Making Urban Services Work For Poor People January 19, 2004 Junaid Ahmad

2 Ground Reality South Asia as an example  Not one city or town in South Asia has 24 hour, 7 days a week water supply  Hyderabad and Karachi : 3 hours every two days  Delhi and Dhaka: 6-8 hours a day  Intermittent supply: health implications  Unaccounted for water: over 50%  Cities in South Asia: leaking bucket  Cost recovery: very low % of O&M  Sanitation  Open defecation  Little waste water treatment (less than 8-10%)  Decaying infrastructure: no O&M  Scale without sustainability  30-40% not connected  Use of infrastructure for patronage and politics!!

3 The Overall Context  The “ground realities” suggest that making services work is essential to making services work for poor people  Going from hours of water a day to 24 hours (or increasing access by 10%) is a matter of money and technical solutions: it’s a managerial problem  Going from 3 hours every other day to 24 hours (or increasing access by 40%) is not a matter of money and technical solutions, it is an institutional problem  Don’t fix the pipes, fix the institutions that fix the pipes

4 Messages of the WDR  What kind of institutional reforms? Ones that ensure that the institutional relationships between key players in service delivery chain are such that they:  Empower poor people to  Monitor and discipline service providers  Raise their voice in policymaking  Strengthen incentives for service providers to serve the poor  So, what are these institutional relationships?

5 A framework of relationships of accountability Poor peopleProviders Client power: short route of accountabilty (e.g. small-independent providers)

6 Poor peopleProviders Policymakers A framework of relationships of accountability Long route of accountability

7 Poor people Policymakers A framework of relationships of accountability Providers voice

8 Mexico’s PRONASOL,  Large social assistance program (1.2 percent of GDP)  Water, sanitation, electricity and education construction to poor communities  Limited poverty impact  Reduced poverty by 3 percent  Even an untargeted, uniform per capita transfer would have reduced poverty by 13 percent

9 PRONASOL expenditures according to party in municipal government Source: Estevez, Magaloni and Diaz-Cayeros 2002

10 A framework of relationships of accountability Providers Policymakers Poor people compact

11 Policymaker-provider: Contracting NGOs in Cambodia  Contracted out: NGO managed & could hire, fire, & transfer staff, set wages, procure drugs  Contracted in: NGO managed and could transfer but not hire and fire staff  Control group: Services run by government 12 districts randomly assigned to each category

12 Contracting for Outcomes: health services in Cambodia Source: Bhushan, Keller and Schwartz 2002 Use of facilities by poor people ill in previous month

13 A framework of relationships of accountability Providers Policymakers Poor people compact Client power voice

14 Poor peopleProviders National policymakers Decentralization Local policymakers

Applying the framework to Cities: Changing Paradigms

16 The Context  A New Global Setting Urban Millennium  A New Management Challenge Creating World Class-Cities

17 Important Implication  Municipal service delivery cannot be seen in isolated context;  How municipal services come together to serve the city-economy;  Managing cities to be credit worthy  National economic growth and poverty reduction efforts will be increasingly determined by the productivity of cities and towns

18 What will determine the economic potential of cities?  In the context of the “city economy”…  …how the political and delivery institutions of the cities are structured, will determine the contribution of cities to the national income

19 Models of Urban Governance

Assumptions  There is effective decentralization of powers to cities  Political  Fiscal  Functional/Administrative  Well defined separation of powers  Felt need for “Metropolitan” entities

21 Which Model of City Governance?  Metropolitan Government  Metropolitan Government with Economic Decentralization  Metropolitan Government with Political Decentralization

22 Metropolitan Government Water/Transport/Waste Management/Electricity Utilities Communities/Firms Municipality1Municipality 4 Taxes Transfers

23 Key Differences  In the political decentralized model, political and fiscal power is shared between the metropolitan and municipal tier.The metropolitan tier and municipalities jointly keep each other in check.  In the economic decentralized model, political and fiscal powers resides at the metropolitan level. The regions are only de-concentrated arms of the metro unlike the independent municipalities of the first model

24 Similarities  Fiscal and political power is devolved to city governments.  Both models adopt corporate structures for the financing and delivery of municipal services with user-charges.  In both models the city has share ownership with expected dividends from the corporations.  Danger of political deadlock.

25 Expenditure Responsibilities  Redistributive  Spatial Planning  Service delivery  Metro tier  Metro tier, municipal  Metro-wide companies (economies of scale), municipal companies

26 Tax Assignment/Revenue Sources  Metro Tier  Municipal  Companies  (All three tiers)  Business Taxes, Commercial Property  Residential Property (land only?)  User-charges  (Capital markets)

27 Need for Decentralized Borrowing  Lumpy investment requirements  Inter-temporal redistribution  Signal of quality of governance  Create accountability

28 Sources of Finance  Supra-local Government(s) and Public Financial Institutions  Subject to patronage  Inefficient allocation of resources  Private Financial Institutions  Transparent and Market-based  Subject to Moral Hazard  Need for suitable Regulatory Framework

