noTE no. 55 ­ JunE 2010 GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Internal delegation contracts 56735 for water in Uganda An innovative approach to establishing a successful public utility Philippe Marin, William Muhairwe, Silver Mugisha, and Josses Mugabi U ganda's national water utility has practices in Kampala. It was followed in 2001 by become known for its successful turn- a two-year management contract awarded to an around under public management. Less international private operator (Suez) to handle well known is that this success owes much water distribution and customer management in to the introduction of private-sector-like prac- Kampala. Thus between 1998 and 2003 the utility tices to motivate employees. Following a mixed was operated under two different modes: a private experience with two short-term management operator handled water distribution, billing, and contracts in Kampala, the utility's management collection in Kampala, while water production introduced an innovative concept of internal in Kampala and all services in secondary cities delegation, inspired by public-private part- and towns remained under the direct control of nership contracts. Local managers establish NWSC headquarters. private partnerships to operate systems under contract with the utility, with part of their pay The two management contracts, designed and depending on performance. The experience awarded without assistance from donors, had offers interesting lessons for those involved in many design flaws. They proved difficult to imple- reforming urban water utilities in developing ment, with tense relationships between expatriates countries. and local staff. The second contract was adjusted for some of the shortcomings of the first, with Uganda's water infrastructure was deeply affected clearer lines of command and a special fund for by the civil war during the 1980s, and the return emergency rehabilitation. But it was of short dura- to normalcy in the following decade brought tion and had a modest impact. Although some little progress. The country's National Water and improvements were achieved, notably in bill Sewerage Corporation (NWSC) was a typical collection, most indicators fell below the contrac- poorly run state-owned utility. More than half the tual targets. urban population lacked access to piped water-- and water rationing was widespread, water not potable, and customer service dismal. Birth of the internal delegation concept Two management contracts The presence of a foreign private operator in mixed results Logo Usage PPIAF Approved Kampala for a few years had one advantage: it gave the new management at NWSC an oppor- In 1998 the government decided to appoint a new Logo at NWSC, with a clear mandate general manager- Black Philippe Marin is a senior water and sanitation specialist to modernize the utility. This appointment coin- in the World Bank's Middle East and North Africa Region. cided with the signing of a three-year management William Muhairwe is general manager of NWSC and has contract with a German consulting firm. The PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY been leading its reform since 1998. Silver Mugisha is chief contract, negotiated by the previous manage- manager of institutional development and external services ment team, focused on modernizing commercial at NWSC. Josses Mugabi is a young professional at the World Bank. Logo - 1-color usage (PMS 2955) Helping to eliminate poverty and achieve sustainable development PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FAC ILITY through public-private partnerships in infrastructure 2 tunity to focus its attention on improving services Scaling up internal delegation outside Kampala. It began an experiment with area performance contracts (APCs) in 2000, with the The second management contract was not renewed rationale that motivating employees was essential when it expired in February 2004. Instead, NWSC to achieving good performance. APCs were basi- decided to expand the internal delegation approach cally one-year performance agreements with local to all NWSC systems, including Kampala, through management teams, with bonuses and penalties (of a second-generation scheme, the internally dele- up to 25 percent of basic salary) based on targets. gated area management contract (IDAMC). The Local managers were given more authority to make idea was to build on the APC concept by designing operational decisions and also made accountable contracts that mimicked a management contract for outcomes. This initiative was accompanied by with a private operator (box 1). programs to promote best practices, emphasize teamwork, and recognize the best performers. The contractual design of IDAMC, inspired largely by the former management contract with Suez, Under the APCs, the operational performance was drafted by a task force of NWSC staff. The of NWSC improved significantly in secondary main idea was to foster the principles and practices cities--much more so than in Kampala under a of efficiency, accountability, and financial viability foreign operator. Nonrevenue water was reduced in the provision of services by transferring operat- from an average of 32 percent to 22 percent in less ing risk to teams of committed individuals who than three years, while no significant change was would lose or gain financially depending on how achieved in Kampala. Bill collection also improved they performed. dramatically. While these were small systems, much easier to operate than the complex infrastructure The adoption of the IDAMC concept effectively in Kampala, the