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The views expressed in this paper are the views of the authors and do not necessarily reflect the

views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Overview of Regional Survey Results


Full Cost Recovery (FCR) in Southeast Asia
Hanoi, Vietnam 7 June 2005
Laila Suryodipuro US-AEP/PADCO

Presentation Outline
FCR overview and principal challenges Survey methodology Highlights of institutional arrangements and tariff setting in 5 countries Key statistics and performance indicators for surveyed utilities Important factors enabling FCR Important actions taken to improve FCR Preliminary considerations for promoting FCR
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FCR Overview and Principal Challenges

Full Cost Recovery Definition


Revenue for O&M, depreciation, debt service, and expansion for the most part, come from billing/user charges Measuring cost recovery: The smaller the ratio, the better O&M Coverage (working ratio) Ratio O&M (excluding depreciation & interest) Water-related Revenues FCR Ratio Total expenses (including depreciation & interest) Water-related Revenues
Based on Accrual / Utility Method of tariff setting
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Why Cost Recovery Matters


Enables expanded coverage
Increasing access to water is a global priority Government cannot afford to subsidize

Improves water quality and quantity Determines and reduces true cost of water increases efficiency (in production and consumption) Promotes rational consumption Promotes equitable pricing to customers Frees up government resources
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The Vicious Cycle of Weak Cost Recovery


Weak cost recovery

Low willingness to pay

Inefficient operations

Customer dissatisfaction

Low investment Poor skills development

Poor service
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Principal Challenges to Achieving FCR


1. 2. 3. 4. 5.

Revenue/Tariff Personnel Operations & Maintenance General & Administrative Government Commitment and Relations

Survey Methodology
US-AEP, in partnership with SEAWUN and national water associations, conducted survey 15 utilities selected based on cost recovery ratios Self-assessment of key factors and actions
Key factorsconditions/tools that enable utilities to take certain actions to achieve FCR (human resources, relationship with local government, customer service) Key actionsdirect actions by utilities that directly reduce costs and increase revenue (billing, metering, tariff increase, reduction of NRW)
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Highlights of Institutional Arrangements and Tariff Setting

Role of Government
Level of government responsibility for water supply varies across the region Municipal: Indonesia, Philippines Province/state: Malaysia, Vietnam National: Thailand Degree of government support for capital expenditure varies No support: Philippine utilities, MWA, Johore (private) Some support: Indonesia, PWA, Vietnam Significant support: Malaysian utilities (except privatized utilities)
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Water Supply Coverage


Average service coverage in the 5 countries (not in the surveyed utilities) ranges between 3570%, except for Malaysia which has universal coverage. The percentage of population served in the region, particularly for the Philippines and Indonesia, is low even among strong utilities.

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Tariff Setting
Tariff adjustment is difficult and political in all 5 countries, except Philippines
Country Indonesia Malaysia Philippines Thailand Vietnam FCR Policy Yes No Yes No Yes, new policy Tariff Adjustment Difficult Increase only every 5-6 years is common Difficult Half of utilities with no increase in 10 years Not difficult Done by LWUA, a national, technical agency Difficult Previously difficult

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Average Tariff Price


Average residential tariff of $0.40/m3 is still affordable for any large Asian city (based on 5% household income ceiling -- ADB study); Average tariff in surveyed utilities is between $0.15 - 0.30/m3, except for Philippine utilities

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Key Statistics and Performance Indicators of Surveyed Utilities

O&M and FCR Ratios


1.40 1.20

1.00

0.80

0.60

0.40 0.20 0.00

WB recommendations (0.68), based on 25% top performing utilities in developing countries

Ind-Bogor

Ind-Makassar

Ind-Malang

Ind-Medan

O&M ratio FCR ratio

Mal-Johor

Mal-Penang

Mal-Sibu

Phi-Dipolog

Phi-Marilao

Phi-Leyte

Tha-MWA

Tha-PWA

Vie-Hai Phong

Vie-TT Hue

Vie-BR Vung Tau

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NRW and Accounts Receivables


