Annex V.pdf

USAID LOCAL GOVERNANCE

PROJECT IN TAJIKISTAN

Comparative Study on the Efficiency of Water Service Delivery in Tajikistan

June 2016

This report is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents are the sole responsibility of the Local Governance Project and do not necessarily reflect the views of USAID or the United States Government

USAID LOCAL GOVERNANCE

PROJECT IN TAJIKISTAN

Comparative Study on the Efficiency of Water Service Delivery in Tajikistan

Prepared based on the request of the Ministry of Finance of the Republic of Tajikistan

Prepared by:

Contract No. AID-176-C-12-00002-00

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Contents

Introduction

Background

Khujand

Faizabad

Tursunzade

Yavan 4

Overview of the efficiency of four water supply enterprises

Table 1. Overview of municipal enterprises

Table 2. Overview of enterprises under the SUE KMK

General considerations

Institutional capacity

Cost effectiveness of water utilities

Unit costs

Tariffs of enterprises for drinking water and wastewater services

The issue of redemption of exemptions

The role of the Anti-Monopoly Agency

The way forward

Abbreviations and Acronyms

CED Swiss Economic Development

SDC Swiss Agency for Development and Cooperation

CSO Civil Society Organizations

CWR clean-water reservoir

EBRD European Bank for Reconstruction and Development

ECA Europe and Central Asia

EU European Union

GoRT Government of the Republic of Tajikistan

IMWG Inter-Ministerial Working Group

KWC Khujand Water Company

LDC Local Development Committee

LGP Local Governance Project

MoF Ministry of Finance

PPP Public-Private Partnership

RT Republic of Tajikistan

SECO Swiss State Secretariat for Economic Affairs

SUE KMK State Unitary Enterprise “Housing and Communal Services”

TSA Targeted Social Assistance Program

WB World Bank

WSS Water Supply and Sanitation

Introduction

The Ministry of Finance of the Republic of Tajikistan (MoF) requested USAID Local Governance Project (LGP) in Tajikistan to compare the efficiency of service delivery between two concurrent government enterprises: the city/district-owned utility enterprises versus the state unitary enterprise, the KMK.

The context of this mission is a conflict/competition between the two dominant means of delivering services in Tajikistan. Under the first model, the infrastructure for drinking water, wastewater and solid waste is owned by the central government and is administered by a State Unitary Enterprise SUE KMK that receives 8% of subordinating enterprises’ income for technical and managerial support, most of time it is not very effective. In the second model, the infrastructure is owned by a local government and is operated by it directly. It is worth mentioning that prior to May 2012, the SUE KMK provided water and wastewater services exclusively in towns and district centers, however after the entry of the SUE Tajikobdehot, owned by the Ministry of Land Reclamation and Water Resources of the Republic of Tajikistan (RT) into its own balance sheet, the SUE KMK started partly providing water supply services in rural areas. In both situations, the operator itself is responsible for collecting fees to operate and maintain the system.

In an attempt to improve the water service delivery, the Government has taken the decision to consolidate 14 subsidiary enterprises for water and wastewater services under two regional subsidiary enterprises, the first one covering the Districts of Republican Subordination and the second one covering Sughd district, in order to streamline processes, consolidate management and administrative procedures, provide technical assistance and optimize use of resources. The consolidation of the SUE KMK branches in two regional enterprises was strongly advocated by international donors that support the reform of the sector: European Bank for Reconstruction and Development (EBRD), European Union (EU), Swiss Economic Development (SED), and World Bank (WB). On the other hand, not all the ministries are aligned with this strategy, and some of them prefer the alternative to let local governments (municipalities) take owner ship of the water, wastewater and solid waste services.

Currently, capital investments are normally financed either directly by the Ministry of Finance, or through a combination of grants from donors (EU and SED being the bigger players) and loans executed between the water enterprises and international banks such as the EBRD and the World Bank. In the case of local governments, capital investments can come from the central government, international donors or through loans. Notable examples are the cases of Khujand, Tursunzade, Yavan and Nurek that directly access the EBRD loans to improve their drinking water and solid waste services.

