67968 Public-Private Partnership Enhances Water Utility's Performance in Armenia Zaruhi Tokhmakhian and Ahmed Eiweida which resulted in a steadily decreasing and costly provision of services. Despite an abundance of water in the country, Key Messages1 for almost all Armenians, water was available for only a few hours a day.  Public-Private Participation (PPP) schemes were successfully implemented in several water utilities in In recent years, Armenia has made significant strides in Armenia, yielding excellent results for the reforming the water sector by developing policies, enacting development of the water and wastewater sectors. laws, and drawing up plans, programs and strategies aimed Armenia is one of the few countries in the region to at improving water service provision. have had such a successful PPP experience.  Private sector participation is increasingly seen Public-Private Partnership as an Agent of Change by the Armenian government as a key component of In recognition of the water sector’s strong potential and the sector reform strategies. vital role it plays in the social safety net, the Government  PPP is only part of a broader process of sector has attached special attention to the development of reform in Armenia. While private operators focus on Armenia’s water strategy. The weak management and lack service management and urgent operational issues, of infrastructure of available water resources has led to poor the Government ensures long-term sector viability water services in the country. To improve access, reliability by putting a framework in place. and quality of drinking water, the Government has increased use of public-private partnerships (PPPs) over the past  Delegated management of urban water supply decade. and sanitation to private operators has the potential to significantly improve the delivery services. In 2000, with the support of the World Bank, under a However, significant investment is still needed to Municipal Development Project, the Government introduced reduce wastage, rehabilitate poor water and a performance-based management contract (MC) for the wastewater infrastructure, and continue institutional water utility in Yerevan. This utility, Yerevan Water and and financial capacity building. Sewerage Enterprise (YWSE), became a pioneering example in the Europe and Central Asia (ECA) region in Armenia Takes on the Water Management Challenge terms of public-private partnership in the water sector. The services of an international water operator (ACEA S.p.A of For many years after the collapse of the Soviet economy, Italy) were engaged to improve the functioning of YWSE most of the water supply and sanitation systems in Armenia through a direct operation and a program of hands-on were in disrepair. The country was faced with increasing training for the technical, financial, and management staff. demand, deteriorating assets and dilapidated infrastructure, Since then, private sector participation is increasingly seen by the Government of Armenia (GoA) as a key component 1 This Knowledge Brief draws information from the report “Outage: of sector reform strategies aimed not only at improving Investment Shortfalls in the Power Sector in Eastern Europe and Central service provision but also at facilitating institutional change. Asia�, World Bank, 2011; the case study "Good Practices in City Energy Efficiency: Yerevan, Armenia – Water and Sewerage Lease Contract," Upon completion of the MC, the reforms in Yerevan water ESMAP Energy Efficient Cities Initiate, April 2011; and the case study continued with increased private sector participation - a “Improving Urban Water Services through Delegated Management to a lease contract for ten years with another international Private Operator: Case study of Yerevan, Armenia�, J. Mugabi, P. Marin operator, Veolia. The successful PPP model tested in YWSE and J. Kamkwalala, November 2008. ECA Knowledge Brief was replicated for another larger utility in the country - Capital Investment Fund Armenia Water and Sewerage Company - covering around 45% of the country’s population. The Government established a US$20 million capital investment fund, partially supported by a World Bank credit, for the private operator to implement necessary The Pioneering Yerevan Water Utility Management system repairs and upgrade measures to achieve the agreed Contract targets. During each contract year, ACEA was required to submit an investment plan laying out required works, In Yerevan, the Government opted for a four-year, goods, and services to be procured for Government review performance-based MC, a hybrid mechanism that included and approval. Once approved, ACEA followed World Bank elements from a concession and a lease. The objective of procurement guidelines to purchase the approved items. such a contract was to increase the efficiency of the operation and development of the city’s water supply Major Rehabilitation Work Carried Out system, increase consumer willingness to pay for the provision of high quality services, provide more responsive The operator purchased and installed block water meters for service, and mobilize the best available managerial and about 90% of all apartment buildings, and individual technical know-how. This option offered several customer