Water Utility Performance The role of innovation and politics Jerson Kelman Brazil

Crisis, huge rehabilitation costs Low tariffs, low collection High usage and system Losses drive up costs Service deteriorates Service provider lives off state subsidies Efficiency keep dropping Service provider can’t pay wages, recurrent costs or extend system System assets go “down the drain” Consumers use water inefficiently Investment, maintenance are postponed Customers are ever Less willing to pay Managers lose autonomy and incentives Subsidies often fail to materialize Motivation and service deteriorates further Most utilities in the developing countries are in a vicious path Crisis, huge rehabilitation costs

A virtuous path is possible Consumers use water More efficiently Investments in new access expand revenue base More satisfied customers = more willing to pay Staff and managers rewarded for improved performance Subsidies for new access provided in transparent and targeted manner Staff motivation improves Tariffs increased to cover greater portion of efficient costs Reduced losses: reduced costs Service quality improves Technical efficiency improves Service providers fully cover operating costs System assets adequately maintained Sustainable water sector Private finance mobilized to increase investment capacity A virtuous path is possible

Sabesp 28 million people 368 municipalities 5th largest company in the world in number of clients % GDP Brazil = 33% In the nineties, Governor of São Paulo challenged Sabesp’s staff: Turnaround or Privatization

Corporate Governance NYSE – Level III ADR INVESTMENTS Higher than US$ 1 billion/year HALF FINANCED + PPPs GOVERNAMENTAL SUBSIDIES? NO CROSS SUBSIDIES AMONG CONSUMERS? YES Nowadays Government controls Sabesp owning only 50.3% of the shares

SABESP’S LONG TERM AND LOW COST FUNDING DEBT BREAKDOWN DEBT BY CURRENCY 1/3 of the debt was contracted in the capital market 9

FINANCING ALTERNATIVES 6

The water sector has only two sources of predictable revenue 1. Direct User Payments Paid by consumers/users 2. Subsidies Paid by taxpayers and other consumers International Grants Not predictable and not sustainable

Direct user payments (tariffs) Willingness to pay is much greater for water supply than for sanitation Benefits: individual X collective

Should be transparent and targeted to: Subsidies Should be transparent and targeted to: Help the low income families to pay the full cost of the service, including the connection of the household to the sewage collection system Help the entire community to pay partially the cost of sewage collection and treatment

Capital investments need to be more efficient Rationalize procurement and construction management, aligning the interests of utilities and contractors Pay for results, not for the construction

Governance Managers should be chosen by professional capability Internal and external auditing Regulation (independent and technically capable agency) Quality of the service Tariff level Tariff structure

Innovation Currently, we use in sanitation the technology of the XIX How to avoid the high cost of moving wastewater?

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