During the ongoing economic crisis that the country is facing, exacerbated by the collapse of the Ruble and therefore of the Tajik Somoni, the SUE KMK has not been able to ensure timely repayment of loans received from the EBRD. As a result, the EBRD has requested the intervention of the Government and the Ministry of Finance that are the guarantors for the SUE KMK loan. The government instructed the cities and districts where EBRD is implementing projects to assist water supply enterprises with the repayment of their loans. A part of the loan was repaid by the Ministry of Finance of the Republic of Tajikistan through granting of loan to the SUE KMK.

On the other hand, municipal enterprises that are not part of the SUE KMK have navigated this difficult economic situation better, for example Khujand. This is an example of evidence that municipal services have worked better than the ones controlled by the SUE KMK.

In absence of a shared national vision on the most appropriate water management system for the country, and as a result of the growing divergence about the effectiveness of the two service delivery models (Municipal versus State Unitary Enterprises), the Ministry of Finance asked the

USAID Local Governance Project to conduct a study to compare the efficiency of water service enterprises owned by the central government versus those under municipal control. This study focused on four cities: Khujand and Faizabad, where the water service is under the municipal ownership and controlled by local governments, and Tursunzade and Yavan,, where the enterprises for water and wastewater services are under the republican ownership and were handed over to the control of the SUE KMK.

The study was based on a set of indicators that covers all aspects of the service, from accessibility and quality of the resource, to institutional capacity, through to financial aspects and customer satisfaction.

A general consideration that is possible to draw from the study is that the overall performance of a water utility is strongly influenced by the economic wealth of the area served: the best performing water utilities are those that serve areas with higher average income. The second factor that influence the performance and therefore sustainability of a water utility is the economy of scale:

larger water utilities have better capacity to access funds for capital investments and repay credit via tariffs, whereas smaller ones are likely to benefit from a higher level structure that could help them improving their managerial capacities, streamlining processes and optimizing use of resources.

Besides the environmental constraints in which the water utilities have to operate in Tajikistan, when discussing the support provided by the SUE KMK to the local subsidiary enterprises, the feedback received was either neutral or negative. The service received by the two SUE KMK enterprises in exchange of the 8% fee paid to the central level was not considered satisfactory, and the creation of the regional subsidiaries has not changed much in terms of decentralization of the actual decision making processes: instead of being the result of a consolidation of the local enterprises, the regional subsidiaries of the SUE KMK are emanated from the central level and perceived as an additional level of control and a closer eye to the financial resources of enterprises making up the regional enterprise.

It is still unclear on how the way the regionalization of the SUE KMK will play out, and the creation of the regional subsidiaries is still too recent to be evaluated. The de-monopolization of the SUE KMK is a very important subject under discussion at governmental level.

Background

Khujand

In 2015, it was estimated that the Khujand agglomeration is of 173,000 people. The Khujand Water Company (KWC) counts a total of 48,991 connections (128,700 people), serving the population of Khujand city mostly and partly, the rural settlements adjacent to the city.

The Khujand Water Supply Project was initiated by the EBRD upon the request of the Hukumat of Tajikistan's Sughd oblast. This engagement in the urban water sector is in accordance with the Swiss Central Asia Water Strategy, jointly developed by the Swiss Agency for Development and Cooperation (SDC) and the Swiss State Secretariat for Economic Affairs (SECO).

The project was launched in the second half of 2004 and has been undertaken to rehabilitate the necessary infrastructure and improve institutional capacity of KWC. Project implementation started in 2005 and was scheduled for completion by middle of 2008. Total external budget of the project is USD 4.7 million out of which: (a) USD 3.15 million non-refundable grant from SECO was used for infrastructure rehabilitation and consultant services for implementation support, (b) USD 1.20 million loan from EBRD, and (c) USD 0.35 million grant from Norway earmarked for the Financial and Operational Performance Improvement Programme. The management of the Project on behalf of the donors was entrusted to EBRD. The Tajik Government contributed to the development of KWC through a substantial investment programme to open up a new water source at Khoji Bakirgan River.

The third phase of this project has been recently approved. The technical assistance will be completed over a period of 3 years, whereas the loan will be repaid over a period of 15 years.

