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Aggregationmodule 0807
1. Models of Aggregation for Water
Supply and Sanitation Provision
Capacity Building Module
2. Outline of the presentation
What is aggregation?
Aggregation models
The process of aggregation
Summary
3. What is Aggregation?
Grouping of several municipalities into a
single administrative structure for the
provision of a service
town A town B
town C
town D
Aggregated service
provider
aggregation
4. Aggregation: one of many management models
Aggregation of small
towns
Professional support to
medium operators
Scaling up demand
response approach
Strengthening community
management models
Public private
partnership
Small scale independent
providers
Engaging the public sector
5. Aggregation: Essential Pre-requisites
Political support and commitment
Identify a “Champion” to pilot the aggregation
Adapt approach to local culture &
circumstances
Keep public informed of benefits attained and
progress
Consider whether a carefully-constructed,
well-implemented public consultation,
education and communication program is
necessary according to local circumstances
6. Drivers for Aggregation (1)
(Supply)
BOTTOM UP & TOP DOWN APPROACHES - DEMAND OR SUPPLY
DRIVEN
Government Driven
Central Government
Province
District
Sub District
Village
(Customer Base)
Customer Driven
(Demand)
7. Economies
of scale
Access to professional
& technical resources,
in-house or procured
Access to water
resources
Access to
private sector,
local &/or
international
Access to finance
Cost sharingImproved management
systems & technology
aggregation
Drivers for Aggregation(2)
8. Outline of the presentation
What is aggregation?
Aggregation models
The process of aggregation
Summary
9. Aggregation: no standard blueprint
Each aggregation has a unique character
Tailor aggregation to specific
circumstances and needs
Lessons can be drawn from other
aggregations
10. Scale: The optimum size of utility
SCALE
Two Towns Several Towns Regional Provider National Territory
Hungary, The Philippines,
France
Brazil Italy, England and Wales,
The Netherlands
11. Scope of Aggregation
SCOPE
A single service
e.g. bulk supply
All municipal
services
All water and
sanitation services
A single function
e.g. procurement
All functionsSeveral functions
What services?
What functions?
Nimes (France), The Netherlands
only water
Dunavarsany (Hungary), water
first, waste water later
Italy,
England and Wales
13. Governance arrangements:
Voting rights in Board
….Or a mixture of the various methods
Method Pluses (++) and Minuses (- -) Power tilted
to…
Specific powers for
the largest entity
++ Confidence for larger entity
- - Small entities have limited influence
larger entities
smaller entities
% of population in
each entity
++ Democratic
- - Small entities have limited influence
Large entity needs
vote of 1 or more
smaller entities
++ Democratic
- - Small entities have greater influence
# of connections or
value of the assets
++ A sound economic basis
- - Varies from year to year
One entity = one seat ++ simple and transparent
- - can be unacceptable to larger entities
14. Outline of the presentation
What is aggregation?
Aggregation models
The process of aggregation
Summary
16. Stages in the Aggregation Process
Preparatory
Phase
Analytical
Phase
Implementation
Phase
•Initiate the aggregation process
•Identify key drivers for aggregation
•Identify aggregation candidates and stakeholders
•Choose an appropriate consultation process
•Establish group to lead the process
•Choose an appropriate aggregation process
•Assess drivers, constraints, and potential issues
•Assess benefits and costs for each entity
•Assess benefits and costs for alternative groupings
•Choose the most appropriate aggregation model
•Define an aggregation plan
•Define procedure to resolve disputes
•Monitor Progress against that plan
17. Entry and Exit Conditions
Entry and exit conditions must be carefully
specified
Entry implies commitment and obligations to
partners and should not be entered into lightly
Exit has potential to damage/weaken the
aggregated entity and should be made difficult
and expensive!
18. Is aggregation a suitable option? Adding up the
pros and cons for the individual municipality
Potential Pluses ++ Possible Minuses - -
++ Facilitates access to water
resources
++ Economies of scale in works,
procurement & support services
++ Access to finance (private/donors)
++ Attract private operator
++ Cost sharing between towns
++ Integrated Water Resource
Management
++ More professional staffing
++ Improved governance through
greater network of accountability
- - Lower control over water
resources
- - Lower tailoring services to
the needs of the end users
- - Loss of competition
- - Lower accountability to
customers & citizens
- - Resistance to cost sharing
- - Potentially high transaction
costs
20. Outline of the presentation
What is aggregation?