Non-revenue-water (NRW)
Varies between 15% and 46% Correlation between NRW and achievement of FCR the lower the NRW, the better the FCR

Accounts Receivables
Varies between 10 and 99 days. All, except one, are below WBs recommended 90 days Positive correlation between Accounts Receivables and achievement of FCR
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Key Factors Enabling FCR

Relative Importance of Key Factors


No. 1 2 3 4 5 6 Key Factor/Enabling Condition Government Relations (local or central) Attitudes and background of personnel Customer-oriented service Existence of medium-term plan Accuracy of record keeping, accounting and IT Development of benchmarking/KPI system Importance 20% 16% 13% 8% 7% 7%

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Government Relations (local or central)


Primarily: Government (local/central) approves tariff increases. Secondarily: Government (local/central) provides grant funding Challenging factor as it is outside utilitys control Consistent with ADBs Asian Water Supplies (2004) conclusion:
It is the reluctance of elected officials to increase tariffs that has, more than any other single factor, constrained water supply development in terms of quality of service and coverage.

Case study: Medan, Makassar


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Attitudes and Professional Background


Quality of management and staff critical to success of organization, and its ability to effectively communicate with government Case studies: Hai Phong, Penang, Dipolog

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Customer-Oriented Service
Good service will create good reputation, reduce customer objections to tariff increases, and attract new customers Utility efforts to improve customer service include creating a call center and an available rapid response team Case study: Hai Phong

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Existence of Medium-term Plan


Helps identify priority projects and timeframe; allows basis for establishing future cost and revenue drivers Resulting tariff increase also becomes more acceptable

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Accuracy in Recordkeeping, Accounting, and IT


Allows management to better identify problems, evaluate cost centers and revenues, and make sound decisions IT enables faster decision-making Case study: Penang

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Development of a Benchmarking/KPI System and Targets Allows comparison of performance within and between utilities Quantitative targets (and rewards) create incentives to perform; targets are set for the lowest level of the organization Case study: MWA

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Key Actions to Improve FCR

Relative Importance of Key Actions


No 1 2 3 4 5 6 Key Action Reduction in physical losses Improvements in operational efficiency (reducing power, labor, chemical costs) Improvement in metering (reading, replacement, and repair) Increase in tariff Aggressive increase in the number of connections Improvement in billing (Invoicing, collection, payment methods) Importance 22% 19% 17% 12% 12% 9%

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Reductions in Losses
Use of high quality pipe and meters for new connections and careful supervision during construction (Ba Ria Vung Tau, Penang) Community asked to report leakages (many) Apprehension & strict penalty of water theft (Philippines)

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Improved Operational Efficiency


Reduce labor costs through early retirement (MWA, PWA), no new hiring (many), limit on overtime (Sibu) Reduce power cost through improvements in pumping (PWA)

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Improvements in Metering
Replace meters automatically after 5-8 years of service (many surveyed utilities) Outsource meter reading to third parties (Makassar and PWA) Centralize meters by grouping between 210 meters in one location (Dipolog)

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Tariff Increase
Public education campaigns first Timing Minimal increases for the poor Use the unserved population to support increase (Makassar) Staggered increases approved in one process (Philippine utilities)

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Increase in Number of Connections


Focus on large consumers, such as industrial and large businesses (PWA) Allow customers to pay for new connection fees on credit (Medan) Implement campaign programs in unserved areas (many surveyed utilities)

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Billing and Collection Practices


Field inspection on customer classification (Makassar) Strict disconnection policy for nonpayment (Vietnam and Philippine utilities) Outsourcing (PWA, Makassar), joint collection (many)

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Preliminary Considerations for Promoting FCR

Preliminary Considerations
National Level
Adopt a national FCR policy Establish an independent regulatory body

Local Government Level


Develop quantitative and realistic performance targets to evaluate utility performance

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Preliminary Considerations
Utility Level
Improve tariff application process Maintain regular communication with local government on state of services Stakeholder education campaign on FCR Attract and retain high quality personnel Develop customer-oriented services Establish medium-term business plan Improve operational efficiency
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