Faizabad

The local water company, the SUE KMK of Faizabad district, serves the district center and provides various services (Water, Sanitation, Waste and Landscape management). The water supply system was originally designed during the Soviet time to satisfy the needs of about 3,000 to 4,000 people, whereas nowadays the total population served counts 10,000 people. Back in the Soviet time, there were nine boreholes, seven of which were operating 24 hours a day for seven days a week. The system is severely under-dimensioned for the population served.

For decision of the Municipality, the local SUE KMK was separated from the central one and attached to the Municipality in 2008.

Faizabad is not included in the list of the urban centers supported by the EBRD and they do not benefit from international organization programs. The local executive government branch itself had endeavored to attract capital investments from the budget and other international institutions.

Tursunzade

Tursunzade is a city in western Tajikistan, known for its primary aluminum smelting plant TadAZ.

It is located 60 km west of Dushanbe, near the border with Uzbekistan. According to statistics, the city population was estimated to be 50,900 as of January 1, 2014. The aluminum plant was built in 1975. During the Soviet time, the plant used to employ about 15,000 people. It is still active and the local economy heavily depends on it and Tursunzade is one of the wealthiest towns in the country. In the past, the factory used to provide services to the city, from the construction of new buildings, schools, hospitals and roads, to supply water and sanitation services.

The factory used to provide Water and Sanitation Services to the new part of the city (apartments sector), whereas the old part was served by the municipality. From 2009, by an act of the national government, all the services provided by the factory passed under the municipality with a staff of https://en.wikipedia.org/wiki/Tajikistan https://en.wikipedia.org/wiki/Aluminium https://en.wikipedia.org/wiki/Smelting https://en.wikipedia.org/wiki/TadAZ https://en.wikipedia.org/wiki/Dushanbe https://en.wikipedia.org/wiki/Uzbekistan

500 people. In 2013, the water supply service was transferred under the responsibility of Vodacanal.

Since 2011 a $6.8M capital investment project funded by the EBRD has been going on. The project includes the replacement of old pipes and major rehabilitation works. The Water Enterprise is paying back the debts without major problems.

Yavan

The city of Yavan has an estimated population of 32,847 people. The water enterprise is under the umbrella of the SUE KMK, whereas the other utilities are a separate enterprise under the municipality.

The city water supply system counts a total of 5,925 connections, only 1,300 of which have water meters. They bill, based on the amount consumed for places where meters are installed, and a flat rate of 9.70 Somoni per person a month for connections without water meters.

Out of three projects submitted to the EBRD, only one was approved in 2012. This year, 2016, the enterprise will start paying back the debt of the first tranche of the project. In order to do so, the plan is to raise tariffs of 30%. However, in the current year, the Antimonopoly Service under the GoRT, after reviewing the SUE KMK’s proposal on a two-fold increase of water and wastewater service tariffs, increased them only by 10%.

The one project that was approved is a $16M project that has three milestones, each worth $5.3M, the first of which is the reconstruction of water and wastewater treatment facilities in Parchasoy, laying of the 7,6km water pressure main from Parchasoy intake to the clean-water reservoir (CWR) in Yavan and of the 2km gravity conduit from the CWR to Lesnaya street. Further, the city water supply networks will be reconstructed and extended and water meters will be installed in houses and apartments. They expect a significant reduction of costs after this work will be finalized. That is to say, that the enterprise will not use the water purchased from Yavan Chemical Plant having a significant impact on city water supply service.

Overview of the efficiency of four water supply enterprises

Table 1. Overview of municipal enterprises1

1Drafted based on the data received from the enterprises during the survey/study.

Table 2. Overview of enterprises under the SUE KMK2

2 Drafted based on the data received from the enterprises during the survey/study.

General considerations

From a high level analysis of the four cities considered for this comparative study, it emerges that the effectiveness of the water service is related to a combination of factors that include:

Economic welfare of the area;

Size of the water utility and related institutional capacity;

Economy of scale;

Support from international organizations.

Tursunzade and Khujand, the wealthiest cities of the country, exhibit an overall decent water delivery service and have a clear and well-structured investment plan backed by the EBRD and other international donors such as theSDC in Khujand and theEU in Tursunzade that will improve even more the performance of their services in the coming years.