results were encouraging. transformed NWSC's regional branches into a Box 1 How internal delegation contracts work While the IDAMCs bear many similarities to the initial APC approach, there are also several fundamental differences. APCs were internal agreements between NWSC and area managers. IDAMCs are private law The idea was contracts between NWSC and a privately incorporated partnership. A deed of partnership detailing the duties, to mimic a rights, and obligations of each partner is signed by the members of the management team. management As in a traditional management contract, the privately incorporated partnership acting as operator is responsible for running and maintaining the water infrastructure (production and distribution) and handling customer service contract with (from reading meters to collecting revenues). NWSC remains responsible for making investments and setting tariffs. a private One difference from a true management contract is that headquarters still provides centralized services as well as operator funding for working capital. Another is that disputes are settled by the NWSC board rather than a court of law. UndertheIDAMCfinancialarrangement,operationalcosts(suchaspower,chemicals,maintenance,andthe salaries of seconded employees) are borne by NWSC. The remuneration of the partnerships is essentially based onanincentivefeecorrespondingtoashareoftheoperatingcashflow--anddependsonperformanceonfive key indicators: cash operating margin, nonrevenue water, working ratio, bill collection, and percentage of inactive connections. There is also a performance fee based on savings achieved on a few administrative costs (such as vehiclefuelandtelephoneservice)aswellasperformanceinmeetingsometargetsspecifictoeacharea. Even though NWSC bears most of the operating costs, local managers still have strong incentives to reduce thembecausetheydirectlyaffecttheoperatingcashflow,thebasisforcalculatingtheirremuneration.Theyalso have direct incentives to maximize sales and revenue collection, improve bill collection, and reduce water losses andtheproportionofinactiveconnections--allofwhichleadtobetterfinancialviability.Thecontractualtargets andlevelsofrisktransferareadjustedonthebasisofconditionsineacharea--withthevariableportionofthe partnerships' remuneration ranging from about 25 percent to more than 45 percent (as in Kampala and Entebbe) and bonuses for employees directly negotiated between unions and each local partnership. Internal delegation contracts for water in Uganda 3 Ta B L e 1 Key operational indicators for NWSC, 1998­2008 Indicator 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total connections (thousands) 51 54 59 66 75 87 101 123 152 181 203 Service coverage (urban, %) 47 50 54 57 60 63 65 68 70 71 72 Nonrevenue water (%) 50 46 43 43 41 40 38 34 30 33 34 The reform Water losses per connection 1.21 1.03 0.92 0.84 0.69 0.63 0.57 0.46 0.33 0.32 0.28 recognized per day (cubic meters) that motivating Labor productivity (staff per 36 27 21 17 15 11 10 9 7 7 6 thousand connections) employees Source: NWSC. was crucial for success series of quasi-private, ring-fenced, and autono- sion of service, with connections doubling between mous business units. In each branch NWSC enters 2004 and 2008. By 2008, 72 percent of the urban into a two-year contract with a team of individu- population had access to piped water through a als called "the operator"--a private partnership household connection, and more than 90 percent consisting of key staff headed by the area manager. had access to an improved water source. The IDAMC terms replace those of the employ- ment contracts of local managers, while lower-level Labor productivity has improved considerably, NWSC employees are seconded to the operator standing at about 6 employees per thousand appointed in their area. connections in 2008, down from 36 in 1998 and 15 in 2002. While half the employees were laid off between 1998 and 2002 (through a voluntary Sustained performance gains redundancy plan negotiated with unions), new and better-qualified staff have been recruited in By 2002 NWSC had made sizable progress, thanks the past five years to keep up with the fast-growing to the positive results of APCs in secondary cities. customer base. Starting in 2003, the implementation of IDAMCs raised its performance to a new level. While further NWSC has not benefited from any significant gains were made in secondary cities, the biggest tariff increase over the past decade, with adjust- improvements were achieved in Kampala. ments limited to inflation. Yet thanks to efficiency savings and a fast-growing customer base, the util- Water losses have fallen significantly. Nonreve- ity has been able to post an operating profit for nue water, already reduced from 50 percent to six years in a row since 2003, having always been 41 percent between 1998 and 2002, was further cash negative before. Although salary costs have reduced to 34 percent in 2008 (table 1).1 Almost grown significantly with the payment of bonuses all customers are now metered, and bill collection under IDAMCs, this increase has been largely for residential customers has been maintained at a offset by the many efficiency gains in operation. high level (although, as in other African countries, The improvement in financial viability allowed irregular payments from government agencies are NWSC to easily access donor funding to finance a continual problem). While the utility maintains its continual expansion. a strict collection policy, it also makes every effort to negotiate with customers before cutting off service, resulting in