Aggregation models
The process of aggregation
Summary
21. Aggregation: define scale, scope and
process
SCALE
Two Towns National Territory
SCOPE
A single service
or function
All services and
functions
PROCESS
Voluntary Mandated
22. Improved efficiency of service delivery
(economies of scale)
Enhanced professional capacity in service
provision
Cost sharing to mitigate high-cost systems
Multiple utility ownership will enhance
autonomy of the utility
Potential Benefits
23. Need to balance interests of all participating municipalities to
overcome resistance
Role of central government: assist; incentivize; and/or
mandate
Aggregation without asset ownership transfer can overcome
resistance (but gives aggregated utility less autonomy)
Aggregation must be seen as one element of broader reform
process:
∼ Requires corporatization
∼ Might require reform of the oversight of service provider
∼ Might require adjustment (standardization) of tariffs and subsidies
∼ Sometimes combined with private sector participation
The politics of aggregation
Actual benefits depend on political & other local circumstances
This is one of 2 PowerPoint presentations for leaning module. This one gives an overview, while the one includes case studies.
The module is mainly based on WN1.
In the past 20 years, WSS service delivery in many countries is decentralized to make them more responsive to the needs of the local population. However, most small and medium-size towns lack the capacity to provide beyond a very basic level of services. Therefore, decentralization in the water sector may not yield all of its expected benefits without stronger governance skills at the local level and small-town service providers.
Aggregation of WSS providers is relatively frequent to overcome these problems.
Aggregation is one of many reform options.
Can also be combined with other models (private sector participation for instance)
Interesting for towns that are too small to sustain independent utility.
More on this in para 3.1 of WN1
Models differ from country to country and sometimes with countries.
Models are characterized by:
-scale
-scope
-governance
Corresponding chapter in WN1 is chapter 4.
On lessons: we will come back to case studies
Scale of the aggregated structure?
A few neighboring towns (e.g. Hungary, The Philippines)
All towns in a given region or river basin (e.g. The Netherlands)
Most towns in the country (“national utility”) (e.g. Burkina Faso, Tunisia, Uganda)
There is no standard ‘optimum’ size of utility, but clear that smallest ones are not viable.
Economies of scale tail off beyond a certain point. See graph – With the increase in scale (x axis) the returns to scale increase. The slope becomes less sharp after a point and at some point the returns to scale decline.
Optimal size of an aggregation structure depends on many circumstances such as topographical conditions, access to international markets, water availability etc.
Recent study (Kingdom and Tynan, see reading list) of 270 utilities world wide shows that utilities, particularly those serving a population of 125,000 or less, could reduce per-customer operating costs by increasing their scale of operation.
Scope - What services are aggregated?
Water production
Whole water service (e.g. France and Netherlands)
Water and sanitation
Water and energy and others (solid waste, street lighting, heat)
Scope - What functions are aggregated?
Operations / Management /Procurement / Investment /Financing (Can be through a pick and choose system, e.g. France)
All functions, with merging of assets and staff
Decisions:
Define institutional form of aggregated structure
Distribution of responsibilities between member municipalities and aggregated structure.
Arrangements can be temporary, for a specific objective such as investment or access to private sector participation or permanent, with practical limits on exit
Some forms:
Loose association: Example in Duanvarsany in Hungary: six municipalities created a wastewater association led by the largest municipality, which carries out all administrative activities on behalf of its members.
Permanent structure: Example: the “syndicate” model in France, a permanent structure with its own staff, which offers different combinations of services to different municipalities, according to their requirements. For example, the SDEA syndicate in the East of France provides services to 453 member municipalities and employs 480 employees, most of whom are regional public servants.
Supralevel of local governments: Example: Partido Development Administration in the Philippines provides water, communications, training services, port facilities, energy programs, tourism development, fish processing, health services, economic zones, local roads, and railways for 10 municipalities to accelerate development through an integrated approach.
Aggregated entity will have a board in which various owners (e.g. municipalities) make decisions. The distribution of power between the various entities depend on their voting share in the board.
Important:
Define governance arrangements that balance the need to represent all member municipalities and avoid fragmentation and conflicts. Ensure that aggregated entity cannot be captured by one (political) actor.
Establish clear rules in articles of association or other founding document of aggregated entity.
Develop a clear information strategy to customers and community leaders can help further in limiting political capture.