Yavan experiences a more difficult economic situation. Nevertheless, being part of the EBRD program will help improving whole water service. However, slow growth of service tariffs may become an obstacle to this process. For example, in February 2016, new tariffs for water and wastewater services were approved being only by 10% higher compared to the previous ones and not sufficient for loan repayment.

Faizabad, on the other hand, in addition top of the economic difficulties, is not part of the EBRD program and the decision to support its long-term investment plan depends entirely on the governmental budget and its priorities.

These four factors impact a number of aspects of the water services:

Quality and reliability of the service;

Managerial and institutional capacities;

Operational effectiveness;

Customer care;

Reporting and Transparency;

Planning;

Tariff structure.

In Khujand and Tursunzade, official information released by municipalities and the same water enterprises tend to be confirmed by the feedback of common users, whereas in Yovon and Faizabad the discrepancy between official reporting, users’ feedback and sometime the same employees results to be quite wide. Particularly important is in the case of Faizabad, where the poor quality of reporting and lack of information makes very difficult any in depth analysis of the actual performance of the water utility.

A common trait that characterizes the SUE KMK subsidiaries is that they are less customer oriented than the equivalent municipal enterprises, which showed to be much more aware of the needs of the population and open to dialogue with the population. In Khujand and Faizabad the population is more engaged in discussions to improve the water service and consultations happen on a regular basis. In Khujand, a roundtable with representatives of the Mahallahs is organized every quarter by the water company. During our visit we had the opportunity to attend one that was shown on TV in an effort to improve transparency and build trust with the population. In Faizabad, the representatives of the population mentioned during our focus group that they requested and obtained from the municipality one extra hour of water service per day. On the opposite, where the service is delivered by the SUE KMK subsidiary enterprises, the level of consultation of the population seems to be very limited and mostly related to the existing EBRD program’s activities.

As a general feedback on the performance of the service provided from the central SUE KMK to their subsidiaries, representatives of municipalities and enterprises from all four cities stated that the 8% fees required is far too much compared to the service received and they all would prefer to keep control of their finances at local level.

The case of Faizabad is particularly enlightening. In 2008 the local enterprise was separated from the SUE KMK and attached to the Municipality. Until today, and despite being in a rather difficult situation, both municipality and the enterprise prefer to remain separated from the SUE KMK.

Institutional capacity

Statistical analysis on the four water utilities revealed a correlation between the overall performance of the water utilities and their institutional capacity. Particularly,the largest utilities (Khujand and Tursunzade) have a better structured and transparent reporting system including the one on delivered services broken down by consumers, revenues and expenditures, indebtedness that allows a more in-depth analysis of the key indicators. Their statistics show a better performance than the smaller enterprises in Yavan and Faizabad. The water service companies in Khujand and Tursunzade cover 100% of the population living in the cities, with a collection rate above 95%.

In the case of Faizabad and Yavan, reports are not very accurate and in many cases numbers have not been validated by observations. Faizabad has a lack of key assets’ accounting practices and established revenue and expenditure reporting forms. The enterprise reports to its owner, the district executive government body, irregularly, inclusive on matters of an expenditure of budget funds. The reporting system is well established in Yavan enterprise for water and wastewater services. The accounting records kept here more accurately, and, in line with the statistical reports required by the SUE KMK, the enterprise submits various reports on revenues and expenditures, delivered services broken down by consumers, receivables and payables, benefit holders, salaries paid to enterprise employees and so on.

A note has to be made related to the inconsistency of level of education of the staff across the different enterprises:

this lack of standard was also pointed out by the Ministry of Energy and Water Resources as an existing problem that the government need to streamline.

Figure 1. Total number of employees

Figure 2. Level of education of employees

Cost effectiveness of water utilities

An overview of cost and profitability of the four water companies allowed us to identify similar patterns which is worth analyzing for identifying common determining factors listed below.

As shown in Figure 3, total costs and income of all the four utilities have increased in the last 3-5 years while profits of the utilities dramatically decreased, especially in 2014 and 2015. We believe that the root cause of this decrease has roots in four factors:

1. Switch to metered systems for measuring water consumption by the consumers;

2. Imperfect enterprise management;

3. Russian rouble crisis (exacerbating factor since 2014);

4. Credit balance from unredeemed exemptions.

The combination of these four factors is causing the erosion of the profitability of the enterprises in different proportions, putting at risk the capacity to repay the loan to the EBRD for those who have one.

