FINANCIAL SUSTAINABILITY OF WSPs: Overcoming the Barriers

Eng. PETER NJAGGAH

WASREB, Kenya

Innovative Water Sector financing .7th – 12th November 2011, Mombasa Kenya.

CONTENT

Definition of Financial sustainability

Barriers to Financial sustainability

Response to the BarriersConclusion

Financial Sustainability

Ability of a Utility to sustainably cover its O&M, Depreciation, and investments costs using

Internally generated resources ( Tariffs)Externally generated resources( Taxes and

Transfers)Financial sustainability allows for the possibility of

accessing different subsidies such as donor grants and below market rate loans as long as they are transparent and targeted and do not undermine the financial discipline of the company( Thelma Triche -2005).

•63% of WSPs within Very Large & Large Category achieve over 100% O&M cost recovery.

•Only 25% of Small WSPs fulfill the criteria for O&M cost recovery

This firmly establishes the case for clustering for commercial viability

Viability of WSPs

0

20

40

60

8063 55

25

Percentage of Viable WSPs(>100%) O&M cost recovery

Very Large and LargeOver 10,000 connections

Medium5000-9999

Small<5000

Bigest Barriers to Financial Sustainability

Operational inefficiency Barriers:Large inefficient work force with conflicting roles,High NRW ,

Poor Customer Care, Low Collection Efficiency etc

Management barriers: lack of business like culture, Poor Governance, poor leadership,

poor organizational culture.

Tariff Structure Barriers; i.e. connection fees, erosion etc.

Lack of full cost Recovery Tariffs

Low economies of Scale .

Huge Unsustained debt burden.

RESPONSE TO BARRIERS FOR FINANCIAL SUSTAINABILITY

Policy level Change board and management

Operational level Long term plan; corporate plan and performance

contracting Short term strategies: shortterm turn around programme

eg 100 RRI

OVERCOMING THE BARRIERS: Mitigating

Operational Inefficiency. Cost Containment–

Staff rightsizing:

Optimization of Administrative and Vehicle Maintenance costs.etc

Strict Appraisal of Capital projects .

Revenue Maximization.

Improved customer care and interface with customers: customer call centers, e-water payment system, prepaid water systems.

Amnesty for illegal users Market size increase.

Operational Improvements Reduction in NRW Improve collection efficiency etc..

.

RESPONSE TO MANAGEMENT BARRIERS – Building An Efficient Organization

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Customer focus & stakeholder engagement Organisational culture change. Adopting private sector like management principles of

commercialization and use of Incentives & competition to drive performance

Developed MIS - improved communication, operations and feedback systems

Increased accountability and effective monitoring systems Capacity building of staff . Networking and benchmarking with peers for best practices.

RESPONSE TO TARIFF STRUCTURE BARRIERS

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Tariff reforms –

Protected Tariff through an Annual Indexation: Tariff adjustment to ensure real value of Tariff maintained (indexation etc). This improved financial sustainability.

Easing access through review of one off connection and reconnection costs.

Rebalancing to ensure Different customer categories pay an economic price.

Eliminated Minimum charges

RESPONSE TO NON- FULL COST RECOVERY TARRIFS

FUNDING OPTIONS:Internally Generated Resources - For Minor Works

and Flagship InvestmentsDirect Grants : For Social Mission and New Large

works e.g. Sanitation, New Treatment facilitiesGovernment Budget provisions: For Social Mission

and New FacilitiesMarket Finance: Novel mechanism for Viable and

emergency worksOutput Based Aid: To serve the poor

RESPONSE TO LOW ECONOMIES OF SCALE

Growth in Customer Base Review of connection charges.Network expansion.

Economies of ScopeProvision of Consultancy Services?.

Production of Mineral Water?

RESPONSE TO HUGE DEBT BURDENNegotiated with Government to restructuring

total debt and converted to equity. OBJECTIVES: Enable the WSPs access market Finance for critical and

commercially viable projects. Enable the WSPs build a history of profitability and credit

worthiness with a healthy balance sheet. Enable the WSPs finance from its internal resources key

investments all aimed at expanding production and service coverage.

WSPs to undertake a Credit Rating to enhance their credit worthiness

conclusion Financial Sustainability a prerequisite to improved and efficient

service delivery.

improvement in utility efficiency and adoption of good commercial practices is a prerequisite to ensuring sustainable financing from both public and market finance.

Financial sustainability hinges upon the need for Cocktail funding corresponding to the nature of investment.

Social Mission Investments should be financed by Grants.

Viable investments may opt for market finance.

WSPs are challenged to move a step further to achieving bankability premised on the 3 C’s namely;

Cash flow,

Character (Debt history)

Collateral (Ungeared balance sheet).

THANK YOU FOR YOUR ATTENTION

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