a low rate of inactive connec- Lessons learned tions (about 5 percent). The modest achievements of the two successive The introduction in 2005 of a free connection management contracts in Kampala show that policy--to allow the poorest households to gain bringing in a private operator from outside is no access to the water supply network and become guarantee of success. Yet the utility management regular customers--resulted in a remarkable expan- pushed forward by introducing private-sector-like 4 practices that mimicked the public-private part- ·Supervision of the local partnerships has been (and nership approach. As these became well accepted remains) a challenge. NWSC had to learn how by employees, the reform turned into a major to properly monitor the private partnerships success. and deal with fraudulent reporting and abuse of autonomy by some local managers. The "check- Uganda's success with NWSC provides encour- ers system," in which dedicated staff make agement for other countries to experiment with unscheduled visits and audits, has proved to the corporatization of public water utilities, be an efficient approach. Since the start of the designing schemes that suit their own situation program, strict control by headquarters has led and culture. The full story of the reform has been to the dismissal of three partnerships. recently published (Muhairwe 2009). There is no prescribed blueprint--only a need to respect ·Internal delegation contracts require strong nurturing fundamental principles of efficiency, accountabil- from headquarters. This is one major difference ity, and financial sustainability. The originality from a contract involving a traditional private of the Ugandan model lies in its introduction of operator. Headquarters remains in charge of such sharp financial incentives for staff and its emphasis essential functions as handling the customer on private sector principles. The experience offers database, procuring equipment, controlling several important lessons: financial flows, and, of course, handling invest- ments. And major efforts are made to promote ·NWSC became a successful public utility because of benchmarking between units, recognize the best its strong commitment to operational efficiency and performers, and share good practices.2 improvements in financial viability. This commit- ment is well expressed in the motto chosen for ·The long-term viability of NWSC remains dependent the 2009­12 corporate plan: "maximize the on government support. Tariffs fully cover operation operating cash flow." It underlines the impor- and maintenance costs but only part of invest- tance for NWSC management of explaining to ment, and the government has been closing employees that increasing sales, improving bill the gap by financing the investment program-- collection, and keeping operating costs down carrying donor debt on its own books. As a are essential for the financial viability of the result, taxpayers, not users, have been paying company. for the investment program. This policy choice on who bears the burden of investing in water ·Focusing on motivating employees through better incen- raises the question of sustainability in the long tives was central to the success of the reform. Water term. This will depend on the availability of utilities are in the service business. Workers investment resources from the central budget are assets, and no lasting improvement can be (and fiscal space to acquire additional debt) as achieved without their commitment and collab- well as on the incentives in place to ensure that oration. Providing sizable financial bonuses is NWSC uses these resources effectively. a fair and efficient way to motivate those who perform well. But it also requires enforcing penal- Notes ties and sanctions (including dismissal) for those More information on NWSC is available through its Web site (http://www.nwsc.co.ug). who do not. These two key elements are missing under traditional public management. Strong 1. Even though the trend shows a slight increase since 2006, nonrevenue water measured as water losses per connection has leadership together with a motivated team been declining every year, falling from 630 liters per connection a GRIDLINES PPIAF essential Logo Usage of employees wasApproved for promot- ing acceptance of this innovative, day in 2003 to 280 in 2008. 2. Quarterly workshops are organized to discuss findings and Gridlines share emerging knowledge incentive-based approach. feedback with regional teams, and a scorecard is published to show on public-private partnership and give an Logo - Black relative performance and the incentive awards earned by staff and overview of a wide selection of projects from water utility managers in particular areas. various regions of the world. Past notes can be Reference found at www.ppiaf.org/gridlines. Gridlines are a PUBLIC-PRIVATE IN F R A S T R U C T U R E A D V IS O RY FA C IL IT Y Muhairwe, William. 2009. Making Public Enterprises Work-- publication of PPIAF (Public-Private Infrastructure From Despair to Promise: A Turn Around Account. London: IWA Advisory Facility), a multidonor technical assistance Publishing. facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing Logo - 1-color usage (PMS 2955) strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. The views are those of the authors and do PHoNe (+1) 202 458 5588 Fax (+1) 202 522 7466 not necessarily reflect the views or the policy of PPIAF, geNeraL eMaIL ppiaf@ppiaf.org WeB www.ppiaf.org PUBLIC-PRIVAT E INFRASTRUCTURE ADVISORY FACILITY the World Bank, or any other affiliated organization.