Corresponding chapter in WN1 is para. 4.3 and annex B.
We will look at:
Permanent or temporary aggregations
Voluntary or mandatory aggregation
Stages in process
Entry and exit conditions for local governments
Aggregation can be initiated by the entities involved without any incentives of rules from “above”. This is called voluntary aggregation. Example: The Philippines – speed of aggregation varies, some areas get stuck (if entities are too different – in size, $$, water resources).
Higher tier governments can play an important role by steering local entities through incentives or roles.
Incentives – example: Hungary, the central government increased grant funding by 10% for aggregated entities vs individual municipalities. In Brazil, local governments were compelled to delegate service provision to state water companies through concession arrangements to receive subsidies and funding.
Mandatory -often imposed after a voluntary or incentive process fails. Examples: The Netherlands: national government mandate provincial government to impose binding reorganization plans (however, force let to local resistance and slow process). England and Wales are exceptional in having a fully top-down process.
The process of analyzing the options for aggregation starts with identifying and assessing drivers and constraints. Secondly the
benefits and costs for each entity should be identified and assessed. Deciding on whether to embark on a process of aggregation. This is a standard list of pros and cons ~ specify them for your own situation.
Upon completing the assessment of benefits and costs for each entity, it will be important to consider the impacts of alternative types of grouping, considering different geographical scales, services, and functions aggregated. Under this analysis, the distribution of benefits and costs for each entity for alternative types of grouping should be conducted because one of the main constraints of aggregation is often that such benefits and costs are inequitably distributed. Intuitively, it appears that the benefits of aggregation are likely to increase with the degree of grouping (up to a certain level), but so would the costs and the associated constraints. Therefore, the optimal level of aggregation (or optimal size of the unit of water service provision) should be where the curve showing the reciprocal of the increasing benefits would intersect the curve showing the increasing constraints, or degree of resistance to aggregation that would result from such constraints, as in this figure.
This figure also illustrates that barriers to aggregation could be reduced through the provision of incentives for aggregation (such as financial incentives provided by higher levels of government), broadly described in the main report. If incentives were adequately provided, it may be possible to move further along the progressive complexity from informal or temporary clusters of municipalities to more formal types of grouping or aggregation.
We discussed: scale, scope, process.
Conclusions:
experience with aggregation is rich and abundant and that many policy lessons can be drawn from such experiences.
Aggregation reforms are likely to become increasingly needed, for reasons internal or external to the WSS sector.
Three main factors to consider are scale, scope and process.
Let's recuperate the potential benefits:
Aggregation provides opportunities for improved efficiency of service delivery through economies of scale and scope.
Aggregation facilitates enhanced professional capacity in service providers.
Cost sharing through aggregation can mitigate the impact of high-cost systems.
Aggregation can fail if benefits are not clearly understood and there is no adequate process in place to implement it; due process and political will are key to the success of the aggregation initiative.
Aggregation - like all WSS reforms - is an inherently political process. Aggregation has implications for local democracy. The potential benefits are high, but in how far these potential benefits can be realized depends on local politics. There will always be resistance to change, as some actors will have to give up power. Central governments can assist, mandate, or provide incentives for the aggregation process. Assets can either be divested to the aggregated utility or remain with the individual governments. Aggregation without transfer of asset ownership will meet less resistance --> however it might lead to problems down the line as the utility has no full control over its assets.
Aggregation is one element of reforms.
Aggregation can be an important element of public utility reforms as it introduces multiple minority owners. Diversifying ownership can reduce the risk of capture by own owner. An aggregated entity, by its nature, is either a statutory body or a government owned company. Its corporate oversight board comprises of representatives from multiple municipalities. The Board will balance the needs of the various member municipalities and thus proceed on a consensus rather than unilateral approach. The ability of any single municipality to overtly influence the activities of the provider becomes more limited.
When linking aggregation and private sector participation, be careful not to overemphasize the need for a larger revenue base to attract operators.
Aggregation decisions may be formulated when introducing private sector participation (PSP) into the WSS sector. Implementing PSP and aggregation reform processes simultaneously is not necessarily beneficial, however. Aggregation decisions are fundamental decisions for the sector. Maximizing the efficiency of service provision should be the primary focus, as opposed to maximizing the attractiveness of the transaction. Any proposed aggregation should stand on its own and make technical, economic, and political sense.