In Khujand and Tursunzade, the installation of metered systems, without the immediate adaptation of tariffs to the new system, caused a severe drop of the monthly fees collected due to (a) a more controlled consumption of the resource at the users’ end together with (b) a more accurate measurement of the actual consumption from the service provider. The switch to the metered system revealed that the estimated consumption per capita that is used in non-metered systems to calculate a flat tariff per person per month, is grossly overestimated. With the adoption of water meters, users have been saving up to 80% from their water bill compared to the old tariff system.

This situation negatively affects the capacity of the two most performant water enterprises to recover costs and to repay their loans.

Figure 3. Cost and Profitability of the Water Utilities

The enterprise did not foresee the results of installation of water meters i.e. the decreases in water usage by consumers and accordingly, reduction of revenues. The latter requires a reduction of unreasonable expenditures, including the loss of water. The level of water loss is extremely high on all 4 enterprises, in Faizabad it makes 37%, in Khujand – 48%, in Tursunzade – 31% and in Yavan it constitutes 43. %. It should be pointed out that the water enterprises in Yavan district and in the city of Tursunzade purchase water from Yavan chemical plant and Tajik aluminum plant accordingly. Elimination of water loss could result in significant reduction of enterprise costs up to 40%. The case highlights the need to improve the management on all enterprises under review.

In addition, the Russian rouble crisis over the last two years has affected the Tajik Somoni that has lost about 40% of its value to the Euro, affecting the sustainability of their loan with the EBRD.

Lastly, the credit balance due to the unredeemed payments of exemptions from the Ministry of Finance is particularly affecting the smaller enterprises (Yavan and Faizabad) that are not able to absorb these costs through their profits (absent in the case of Yavan, negative in Faizabad), and more recently has become an important factor also for the SUE KMK in Tursunzade, due to the dramatic collapse of its profit in the last year. Khujand on the other hand is a positive exception, since they do not experience any discrepancy of calculation of the exemption with the Ministry of Finance since 2002 and their redemption rate is 100%.

Figure 4. Impact of Unredeemed Exemptions from Water Bills

Unit costs analysis derived from indicators that compare a series of unit costs, revealed the efficiency of the services through a simple statistic normalization of the data.

In Figure 5. the first of these indicators that shows the distributed annual cost of the water utility over the number of connections served. We can observe that both water enterprises under the SUE KMK have higher costs per unit than the two equivalent municipal ones. The gap is particularly important between the two largest enterprises – Khujand Water Company and Vodokanal in Tursunzade. The cost of one connection results being 23% cheaper for Khujand Water Company’s than for Vodacanal in Tursunzade. A bit closer is the gap between Yavan and Faizabad, but still in favor of the municipal enterprise in Faizabad.

Figure 6 illustrates the second most important indicator that is the cost per cubic meter of water produced. In this case, we can notice that the cost of water produces in Khujand is much higher than in any other city. It should be noted that the water enterprise in Tursunzade purchases water from the aluminum plant and in turn provides wastewater services to the plant. Here theparties use a mutual service settlement practice against service payments.

Figure 5. Distributed Cost Over the Total Number of Connections

Figure 6. Production Cost per Unit

A third important indicator to compare cost and efficiency between the four enterprises is the average amount of water produced per connection served. As shown in Figure 7, Khujand is by far the most efficient water supply system, indicating that the level of water losses per connection is extremely low compared to all other utilities, and compensating the higher production cost per cubic meter shown in figure 6. This effect may be the positive outcome of the capital investments over the last several years: Khujand is indeed the city that has enjoyed the support of the EBRD/SDC program for the longest time.

Tursunzade, on the other hand, produces almost five times more water per connection served, revealing a very inefficient system where losses seem to be extremely important. At the bottom of this ranking stands out Faizabad for its very poor performance that would require great attention, being the water produced per connection almost 20 times higher than in Khujand, and about 4 times higher than the second worst performant enterprise.