water meters for about 87% of its subscribers. advantages: it was highly flexible, of limited duration, and ACEA also equipped all water treatment plants with state- ensured the highest level delegated management while of-the-art chlorination systems, implemented new maintaining Central Government control over tariffs and procedures for monitoring water quality, and mapped the local government ownership of infrastructure. In addition, water/wastewater transmission network. the MC allowed the Government, the water utility (YWSE), and the general public to judge the advantages of private In addition, the operator completed the sectorization of sector management without committing to a long-term three districts - Nor Nork, Kentron, and Arabkir - and relationship. identified sectors for about 50% of the Yerevan service area. The network sectorization not only increased water The private operator was responsible for the operation and pressure to acceptable levels for more residents, but also maintenance of the water and sewerage infrastructure, as enabled systematic leak detection and long-term planning well as billing and collections. In addition, the operator for rehabilitating water mains. The operator rehabilitated managed an investment capital fund supported by Garni, Shor Shor, Aparan, Khatnaghbyur, and Araratyan Government contributions and a World Bank credit to pumping stations, and installed new and more energy improve and upgrade the most critical elements of the efficient pumps, which resulted in major energy savings. system. The private operator was supposed to achieve a ACEA implemented a campaign to reduce electricity waste total of 92 performance targets, including both at booster pumping stations. These measures reduced the quantitatively verifiable performance measures and total installed pump capacity, resulting in significant technical deliverables. reductions in electric power use. Unlike a concession, lease, or full privatization, the ACEA also implemented a leak detection program. To this performance-based MC has a shorter duration and enables end, it analyzed the volumes of water produced and billed, the Government to maintain ownership and greater control, mapped out the distribution network, inspected the city’s while providing performance bonuses to the operator to transmission mains regularly for repairs, and investigated successfully achieve priority improvements. Also, such a water leaks in low pressure or water shortage areas. scheme permits the utility to attract a concessionaire or lessee on more advantageous terms at the end of the MC, Project Costs once performance and efficiency improvements have been achieved. During the contract period, ACEA disbursed US$24.07 million of the capital investment fund to rehabilitate the Contracting existing system. It was paid US$3.43 million for managing YWSE for the duration of the MC, and received a US$1.41 ACEA S.p.A, a joint venture led by an Italian water million performance-based bonus. The capital investment operator, was ultimately awarded the four-year fund and MC were financed, in part, from a US$30.87 performance-based MC in Yerevan, as a result of million credit from the World Bank. The financial rate of international competitive bidding. The contract was signed return for the overall project was estimated at 49%. The on February 14, 2000, and began on June 1, 2000. cumulative net benefits of the World Bank project were estimated at US$97.23 million (from 1998 to 2010). ECA Knowledge Brief Figure 1: Duration of Water Supply and Percentage of  As seen in Figure 2, service improvement, combined Population with Continuous 24-hour Service with the improved collection procedures and metering campaigns, increased revenue collection from 20% 120 24 when the contract was signed to over 100% (including Before After arrears) in 2003. 100 20  The utility’s energy consumption, the biggest O&M cost item, was reduced by 30%, exceeding the 20% % pop with intermittent service Average hours of service 80 16 contract target (Figure 3).  Energy use declined from 240 million kWh in 60 12 1999/2000 to 169 million kWh in 2003/2004 due to pump upgrades and replacements, more efficient 40 8 network management, and greater use of gravity-fed water. The energy savings translated into an estimated 20 4 US$4.83 million of annual electricity cost savings.  Reduction of non-revenue water (NRW) is a key 0 0 measure of improved technical efficiency. However, 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 NRW reduction fell short of expectations. Although Year % pop w ith intermittent service data appears to show a reduction in actual water losses Average hours of service by 17%, the NRW target expressed as a percentage of Contract target for hours of service water production increased (Figure 4). Given the Source: ACEA S.p.A increased water pressure and a badly deteriorated distribution network, water losses as a percentage of Figure 2: Revenue and Collections production are not expected to decrease until most of the network is renewed. 