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Overview of RegionalSurvey Results

Full Cost Recovery (FCR)

in Southeast Asia

Hanoi, Vietnam7 June 2005

Laila SuryodipuroUS-AEP/PADCO

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of theAsian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guaranteethe accuracy of the data included in this paper and accepts no responsibility for any consequences of their use.Terminology used may not necessarily be consistent with ADB official terms.

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Presentation Outline

FCR overview and principal challenges

Survey methodology

Highlights of institutional arrangements and tariff setting in 5 countries

Key statistics and performance indicators for surveyed utilities

Important factors enabling FCR

Important actions taken to improve FCR

Preliminary considerations for promoting FCR

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FCR Overview andPrincipal Challenges

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Full Cost Recovery Definition

Revenue for O&M, depreciation, debt service, andexpansion for the most part, come from billing/user charges

Measuring cost recovery: The smaller the ratio, thebetter 

O&M Coverage (working ratio) RatioO&M (excluding depreciation & interest)

Water-related Revenues

FCR RatioTotal expenses (including depreciation & interest)

Water-related RevenuesBased on Accrual / Utility Method of tariff setting

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Why Cost Recovery Matters

Enables expanded coverage Increasing access to water is a global priority

Government cannot afford to subsidize

Improves water quality and quantity

Determines and reduces true cost of water –increases efficiency (in production andconsumption)

Promotes rational consumption

Promotes equitable pricing to customers Frees up government resources

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The Vicious Cycle of Weak Cost Recovery

Weak cost recovery

Inefficient operations

Low investmentPoor skills development

Customer dissatisfaction

Poor service

Low willingness to pay

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Principal Challenges to

Achieving FCR

1. Revenue/Tariff 

2. Personnel

3. Operations & Maintenance

4. General & Administrative

5. Government Commitment and Relations

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Survey Methodology

US-AEP, in partnership with SEAWUN andnational water associations, conducted survey

15 utilities selected based on cost recoveryratios

Self-assessment of key factors and actions

Key factors—conditions/tools that enable utilities totake certain actions to achieve FCR (humanresources, relationship with local government,customer service)

Key actions—direct actions by utilities that directlyreduce costs and increase revenue (billing, metering,tariff increase, reduction of NRW)

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Highlights of InstitutionalArrangements and Tariff Setting

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Role of Government Level of government responsibility for water supply

varies across the region

Municipal: Indonesia, Philippines Province/state: Malaysia, Vietnam National: Thailand

Degree of government support for capital

expenditure varies No support: Philippine utilities, MWA, Johore

(private) Some support: Indonesia, PWA, Vietnam Significant support: Malaysian utilities (except

privatized utilities)

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Water Supply Coverage

Average service coverage in the 5 countries (notin the surveyed utilities) ranges between 35-70%, except for Malaysia which has universalcoverage.

The percentage of population served in theregion, particularly for the Philippines andIndonesia, is low even among strong utilities.

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Tariff Setting

Tariff adjustment is difficult and political in all 5countries, except Philippines

Not difficult

Done by LWUA, a national, technical agency

 YesPhilippines

Difficult

Half of utilities with no increase in 10 years

NoMalaysia

Difficult

Increase only every 5-6 years is common

 YesIndonesia

Previously difficult Yes, new

policy

Vietnam

DifficultNoThailand

Tariff AdjustmentFCR PolicyCountry

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Average Tariff Price

Average residential tariff of $0.40/m3 isstill affordable for any large Asian city(based on 5% household income ceiling-- ADB study);

Average tariff in surveyed utilities isbetween $0.15 - 0.30/m3, except for Philippine utilities

Key Statistics and PerformanceIndicators of Surveyed Utilities

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O&M and FCR Ratios

   I  n   d  -   B  o  g  o  r

   I  n   d  -   M  a   k  a  s  s  a  r

   I  n   d  -   M  a   l  a  n  g

   I  n   d  -   M  e   d

  a  n

   M  a   l  -   J  o   h  o  r

   M  a   l  -   P  e  n  a  n  g

   M  a   l  -   S   i   b  u

   P   h   i  -   D   i  p  o   l  o  g

   P   h   i  -   M  a  r   i   l  a  o

   P   h   i  -   L  e  y   t  e

   T   h  a  -   M   W   A

   T   h  a  -   P   W   A

   V   i  e  -   H  a   i   P   h  o  n  g

   V   i  e  -   T   T   H  u  e

   V   i  e  -   B   R   V  u  n  g   T  a  u

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

O&M ratio

FCR ratio

WB

recommendations

(0.68), based on

25% top performing

utilities in developing

countries

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NRW and Accounts Receivables