The last indicator we considered was the average annual wages of the staff. From Figure 8, we observe how it is much higher in the two enterprises under SUE KMK than in the municipal

Figure 7. Efficiency of the Water Distribution System

Figure 8. Cost of Personnel enterprises. In Faizabad, though salaries are far too low despite the higher level of education of the staff, the situation may be the result of the overall poor economy of the area.

If we limit our compared analysis to Khujand and Tursunzade, the two larger and best performing enterprises in terms of quality and reliability of the service, we notice that Tursunzade is consistently less efficient than Khujand as per the overall cost of service delivered per unit and amount of water produced per connection, while having higher average wage of its personnel. This last not being a negative aspect as such, the higher wages is not justified by the level of education of the staff, which is on average lower than the one in Khujand (see Figure 2).

In a similar way, Yavan results to be consistently more expensive than Faizabad despite the impressive inefficiency of Faizabad’s water production and supply system. This situation though could be explained partially by the very low tariffs applied in Faizabad, accompanied by a very low collection rate that virtually provides free water to the city and no control on the resource.

In conclusion, it is important to point out that as of today, the municipal water companies of Khujand and Faizabad are overall more cost effective than the respective SUE KMK subsidiaries, although in the case of Faizabad this does not translate in a better service provided by the water company.

Tariffs of enterprises for drinking water and wastewater services

Drinking water and wastewater tariffs in compared enterprises were developed with consideration of all expenditures for service provision. In the past four years, the SUE KMK annually reviews water and wastewater service tariffs for subsidiary enterprises. Earlier on, if a single tariff was developed in consultation with the Antimonopoly Service, then today it is developed individually for each locality/service enterprise. Based on the tariffs, the SUE KMK makes forecasts for subsidiary enterprises on achievement of revenue levels, exercises control over the targeted use of funds, provides centralized funding to the city and the utilities for rehabilitation and capital repairs of water supply facilities, pays off for the volume of services to be provided to the benefit holders and so on.

At the same time, municipal enterprises in Faizabad and Khujand have not reviewed water and wastewater service tariffs over the last three years, although the efforts of enterprises demonstrate their unprofitability.

A comparative summary table of enterprise tariffs for the period 2012-2015 in given in Annex 1.

The issue of redemption of exemptions

The issue of the redemption of exemptions from water bills for users that have particular status, such as veterans, people with disability or in severe economic distress, has been highlighted by the Ministry of Finance as one of the main problems that is impacting their relationship with the SUE KMK, together with the insolvency of this last one towards the debts contracted with the EBRD and other international banks, for which the Ministry of Finance is the final guarantor.

Figure 9 illustrates the complexity of the process for the redemption of the exemptions. The burden is on both, users and the institutions that have to process the paperwork, with many steps that can easily lead to mistakes.

In addition to the burdensome process, the interpretation of the new law related to the exemptions is not clear. In the past, the law used to extend the exemption to the entire family of the individual that was entitled to it, whereas the new law is not clear to this regard, and a more restrictive interpretation from the Ministry of Finance versus a more loose on the side of the SUE KMK may explain the discrepancy between the two calculations of the amount due.

The role of the Anti-Monopoly Agency

The Anti-Monopoly agency plays a key role for the sustainability of the capital investments needed for the renovation of the infrastructures and the technological innovation of the water utilities. The role has become very critical in the recent years due to the installation of water meters across the country. This innovation that improve transparency of charges and trust between service provider and water users, has also the result to dramatically reduce the water consumption and the average monthly fees with it, up to one fifth of the charge with the previous system. This sudden change would require a quick adaptation of the tariffs to avoid a collapse of the income for the water utilities when metered are installed.

The Anti-Monopoly agency tends to be very conservative when approving changes in tariffs, allowing a maximum of 10-20% increase per year, which is not sufficient to compensate the drop of the income observed after the switch to the metered system. The result is that the most virtuous utilities that provide a better and more transparent service are also the ones that are penalized by the regulatory system. Nevertheless, it is worth to mention that it is possible for water utilities to request exceptions in order to adapt tariffs to the new situations, as long as the request is properly substantiated. In this sense municipal and decentralized systems have more flexibility that those under the SUE KMK, since they can submit their requests directly to the local branch of the Anti-

Figure 9. Process for Redemption of Exemptions

Monopoly agency, whereas the SUE KMK negotiates tariff increase on behalf of all the 39 enterprises under its control, losing the capacity to represent and voice the needs of specific enterprises.