9 160 Figure 3: Energy Costs as Percentage of Operating 8 Billed revenues 140 Costs Actual collections 7 Collection ratio (%) 120 Billions AMD Collection ratio Energy costs as percentage of operating costs 6 100 5 100 Energy costs (% of total 80 operational costs) 4 80 60 3 60 40 2 40 1 20 20 - 0 0 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Year Source: ACEA S.p.A Source: ACEA S.p.A Results Achieved by Management Contract Energy Efficiency Achievements The overall results of the project were substantial. Over 332,000 households in Yerevan (about 1.1 million The energy efficiency investments, in particular, were inhabitants) have benefitted from the following deemed highly cost effective. Prior to 2000, the utility’s improvements between June 2000 and June 2004: energy cost was on average 75% of the total operating cost due to over-reliance on pumped supplies. For this reason,  The duration of water supply (with a base value of 6 one of the key objectives of the MC was to develop and hours in the year 2000) increased to 18 hours in 2004 implement an energy management plan to reduce power (see Figure 1). 50% of the customers had continuous consumption by 20%. Between 2000 and 2005, YWSE 24-hour water supply, due in large part to the network registered close to 50% reduction in the share of energy sectorization. costs. Pumped water supplies decreased by about 52%, while gravity water supplies increased by over 40%. In ECA Knowledge Brief cases where pumps were still needed, YWSE increased improvements in the short-term. It laid the foundation for a efficiency in operation of pumping plants, reduced the more elaborate form of PPP that could offer long-term number of booster pumps for high rise buildings, and solutions to Yerevan’s service problems. replaced old energy intensive pumps with modern energy efficient pumps. Lessons Learned Figure 4: NRW Trends Expressed As Volume and The PPP experience in the water sector of Yerevan holds Percentage of Water Produced valuable lessons for governments willing to engage the NRW Trend private sector in management of water services. 900 84  A mutually beneficial relationship is crucial for the 82 850 success of any public-private partnership. Political NRW ('000 m3/day) 80 78 support and commitment by policy-makers helped the NRW (%) 800 76 PPP work and succeed effectively. Despite many 74 bottlenecks during the implementation of the MC, both 750 72 the Government and the operator demonstrated 700 NRW (Volume) 70 willingness and openness to work things out and agree NRW (%) 68 on common benefits for the sector. 650 66  PPP contracts alone cannot resolve all sectoral 2000 2001 2002 2003 2004 2005 challenges but they can be viewed as a significant tool Year in the reform process. Policy-makers should focus on Source: ACEA S.p.A creating an enabling environment for involving the private sector, establishing a legal and regulatory Overall Impact and Sustainability framework, and developing a reform strategy to achieve sector development objectives. The introduction of the MC with ACEA S.p.A resulted in  Under the MC, the only performance target that was not significant and measurable improvements in overall achieved was in the area of non-revenue water sustainability of YWSE, the water utility in Yerevan. The reduction - it was underestimated prior to signing the utility’s financial situation improved drastically, with contract and the target values were set based on wrong increased bill collection and reduced energy costs. This assumptions. The experience shows that the correct enabled the utility to generate sufficient revenues to cover assessment of baseline values is important, particularly operation and maintenance costs. Further, the PPP helped for setting realistic performance targets and defining a transform the utility into a sustainable business, with program of activities to successfully solve the problem. improved levels of service, full metering, and customer  The Yerevan MC experience also demonstrates the need payments and satisfaction. The operator achieved and to have realistic expectations about the scale and pace exceeded targets on continuity of supply, metering, of reforms in the water sector because sustainable collections, and energy efficiency but failed to meet targets change doesn’t happen overnight. on non-revenue water reduction. In addition, YWSE’s capacity to manage and efficiently operate water services About the Authors improved, as a result of increased technical know-how and Zaruhi Tokhmakhian is an Operations Officer with the knowledge transfer from an international private operator. Urban Water Supply and Sanitation Sector Unit of the Also, the fact that YWSE has recently signed a longer term Europe and Central Asia Region of the World Bank. contract with another international private operator, and the presence of similar PPP arrangements elsewhere in the Ahmed Eiweida is a Country Sector Coordinator for the country, is evidence that Armenia’s institutional framework Sustainable Development Sector Unit of the Europe and has improved and created a more conducive environment Central Asia Region of the World Bank. for increased private risk-taking. By and large, the MC was a good first step to reform, resulting in significant “ECA Knowledge Brief� is a regular series of notes highlighting recent analyses, good practices and lessons learned from the development work program of the World Bank’s Europe and Central Asia Region http://www.worldbank.org/eca