29 Regulatory Framework  Information/Disclosure System  Bankruptcy Laws/Penalties for default  Own tax bases for collateral  Separation of fiscal and financial systems  Independent Central Bank  Public Sector out of Financial System  Prudential Regulation of Financial System  Market Decentralization

30 Key Lessons  Expenditure and tax assignments: should be legislated  Capital market Access: Any implicit liability should be made explicit

31 Tradeoffs MetropolitanPolitical Decentralization Economic Decentralization Macro Stability - -/+ Design + Efficiency: Allocative - + -/+ Design Efficiency: Locational + -/+ Design + Efficiency: Planning Coordination + -/+ Design + Equity + -/+ Design +

32 City Restructuring: Johannesburg Example

33 Johannesburg’s Original Structure  4 municipalities and one metro  Fragmented: no economies of scale  Duplication of service delivery  Typical line function responsibility  No integrated planning

34 The Problem  Chronic poor performance is the rule rather than the exception in many publicly run municipal services  Technical losses  Poor cost recovery  Subsidies do not reach the poor

35 Why? Policy RegulationDelivery Define the Objectives –24-hour supply –Clean water –Extended Access Define the Rules Enforce the Rules –Monitor Compliance –Regulate Pricing Deliver the Service Play by the Rules.

36 Restructuring of Johannesburg Delivery Contract Fiscal Surplus Water & Sanitation Waste Electricity IT Transport/Roads Slum-upgrading Primary Health Peoples Center R1R1 R2R2 R 11 Spatial Planning Fiscal Budget Local Economy Metropolitan Government

37 Change Process  Time framework: 21 months  No one blue print for the companies

38 Organizing to Deliver  service contract  management contract  lease  concession  divestiture

39 Organizing to Deliver LowHigh Government Involvement in Running the Business Government Ownership High Low Corporatised Utility Fully-privatised Water Company Government-run, Joint Equity Company Management Contract Water Department

40 Johannesburg’s Choice  Electricity generation: sale of assets  Water and Sanitation: Management Contract with Incentive  IT: sale and lease back services  Roads: Corporatized Line Department  Waste: Corporate utility  Property Management: Private Management

41 Commercial: User Charges

42 Roads and Storm water Council Owns Assets Provides Finance Develop High-level plans Contracts Roads Agency MD Planning Division Contracts Division Internal Contract Rd & S Man Sys 5 yr Programme Contracts out -  % Performance benchmarks Neg bid for work Operations Compete against benchmarks Commercial: No User Charges

43 Capital expenditure (R m) R309m R1280m R949m R816m R1100m R592m R375m R975m

44 Operating surplus/deficit (R m) +R102m -R82m +R2m +R0m -R314m -R74m -R116m

Example: City Utility

46 Asset Holding Company Operating Company State Govt.Municipalities shareholders contract customers bulk buyers municipalities, SSIPs customers Regulator

47 Expenditure Responsibilities  Redistributive  Spatial Planning  Service delivery  (Regulator)  Metro tier  Metro tier, municipal  Metro-wide companies (economies of scale), municipal companies  (Independent of the city structure)

48 Example: Medium and Small Towns

49 Need of Alternative Management Model  Too big to be managed by communities  Large and dense enough to benefit from economies of scale offered by piped water systems  Too small and dispersed to be managed by a conventional utility

50 Possible option  Regional or multi-town utilities  Advantages  Economies of scale in management  Minimize transactions costs of contracting  Viable volumes of business

51 Criteria for Clubbing  Large enough population base  Clusters of 1-2 million  “Manageable” overall distance  Within a watershed boundary  Voluntary or prescribed

52 International Examples: UK  Economies of scale up to population of 1 million  10 large utilities with population of 2-10 million  15 smaller utilities with population base of 250,000 to 1.2 million  Jurisdiction based on watershed boundaries

53 International Examples: France  WSS responsibility of Local Governments  Voluntary “Syndicates”  undertakings for municipalities – 2/3 per grouping  SEDIF manages water services for 144 municipalities and about 4 million customers

54 Regional Utility Shareholders: ULBs, State government ASSET HOLDING COMPANY Contract Private sector operator Town 1Town 2Town 3

55 Rules of Engagement  “Top down”: Statutorily create the regions and enforce all ULBs to be members e.g. England, Scotland  Need to ensure compatibility with 74 th amendment  “Bottom up”: Voluntary association e.g. France  Slow  How to create incentives for association?

56 Governance  Vesting O&M control of water related assets by lease (or otherwise) to AHC/AMC  Share ownership proportional to asset value  Voting rights possibly allocated on a more equitable basis  State government as shareholder, coordinator and arbiter  Rules of entry and exit

57 Reforming Institutions  Which path?  Through local governments: South Africa  Through the WSS: Chile  Which path for India?

58 Reforming Through Local Government: South Africa City towns State capital operating capacity incentives Utilities, Departments, Regional systems

59 Reforming Through Utilities: Chile City towns State City UtilityRegional Utility consumers

60 Co-locating Reforms: 74 th Amendment City Utility towns State CityRegional Utility consumers