Enhancing the Economic Regulatory System for Moldova’s Water Supply and Sanitation

Annex A. The proposed roadmap recognises the high complexity of sector regionalization (Extract from the World Bank [2013] Regionalization Review)

The roadmap spans over ten years and acknowledges key challenges, such as raising the interest of local councils (LCs) and building on utilities with limited capacity. In Moldova, the implementation of regionalisation would be initiated, promoted and managed by the government, whereas decision makers are hundreds of local and municipal councils. The regionalisation process would therefore likely be long and strenuous, as is the case in most foreign regionalisation experiences. The proposed roadmap includes four main phases spanning over at least ten years:

1. two years to define the concept and raise interest among LCs (Phase 1)

2. two more years to strengthen the participating service providers before the reform (Phase 2)

3. another three years to support the establishment and initial operations of the regional utilities (Phase 3)

4. after three years, regional utilities may be sufficiently stable to allow the integration of small rural service providers (Phase 4).

Start at a limited scale and with robust service providers to mitigate risks. The implementation of the proposed roadmap should not be disruptive for an already fragile sector. In that perspective, several principles could be considered. First, instead of a country-wide regionalisation, a pilot project could be conducted in a selected sub-region and involve a limited scale of aggregation. Second, the integration of rural localities lacking professional service providers (the vast majority) may asphyxiate the leading utility of the regional scheme if it is already weak. To mitigate such risk, the aggregation could initially leave aside rural LCs. As soon as the regional utility is able to sustain an acceptable level of performance, it may start incorporating them. During the transition period, the regional utility could decide to provide specific support to rural localities through service contracts.

External technical support could be instrumental to navigate successfully the complexity of such reform. The regionalisation of services is a highly transformative process for the sector. Moldova could largely benefit from the experience accumulated in neighbouring countries throughout the past decade (e.g. Romania, Kosovo). Such support could, for example, take the form of study tours, participation in knowledge exchange workshops on the topic or Technical Assistance on specific topics. In addition, since this reform will require major changes in processes, thinking and work habits at local level, it could be beneficial to receive support and advice from organisations specialised in change management.

The following sub-sections describe the main objectives of each phase of the reform.

Phase 1: Clarify the concept and raise interest

Lay the foundations of the regionalisation process. The objectives are to:

1. Clarify the legal, institutional and financial frameworks of the reform.

2. Prepare a master plan narrowing down the range of aggregation options and describing investment needs.  

3. Generate interest of the LCs for the process. This phase would take up to two years. These activities would require a strong mobilisation from the Ministry of Environment. In that perspective, the creation of a regionalisation task force within the ministry would be recommended.

Clarification of the legal, institutional and financial frameworks

The absence of relevant contractual and institutional models could deeply undermine sector development and sustainability. The interconnection of water systems requires that several key questions be addressed, such as:

1. At institutional level: who owns, finances and manages assets?

2. At financial level: who sets tariffs, and how are profits and losses shared between service providers?

3. At operational level: can weak service providers cope with an increased scope of responsibilities?

Suboptimal answers to these questions (or their absence) could, for example, leave communities highly vulnerable to business decisions taken by the parent service providers, interconnection infrastructure without any maintenance, or urban utilities unable to adequately operate services and generate revenues in an unfamiliar rural context.

Define a model of article of association of LCs. As stated above, according to the Law on Local Public Administration, the LCs should be collectively the decision makers regarding the strategy and management of their common operator. Although the Law on Local Public Administration (Article 14) stipulates the right for LCs to associate with the objective of improving the quality of services of common interest, the regulatory framework is not as explicit about the legal forms and patterns of such co‑operation.

A detailed review of the legal framework should therefore be conducted, to ensure its consistency with the considered institutional model. In this preparatory phase, a model of articles of association should be prepared, with a particular focus on three aspects:

1. Governance arrangements: how are voting rights allocated among LCs?

2. Conditions required for joining and withdrawing from the association.

3. Regime of assets: who owns the assets created under the association? In case of disbanding of the association, how are these assets returned to their original owner, and what happens with the assets created under the association?

Define the status of the regional operator and its contractual relationship with the association. A model of incorporation act of the regional operation could also be prepared to clarify its legal status, addressing questions such as the entry or exit rights of shareholders, the distribution of shares and voting rights between them. The delegation contract would most likely be in the form of a concession contract (the operator is responsible for both operation and investment). It would need to address key questions that arise under such type of contract, such as: who decides and finances investment? How are tariffs set and adjusted? How is the performance of the regional utility monitored? What happens in case of failure to meet its targets?

Reassess the tariff policy in the context of regionalised utilities. The water and sewerage tariff policy within the regionalisation context must be clearly stated from the outset, since it could be the stumbling block for a number of LCs. The policy should in particular address questions of heterogeneity of levels of service and capacity to pay between urban and rural areas. If, on average, water services are just affordable for a majority of rural (and pre-urban) population, in some places, the most vulnerable persons may have difficulties for settling their water bills. At the average tariff of USD 1.0 per cubic metre for water supply only in urban areas, 20% of rural population would have difficulties settling their water bills. Such situation is encountered in rural communities connected to the neighbouring urban areas, where many households continue to use shallow wells for non-drinking purposes, as long as these wells are not drying up. The tariff policy should therefore clearly state how the tariff will remain affordable to the poorest segment of the population.

