WB-Castalia report for Metro Iloilo Water District (Philippines)

Oct 09 Final report of Castalia consultants which will be basis of privitization of MIWD thru PPP. Board of Directors now in the process of signing a MOA with IFC for the conduct of the feasibility study.
Executive Summary:
The Board of Directors of Metro Iloilo Water District (MIWD), local government units (LGUs) in Metro Iloilo, and water consumers in Metro Iloilo are not satisfied with MIWD’s current levels of service. They would like to see a substantial improvement in the level of service.  Improvements are needed in coverage, hours of availability, pressure, and quality of water.
This report documents the findings of the study “Assistance to Metro Iloilo Water District in Exploring Options for the Provision of Water Supply and Sanitation Services,” funded by the World Bank and PPIAF. The report answers the following questions:
???? Is MIWD providing value for money to water consumers in Metro Iloilo? If not, why not? What are the implications of not improving services?
???? What management and operations model would best help MIWD substantially improve the water services it provides to residents of Metro Iloilo, and sustain these improvements over time?
This study has found that MIWD is in fact providing low value-for-money relative to other cities of similar size in the Philippines. Only 20 percent of the 139,000 households in Metro Iloilo have a direct connection to MIWD—the rest source their water from ground wells or water vendors. Those households that are connected to MIWD receive an intermittent supply (30 percent of connections have less than 12 hours a day of supply), with low pressure (only 24 percent of connections have a pressure of more than 7 pounds per square inch (psi), and that is not always compliant with water quality standards. This level of service is below that offered to residents in cities of comparable size in the Philippines. In contrast, households in Metro Iloilo are paying an average tariff of PhP 17.6 per cubic meter1—one of the highest among cities of similar size in the Philippines. Clearly, value for money of water supply services in Metro Iloilo can improve.
Insufficient investments during the last 15 years explain low levels of services. Over the last 15 years MIWD has invested close to PhP 1.4 billion (2008 prices) in bulk supply, transmission and distribution assets. We estimate that MIWD needs to invest PhP 1.1 billion over the next 5 years to improve service and attend un-served demand. This means that future investments will need to be 2.4 times more than the average annual investments that have been carried out over the past 15 years.
Weak governance as well as legal and financial barriers can explain MIWD’s underinvestment. Consumers do not have an effective mechanism for making MIWD accountable for providing better services. There are no defined service targets for MIWD and no publicly-available reports on service performance. There is no effective mechanism for consumers to voice their concerns and for making MIWD respond to these. This had led MIWD to make investment decisions that are not in the best interest of consumers— including decisions of not investing. In addition, MIWD’s ability to improve services has been constrained by a legal dispute with local governments over MIWD’s right to extract raw water from sources in their jurisdiction.
MIWD’s ability to finance the PhP 1.1 billion investment needed is constrained by existing tariff and cost levels. If efficiency levels remain at the levels seen over the past five years, MIWD’s average tariff in 2010 will need to increase from PhP 30 per cubic meter to PhP 44.7 per cubic meter, and increase based on inflation and reasonable costs2 from 2010 onwards.
The MIWD Board recognizes that value for money of MIWD’s services needs to improve and has indicated its preference to use a concession contract as the management and operations model for achieving this improvement. The MIWD Board selected, with Castalia’s support, the concession as the preferred option by:
???? Developing several management and operations models that could improve value for money—
Specifically, six management models were identified, starting with one which had no involvement of the private sector and including others that had increasing levels of private involvement
???? Analyzing how risks were managed under each of these models and identifying those that led to an optimal risk allocation—Value for money is maximized when risks are allocated to the party is best placed to control the likelihood of the risk event occurring and the impact of this risk occurring, as well as best able to absorb the risk at the lowest cost. This analysis suggested that a concession and an affermage could maximize value for money
???? Consulting with stakeholders (including MIWD management and staff, local government units—provincial, municipal, and city—within MIWD’s services area, business community in Metro Iloilo, non-government organizations, the academic sector, people’s organizations, and Congress people) to obtain their feedback on the options identified and their risk implication—The majority of stakeholders endorsed the options identified and the decision to focus the additional investigation on a concession and a affermage
???? Analyzing in more detail which option—concession or affermage—would deliver more value for money—This analysis concluded that a concession would represent more value for money than an affermage
???? Consulting with stakeholders to obtain their feedback on the more detailed analysis of these options—The majority of stakeholders endorsed a concession as the option that would maximize value for money.
Under the concession contract that the MIWD Board plans to introduce in Metro Iloilo, a private firm—concessionaire—will be competitively selected to take responsibility for directly providing water services to consumers. This would involve operating and maintaining all existing and new assets; planning, financing, and carrying out all new capital investment; billing and collecting payments from consumers; and all other activities associated with providing water supply services. A concession will increase accountability for improving services by requiring the concessionaire to meet service target set in the contract and by linking the achievement or not of these service targets to financial rewards or penalties. The performance of the concessionaire will be closely monitored by a downsized MIWD.
A concession contract will improve value for money in relation to the existing MIWD. With a tariff increase from PhP 30/m3 to PhP 36.7/m3, the concessionaire will be able to increase coverage from 20 percent in 2008 to 48 percent in 2014 and provide water to connected consumers 24 hours a day, with a pressure of 10 psi and compliant with applicable drinking water standards.
The rest of this summary discusses the questions above in more detail, and summarizes the next steps for implementing a concession contract.