment for identified capital works
o Need to use operator’s insights in required investment
o Need to control size and use of investment
Concession o Revenues cover operational and investment costs
o Can mobilize substantial amounts of private capital
o Government finance can subsidize to meet water sector goals.
o Involving development agencies may lower costs through cheaper finance
Involving Public Financing
“There is still a place for Public Financing. The needs differ for each PP Arrangement type”
Concessions:
The fact that governments can mobilize substantial amounts of finance through private funds does not mean that it should rely entirely on private finance. Public or development agency finance can:
Concessions:
The fact that governments can mobilize substantial amounts of finance through private funds does not mean that it should rely entirely on private finance. Public or development agency finance can:
Be focused to subsidize water infrastructure to achieve specific social or development goals• Make use of development agency rather than private funds, this may reduce total cost of fundsOptions to use public funds in concessions include:
Government lending to the concession company or equity investment (joint ownership)
Direct financing of some infrastructure (so no return for the Concessionaire)
Government OBA fund to extend service to new areas
Arrangement Type Private Operator Public Finance
Management Contract
o Operator brings efficiencies
o Operating cost income needed
o Capital investment needed
o Operating costs by government
o Investment needed to support effective operational improvement
o Capital investment needs are defined by government
Affermage Lease
o Operator brings efficiencies’
o Revenues cover operational cost
o Insufficient cash flow to cover investment
o Operator can prepare investment program for needed improvements
o Investment for identified capital works
o Need to use operator’s insights in required investment
o Need to control size and use of investment
Concession o Revenues cover operational and investment costs
o Can mobilize substantial amounts of private capital
o Government finance can subsidize to meet water sector goals.
o Involving development agencies may lower costs through cheaper finance
Involving Public Financing
“In practice it is possible to adapt the main contract models, to form Hybrid Arrangements to suit the specific PP needs”
Hybrid Arrangements:
These main contract models can be adapted or tailored to suit actual project conditions.
As an example:
Limited investment by the Operator in a Management Contract or Affermage can sometimes be obtained, often with additional guarantees provided for the Operator, in order to support key investments necessary to ensure operational improvement (e.g. network meters, spare parts).
Hybrid Arrangements:
These main contract models can be adapted or tailored to suit actual project conditions.
As an example:
Limited investment by the Operator in a Management Contract or Affermage can sometimes be obtained, often with additional guarantees provided for the Operator, in order to support key investments necessary to ensure operational improvement (e.g. network meters, spare parts).
Fund(investment or subsidy)
Fund(investment or subsidy)
AgencyAgency
Private OperatorPrivate Operator
Investment Lending
Monitoring
Payment per Output
GovernmentGovernment
Fund(investment or subsidy)
Fund(investment or subsidy)
AgencyAgency
Private OperatorPrivate Operator
Investment Lending
Monitoring
Payment per Output
GovernmentGovernment
Fund(investment or subsidy)
Fund(investment or subsidy)
AgencyAgency
Private OperatorPrivate Operator
Investment Lending
Monitoring
Payment per Output
GovernmentGovernment
A Development Agency Finance Arrangement
“One possible model for securing effective disbursement”
This figure illustrates one possible structure for incorporating government and development-agency financing in an arrangement, showing a public investment or subsidy fund established by Government and a development agency. It is not the only model, but gives some ideas of one approach.
This incorporates two options:
Investment lending : Finance from the public fund as a loan to the operator – to invest in infrastructure
Payment per output: The subsidy fund would make payment when the operator provides specified services:
Example:
Major investments needed to replace decaying pipe networks could be an unacceptable risk for the private operator if he had to provide the necessary investment himself.
Example:
Major investments needed to replace decaying pipe networks could be an unacceptable risk for the private operator if he had to provide the necessary investment himself.
Example:
The operator makes new connections as part of his contract .
For those in low income areas he receives a specific fee – say, for example, $150 per connection
Example:
The operator makes new connections as part of his contract .
For those in low income areas he receives a specific fee – say, for example, $150 per connection
‘In this Module we have considered the elements and process of establishing affordable Levels of Service, and some of the design and financing implications….’
Set Tariffs & Subsidies
Set Tariffs & Subsidies
Estimate Cost Estimate Cost
Specify Services Specify Services
YES Does it work?
NOIMPLEMENT• Design• Finance
START
Reviewing Module 5
Checklist: Module 5
Understand what services customers want
Evaluate external benefits from service
Define coverage and service objectives
Establish method for defining cost recovery
Evaluating operations and maintenance costs
Define methodology for calculating depreciation
Value asset base and estimate cost of capital
Estimate future efficiencies
Evaluate how much customers are willing and able to pay
Identify sources of external subsidies
Review alternative subsidy schemes
Revisit service objectives if service is too expensive
Select model of private participation
Define the financial terms of the arrangement
Specify operator’s coverage and service targets
Assign responsibilities for setting and monitoring standards
‘……..and the process is detailed in this Checklist”
More Information: Module 7
More information on Setting Service Standards, Tariffs, Subsidies, and Financial Arrangements:
Definition of service standards: Baker and Trémolet 2000, Estache and others 2002, Smith 2003, and Trémolet 2002.
Health and environmental benefits from water and sanitation: Whittington and Swarna 1994.
The desirability of cost recovery: Environmental Resources Management 2003a and Snijar and Syme 1998.
Regulatory accounting and methods of estimating costs: Green and Pardina 1999 and PPIAF and World Bank Institute 2002.
Estimating the cost of capital: Green and Pardina 1999 (Chapter 9) and Alexander 2000.
Benchmarking water utilities: Kingdom 1999 and Tynan and Kingdom 2002.
Customers’ willingness to pay: Gómez-Lobo and others 2000, McPhail 1993, Singh and others 1997, Whittington and others 1991, and Whittington 1998.
Use of willingness to pay surveys in the context of private participation : see Box 3.1 and Chapter 3, UNDP and others 1999, Water and Sanitation Program 2002b, and Whittington and others 1998.
Social acceptability: Plummer 2000, UNDP and others 1999.
Affordability: UNDP and others 1999, Whittington 1992, and Whittington and others 2000.
Rationale for and evaluation of subsidies: Estache and others 2002, Foster and others 2000, Irwin 2003, Mehta 2003, Whittington 1992.
Output-based aid (OBA) and approaches: Brook and Smith 2001, Drees & others 2004, EconOne Research 2003, Foster and others 2000, Global Partnership on Output Based Aid Web page (www.gpoba.org), Gómez-Lobo 2001a and 2001b, Marin 2002, Mumssen 2004, Yamamoto and Hunt 2005
Information on financing: Brealey and Myers 2000, Delmon 2001, Finnerty 1996, Hoffman 1998, Levy 1996, Nevitt and Fabozzi 2000, PricewaterhouseCoopers n.d.,Yescombe 2002
Supporting Material
• The Toolkit Financial Model• Toolkit Case Study material• Toolkit Website:
http://rru.worldbank.org/Toolkits/WaterSanitation/• For comments or further details contact Cledan Mandri Perrott at
Toolkit: Module 7
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Toolkit: Module 7
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