The rigidity of the regulation for tariffs also impacts the capacity of water utilities to pay back the loans contracted with banks. The legislation of Tajikistan forbids to build the cost of the loans into the tariffs, only allowing to use profits to refund debts. This makes virtually impossible for water utilities to access credit outside of international aid programs. In practice, however, the EBRD and Government of Tajikistan foresee repayment of loans at the expense of service production costs upon signing of agreements on rehabilitation of drinking water supply systems.

The way forward

Differentiate tariffs

The first dramatic improvement to support current programs can come from a differentiation of tariffs for metered versus non-metered systems. The adoption of water meters dramatically reduces the water consumption in two ways (1) people becomemore rational in the use of water, and (2) there is a more accurate measure of the actual consumption of water. A double regime of tariffs for metered and non-metered systems is needed to avoid causing financial stress to the more virtuous water enterprises and reduce risk of delinquency for those that contracted loans with international banks.

Innovate

Combination of water meters and electronic payments are, in most cases, are easy to adopt, especially in a context of regional consolidation of the management. Benefits are immediate and prompt a more transparent and conscious management of finances.

Protect well performing utilities

The ongoing consolidation of water enterprises should be limited to small systems with insufficient performance. For example, the sudden consolidation with smaller and less efficient enterprises will most likely result in a heavy burden for the enterprise of Tursunzade. When the economies of scale, i.e. reduction of costs per unit of production under enlargement of production, creates favorable conditions, better performing utilities such as the one in Tursunzade can be easily transfer under the control of the municipality.

Results of consolidation of enterprises for water and wastewater services of the SUE KMK may result in:

a greater centralization of management of water and wastewater enterprises;

regional subsidiary enterprises having a control over the revenues of the constituting enterprises and possessing a single settlement account, first of all, would channel revenues to repayment of loans and their interest, maintenance of own staff and transfer of 8% of received income to maintenance of the SUE KMK and tax payments. Expenditures for operation and maintenance of water and waste water systems would not be sufficient.

incomes of enterprises not being the part of EBRD projects could be used as the loan repayment sources.

regional subsidiary enterprises with their revenues will become the VAT payers as well as their branches that previously had not been VAT taxpayers. This will lead to increased service prices throughout the territories covered by regional enterprises.

Create formal separations of the water company and its revenues from the government. Legally “ring-fence” the water sector in order to ensure all revenues from the sector remain in the sector or even in the utility. It is important to ring-fence the finance of water enterprises with dedicated budget lines. The only exception can be the combination of water supply with sanitation services, that are often provided by the same entity and require similar infrastructures.

Ring-fence water finances

In some cases, when virtuous water enterprises are successfully saving their surplus for future Capital Investments, there can be inappropriate pressure from other institutions or authorities in order to use funds for other priorities. To avoid similar temptations, access to credit for additional capital investments can accelerate the improvement of the infrastructures while protecting the financial capacity of the water enterprise.

Payment of credits

In most cases credit is covered by the tariffs and treated as any other cost, although regulations only allow credit to be refunded from profits. The discrepancy between theory and practice should be resolved. As per international best practices, the cost of credit needs to be built into the tariff structure, replacing the cost of depreciation. This is a key principle for the financial sustainability of the water utilities that needs to be properly addressed and clarified in the regulatory system.

Streamline and improve financial and accounting reports

As part of the innovation effort, financial reporting must switch to an online platform with various rights of access from the more restricted at decentralized level for data input and reporting, to the less restricted for control, tracking and analysis.

Strategize international aid while introducing commercial financing

To increase the funding available, the water sector can focus its public funds to leverage funding from the private sector, not only from the international markets but also local domestic markets.

The introduction of commercial financing in the water sector requires a package of important reforms to create an enabling environment.

Extend the Targeted Social Assistance Program (TSA) to exemptions from water bills

The procedure to redeem exemptions is far too complicated. An idea could be to include exemptions for utilities in the existing program for consolidation of social assistance into one mechanism (TSA)3.

3The TSA consolidates two largest social assistance programs into a single benefit and uses a special formula to identify and target the poorest 15 percent of the population in Tajikistan