Non-revenue-water (NRW) Varies between 15% and 46%

Correlation between NRW and achievementof FCR – the lower the NRW, the better theFCR

Accounts Receivables Varies between 10 and 99 days. All, except

one, are below WB’s recommended 90 days

Positive correlation between AccountsReceivables and achievement of FCR

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Key Factors Enabling FCR

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Relative Importance of Key Factors

7%Development of benchmarking/KPI

system

6

7%Accuracy of record keeping,

accounting and IT

5

8%Existence of medium-term plan4

13%Customer-oriented service3

16%Attitudes and background of personnel2

20%Government Relations (local or central)1

ImportanceKey Factor/Enabling ConditionNo.

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Government Relations (local or central)

Primarily: Government (local/central) approves

tariff increases. Secondarily: Government (local/central)

provides grant funding Challenging factor as it is outside utility’s control Consistent with ADB’s “Asian Water Supplies”

(2004) conclusion:“It is the reluctance of elected officials to increase

tariffs that has, more than any other single factor,constrained water supply development in terms of 

quality of service and coverage.” 

Case study: Medan, Makassar 

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Attitudes and Professional Background

Quality of management and staff critical tosuccess of organization, and its ability toeffectively communicate with government

Case studies: Hai Phong, Penang, Dipolog

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Customer-Oriented Service

Good service will create good reputation,reduce customer objections to tariff increases, and attract new customers

Utility efforts to improve customer serviceinclude creating a call center and anavailable rapid response team

Case study: Hai Phong

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Existence of Medium-term Plan

Helps identify priority projects andtimeframe; allows basis for establishingfuture cost and revenue drivers

Resulting tariff increase also becomes

more acceptable

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Accuracy in Recordkeeping,Accounting, and IT

Allows management to better identifyproblems, evaluate cost centers andrevenues, and make sound decisions

IT enables faster decision-making

Case study: Penang

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Development of a Benchmarking/KPISystem and Targets

Allows comparison of performance withinand between utilities

Quantitative targets (and rewards) createincentives to perform; targets are set for 

the lowest level of the organization

Case study: MWA

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Key Actions to Improve FCR

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Relative Importance of Key Actions

9%Improvement in billing (Invoicing,

collection, payment methods)

6

12%Aggressive increase in the number of 

connections

5

12%Increase in tariff 4

17%Improvement in metering (reading,

replacement, and repair)

3

19%Improvements in operational efficiency

(reducing power, labor, chemical costs)

2

22%Reduction in physical losses1

ImportanceKey ActionNo

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Improvements in Metering

Replace meters automatically after 5-8years of service (many surveyed utilities)

Outsource meter reading to third parties(Makassar and PWA)

Centralize meters by grouping between 2-10 meters in one location (Dipolog)

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Tariff Increase

Public education campaigns first

Timing

Minimal increases for the poor 

Use the unserved population to supportincrease (Makassar)

Staggered increases approved in oneprocess (Philippine utilities)

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Increase in Number of Connections

Focus on large consumers, such asindustrial and large businesses (PWA)

Allow customers to pay for new connectionfees on credit (Medan)

Implement campaign programs inunserved areas (many surveyed utilities)

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Billing and Collection Practices

Field inspection on customer classification(Makassar)

Strict disconnection policy for non-payment (Vietnam and Philippine utilities)

Outsourcing (PWA, Makassar), jointcollection (many)

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Preliminary Considerationsfor Promoting FCR

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Preliminary Considerations

National Level

Adopt a national FCR policy

Establish an independent regulatory body

Local Government Level

Develop quantitative and realisticperformance targets to evaluate utilityperformance

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Preliminary Considerations

Utility Level Improve tariff application process

Maintain regular communication with localgovernment on state of services

Stakeholder education campaign on FCR

Attract and retain high quality personnel

Develop customer-oriented services

Establish medium-term business plan Improve operational efficiency