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Water articles are written by ADB staff and external contributors on various water issues, reforms, and good practices.
From Loss to Profit: Structural Transformation via Reduced Non-Revenue Water
By Rudolf Frauendorfer, Principal Urban Development Specialist and Michael E. White, Urban Development Specialist (Water Supply and Sanitation) Non-Revenue Water (NRW) is part of a vicious cycle resulting from loss of treated water volume and the revenue that could be generated from selling that water—funds that could help transforming an underperforming utility to a well-performing one that can serve more people with better water supply. NONREVENUE WATER IN URBAN ASIA Nonrevenue water (or NRW) is a critical benchmark and a good indicator of water utility performance. In most developing countries, NRW levels remain high and are indicative that the water utilities suffer from poor operational and financial performance—a situation that contributes to lack of investment in infrastructure and utility capacity. NRW levels often range from 30% to 65%, and sometimes even higher. Supplied water is either not metered or metering is problematic, contributing to billing and collection difficulties. Water is rarely supplied on a 24-hour basis and quite often many urban customers are fortunate to receive any water. Where water is supplied on a 24-hour basis, connection costs can be high and affordability is an issue in expanding coverage. 1 Water quality is generally poor. Conservative estimates of NRW in Asia put the total quantity at about 29 billion cubic meters per year, approximately US$8.7 billion based on an assumed average tariff of only $0.30 per cubic meter. By cutting physical losses by half the present level, about 150 million additional people could be supplied with already treated water. 2 This demonstrates the potential size of the market place and the need to start addressing NRW seriously. Other benefits of reducing NRW include reduced commercial and physical losses, improved financial and operational performance, increased coverage for the urban poor, reduced energy costs, and improved and consistent water quality. More importantly, reduced NRW improves governance and initiates structural transformation. Reducing water losses is often the first, if not most important, element in going from loss to profit. By proving water to be a profitable business, governments are often more willing to allow water utilities become autonomous. NRW reduction not only induces profitability but also supports organizational transformation leading to corporate structures that will allow utilities to provide better services to more people. WHY IS NRW NOT BEING ADDRESSED? Given the potential benefits that reducing NRW provides, and the many years this issue has been discussed and advocacy has been provided, it may seem surprising that there has been so little interest in taking immediate and positive action on the issue of water losses, with the exception of only a handful of both public and private water utilities in Asia (e.g., Phnom Penh, Manila, Singapore). Some possible reasons include:
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Asset management. A lack of understanding of the link between asset management and NRW and how good asset management practices will address not only the amount of water lost but also the underlying cause of NRW. Capacity. Lack of technical expertise and equipment. Awareness. Utility management, local government officials, and the public often are not aware of the quantity of water that NRW represents and how many people and households could benefit if this could be saved and used. Funding. NRW reduction is viewed as an operational activity, which is usually covered by an inadequate budget for operation and maintenance. Accounting. NRW does not show up explicitly in a utility's financial statements; hence utilities, their owners, and the public are not aware of the value of how much water they actually lose every month. Yet they still have to cover all the production and distributions costs, which are passed on to paying customers. Raw water pricing. Subsidy or absence of raw water pricing. If utilities would have to pay for the raw water used, they would (most likely) be more careful handling it and avoid unnecessary losses. Tariffs. Subsidized tariffs and lack of cost recovery; where tariffs are very low there is little incentive or financial justification for investing in NRW reduction programs to reduce leakage and improve tariff collection efficiency. Political backing. Lack of political will, sometimes linked to corruption, vested interests, and ignorance of the benefits that can be derived. SOLUTION CHOICES FOR STRUCTURAL TRANSFORMATION The challenge for many Asian utilities is to change the way that they are structured, so that they can operate as a water business providing good quality service. Reducing a high NRW level is often the first step to a structural transformation of the utility including (i) corporate status, (ii) improved profitability, (iii) enhanced levels of water conservation, and (iv) postponement of capital-intensive water source development and treatment by prioritizing NRW reduction as readily available source. Another pressing matter is the technical capacity of water utilities, which in many cases must be improved. Training needs to include, besides techniques for NRW reduction and leakage control, the fundamental components of managing water utility assets to achieve sustainable low levels of NRW. Unfortunately, good training in this type of work is not often readily available since the experts in asset management and NRW reduction are generally held within internationally recognized water utilities, whose expertise is already used on a full-time basis with those utilities.3 Sometimes the involvement of the private sector can help, particularly through know-how transfer and change management practices, to kick-start transformation of ineffective utilities into effective water businesses on a sufficiently large scale to make the required impact. This does not mean that public utilities must become private nor does it mean that all public utilities will need private sector involvement; however, for many public utilities, some level of private sector participation may be essential to aid their transformation.
Engagement with the private sector to enhance the capabilities of water utilities in activities leading to improved NRW management can be achieved in a number of ways with varying degrees of exposure and risk: Outsourcing of components of NRW reduction. Outsourcing to a private water utility or NRW expert company is an effective way for a public utility to reduce NRW quickly and to develop utility capacity to handle and maintain low NRW levels in the future. Performance-based contracts. An enhancement of the outsourcing model is to agree and apply specific performance targets with and for the NRW expert company. Public Private Partnerships. More elaborate arrangements can be established between a public water utility and a private company for longer-term cooperation for operational and financial performance improvement and/or institutional transformation. Privatization. The majority of the water utilities in Asia and their assets are public and this status is unlikely to change for some time, if at all; so privatization may be an unlikely scenario for many but a few cases. THE NRW REDUCTION CHALLENGE Levels of NRW encountered by utilities across Asia are excessively high resulting in a situation where (i) major parts of the population are not being served; and (ii) utilities are unable to maximize their income, resulting in poor performance and inability to improve their services. Exacerbating the problem are unacceptably low tariffs, lack of technical and managerial capacity, and poor quality of infrastructure. To improve the current situation, it is essential that utility performance improvement demonstrated by reduced NRW becomes the new priority task of Asian water utilities, including enhanced governance and asset management becoming a core utility competence. Not only can effective NRW reduction augment the huge demand for water that is not being met but it will also result in immediate and sustainable gains in their financial performance. NRW reduction will help initiate a process leading to structural transformation and corporatization that will allow the utilities to become more autonomous service providers delivering better quality water supply to more people. Given the relative weaknesses in many publicly owned and operated water utilities throughout Asia, it will be essential for many utilities to consider engaging the private sector to some degree. By how much and in what way will need to be determined on a case-by-case basis, although outsourcing of specialist activities and/or day-to-day operational tasks are seen as the most likely and most effective way forward. RELATED LINKS The Issues and Challenges of Reducing Non-Revenue Water Water Brief: Curbing Asia's Nonrevenue Water
Water and Sanitation Program. 2005. Workshop Proceedings - Managing Karachi's Water Supply and Sanitation Services. Karachi. ADB. 2010. The Issues and Challenges of Reducing Non-Revenue Water. Manila. ADB and other development agencies have been successful in promoting and implementing water operators partnerships by twinning both public and private sector "mentor" utilities with "recipient" public utilities from developing countries to provide expert advice on NRW management and related activities for utility improvement. However, while the results have been good and a catalyst for change has been established, the scale has been limited and greater levels of investment are needed to replicate and upscale this work. *This article was first published online at ADB's Water for All website in January 2011: http://www.adb.org/water/articles/2010/from-loss-to-profit.asp.
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