Define the scope of financial incentives. One of the key drivers for regionalisation would be easier access to funds. Adherence to regionalisation will therefore be subject to a strong commitment from the government and the donor community to financially and sustainably support the process. In that spirit, parts of government funds (e.g. the NEF and the NFRD) might be reserved for utilities willing to join the process.

Complete the revised National Water Strategy. To clarify the overall sector policy framework and ensure its consistency with the regionalisation process, the revision of the National Water Strategy, initiated in 2011 with EU financial support, should be at its final stage.

Investment planning tool

Prepare a reliable master plan that will be essential to the design and implementation of sector regionalisation. A nation-wide water supply and sanitation master plan would define a framework within which sizing options can be developed. The objective of the proposed national master plan would be, for each LC, to do the following:

1. Identify long-term needs and source of water supply.

2. Identify investment needs for rehabilitation, replacement or extension of the water and sewerage facilities and their costs.

3. Prioritise and assess the costs of investments.

Without such a planning tool, the regional operators would not be able to accept and fulfil their mandates of concessionaire of the services. Its preparation is therefore urgently needed, under the co‑ordination and supervision of the Ministry of Environment.

Mobilisation of LCs

Assess LCs’ interest before moving forward with the reform. The Task Force would prepare for the LCs a clear argumentation on the costs and benefits of the regionalisation process, and the key conclusions of the legal and tariff review described above. A “roadshow” would be organised to consult with LCs. Interested councils would be required to express their pre-adherence to the process, which entails them to benefit from a TA described in the following section. This would not constitute a final commitment to the regionalisation process. Pre-adherence of a significant number of LCs would be required to start up the process. Also, in preparation of the next phase, the terms of reference and bidding documents for the TA would be prepared.

Phase 2: Strengthen service providers before the reform

Prepare service providers for the aggregation process with the support of a TA and through priority investments. A two-year TA to the participating service providers would be hired to audit their level of performance and to review managerial aspects. Specifically, it would provide support to do the following:

1. Improve their organisation and internal processes (through training and on-the-job training).

2. Increase revenues (through improved customer management procedures).

3. Optimise their costs.

Detailed three-year corporate development plans – including maintenance plans, staffing plans, etc. – would be submitted to and discussed with the LCs for approval. These plans would integrate the recommendations of the master plan, to consider the possible impact of new investments. Investments identified by the TA provider that would allow immediate improvement in the utility’s operations would ideally be considered as priorities by the NEF and the NFRD.

Complete review of the legal and institutional framework. All contractual aspects regarding the regionalisation process would need to be finalised (association of LCs, delegation contract, etc.) during this phase. Also, draft terms of reference would be prepared for a performance-based management contract (or water operator partnership, WOPs), which could be implemented under Phase 2 between the forthcoming regional operators and a reputable professional utility.

LCs should confirm their participation in the process by the end of this phase. In addition to the LCs that expressed interest during the previous phase, any other interested council would be able to join the regionalisation process at this stage.

Phase 3: Support the establishment and initial operations of the regional utilities

Support the establishment and initial operations of the regional utilities. This implementation phase would take place only if a significant quorum of LCs has officially confirmed their decision to join the regionalisation process. It would include the following steps:

1. The associations of LCs and of the regional utilities are created.

2. The concession contracts between associations and the regional utilities are signed.

3. WOPs are established with reputable operators.

Alternatively, if regional utilities are large enough, operators could be engaged in performance-based management contracts with the boards of the regional utilities for a two-year term. Under such arrangement, the management of a regional utility would be temporarily delegated to this operator under the association’s supervision. A management contract would enable to provide a much more significant support to regional utilities than WOPs, but would only be feasible as aggregation is operated at a large scale.

Partnerships with experienced operators would be critical to develop and strengthen the newly formed organisations. The key objectives of the WOPs (or management contracts) would be to do the following:

1. Support the organisation of regional utilities’ headquarters, through the identification, hiring and training of professionals and specialists for the central and support services.

2. Strengthen the regional utilities’ operational local branches through the introduction of common procedures, the application of updated business plans with the support from headquarters’ resources.

3. Help regional utilities implement the tariff policy.

After two-year support from the “mentoring” operators (or management contractors), the regional utilities would be expected to manage the company efficiently, under the associations’ supervision and according to the concession contracts. During that phase, the regional utilities would implement the priority projects identified in the national master plan. After two years, the regional utility would be expected to reach full operational autonomy.

The regional utilities could provide specific support to rural localities that are not yet part of the association. Renewable service contracts could, at that stage, be signed between local branches of the regional utility and LCs of rural localities for operational assistance. The “mentoring” operator (or management contractor) would support regional utilities in preparing standard service contracts.

Phase 4: Expand to rural localities

Expand to rural areas as soon as regional utilities are stable. After completion of the WOPs (or management contracts), regional utilities may need some additional time to do the following:

1. Complete the rehabilitation, replacement or development of infrastructure.

2. Reach and sustain an acceptable level of performance without external support.

Rural communities equipped with piped water systems may then join (on a voluntary basis) the associations of LCs. The duration of this last phase would strongly depend on the original capacity of aggregated utilities. The four phases could last up to ten years.