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Reforming the water sector and sanitation sector: Challenges in corporatizing service provision the case of Jordan

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Monograph (English)

  1. 1. REFORMING THE WATERAND SANITATION SECTORCHALLENGES IN CORPORATIZING SERVICE PROVISIONTHE CASE OF JORDANContract No. AFP-I-00-03-00035-00, Task Order No. 539 1SEGURA/IP3 Partners LLCDISCLAIMERThe author’s views expressed in this publication do not necessarily reflect the views of theUnited States Agency for International Development or the United States Government.
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  3. 3. ACRONYMS AWC Aqaba Water CompanyASEZ Aqaba Special Economic ZoneASEZA Aqaba Special Economic Zone AuthorityGAM Greater Amman MunicipalityGDP Gross domestic productGPS Global Positioning SystemJD Jordanian dinarJVA Jordan Valley AuthorityLEMA Suez Lyonnaise, Montgomery Watson Arabtech. Private consortium in charge of management contract in Greater AmmanLLC Limited Liability CompanyMIYAHUNA GreaterAmman Water CompanyMOU Memorandum of understandingMWI Ministry of Water and IrrigationN/A Not available or not applicableNRW Nonrevenue waterO&M Operation and maintenancePDT Project Development TeamPMU Project Management UnitPPP Purchasing power parityPSP Private sector participationTA Technical assistanceUSAID United States Agency for International Development 3WAJ Water Authority of JordanUNITSKWH Kilowatt-hourSq km Square kilometerCURRENCY EQUIVALENTS(Exchange rate effective June 2009)1 US$ = JD 0.701 JD = US$ 1.42
  4. 4. TABLE OF CONTENTS Chapter Content Page Preface 6 Acknowledgments 7 Introduction 8 1 Jordan: Little water, neglected economic dimension 10 Country with a rapidly growing population 10 Highly centralized public administration 11 Important environmental constraint 11 Neglected economic dimension 11 Water political markets 12 2 Aqaba and Amman: Why reform? 14 Two important cities with substantial differences 14 Why reform? 15 Government as major player in the water and sanitation sector 16 Aqaba: a branch office with little autonomy and good service quality 16 Amman: inadequate incentives, autonomy and quality of services 18 3 The process: A disciplined approach to reform 23 Demand for reform 23 Strong political support 23 Safe spaces to share knowledge 24 Specialized assistance 244 Systematic approach to reform 25 4 Making choices: Whose interests will be affected? 27 Choosing between the public and private sectors 27 Rhetoric and reality: preserving the status quo 28 Companies governance 29 Financial arrangements 29 Operations 30 Regulation 32 5 Starting up the companies: Paying attention to detail 33 Preoperational stage: a pragmatic approach 33 Preparing the companies for the future 34 Will AWC and MIYAHUNA be able to meet expectations? 37 6 The challenge: Implementing responsive policies and effective management 38 Policy issues 38 Keys to management success 40
  5. 5. 7 Lessons learned: Share results and learn more 42 Supply and demand sides of reform require attention 42 Political support and disciplined approach are critical 42 Feedback loops need to be set up 43Annexes 1 AWC: benchmark indicators - Fiscal Years 2004 and 2008 44 2 LEMA – MIYAHUNA: benchmark indicators - Fiscal Years 2004 and 2008 45 3 MIYAHUNA’s first business plan 46 4 MIYAHUNA - Changing employees’ compensation plans 49 5 MIYAHUNA - Branding components and process 52 6 Ten attributes of effectively managed water utilities 53 7 Bibliography 55Tables 1 Aqaba - customer base 2002 17 2 Amman - customer base 2004 20 3 Amman - declining service hours 21Graphs 1 Project phases and methodology 25 2 Corporatization timeline 26 3 MIYAHUNA’s business model 32 4 Interrelationship between government policies, companies’ management and attributes 37Boxes 1 Corporatization – Concept 9 5 2 Corporatization - Key principle 9 3 The pendulum swings 13 4 AWC - Customer services and outreach 35 5 An independent and diversified board of directors 39
  6. 6. PREFACE USAID is pleased to present this case study on how the water and sanitation utilities in Aqaba and Greater Amman (Amman) were corporatized. The study is addressed to leaders in Jordan and abroad who wish to reflect on experiences of others in carrying out reform. It is part of a broader USAID initiative to analyze and disseminate practices in public water utility corporatization. Organizational learning is an essential part of USAID’s mission. The goal of this learning is not only to improve individual projects but also to make the results available to a wide audience, so as to stimulate the thinking of potential reformers and generate tentative conclusions about the elements of successful and unsuccessful reforms. This study is neither an example of a success story nor of the most promising solutions to issues facing the sector. It is a study that illustrates both the potential and limitations of public policies and attempts to reform. Of course, these potential and limitations vary significantly from one country to another. Nevertheless, there are lessons that can be learned by decision makers from exchanging views on their experiences. SEGURA/IP3 was the author of the case study and the consultant for Amman. Chemonics International Inc. was the consultant for Aqaba. The study draws heavily on the SEGURA/IP3 and Chemonics reports mentioned in the bibliography. July 20096
  7. 7. ACKNOWLEDGMENTSSEGURA/IP3 expresses its appreciation to the following agencies, their senior management, and staff fortheir support during the preparation of the case study: the Hashemite Kingdom of Jordan, Ministry ofWater and Irrigation (MWI), Water Authority of Jordan (WAJ), Program Management Unit (PMU), AqabaSpecial Economic Zone Authority (ASEZA), Aqaba Water Company (AWC), Greater Amman WaterCompany (MIYAHUNA), and the United States Agency for International Development Agency (USAID).SEGURA/IP3 also thanks Bernardo Gomez, author of the study; Meredith Griggs, writing consultant;and the members of the consulting team for the corporatization project. The team members providedvaluable comments and suggestions on several drafts of the study. They are Jorge Segura, Jose Valdez,Guillermo Yepes, Paul Cumiskey, Roger Patrick, Tarek Tarawneh, Hector Arduz, and Tatiana Prada. 7
  8. 8. INTRODUCTION “...a major motivation of institutional change could be thought of as reallocating economic opportunity.” 1 In 2000, the government of Jordan set up the Aqaba Special Economic Zone (ASEZ). The institutional changes embedded in the establishment of the Zone opened the doors for other significant changes in Jordan, some of which were to affect the water and sanitation sector. Before the Zone was set up, central government agencies were responsible for developing and managing the port, the airport, and the utility services, including water and sanitation. The law establishing the Zone brought about a direct challenge to the status quo as it explicitly allocated this responsibility to the Aqaba Special Economic Zone Authority (ASEZA). The opportunities opened up by the ASEZ law for entrepreneurs2 in economic and political organizations in Aqaba were also perceived by many as a threat to central government organizations operating in the city. Consequently, intense negotiations were held between the parties to find ways to implement the law while protecting their respective interests. The corporatization of water and sanitation services was part of these negotiations. The negotiating parties were the Ministry of Water and Irrigation (MWI) and the Water Authority of Jordan (WAJ) on one side, and ASEZA on the other. The Aqaba precedent had ripple effects in the water sector as it was a major factor in the corporatization of Amman services. Aqaba’s services were corporatized in 2004 and Amman’s in 2007. Corporatization, in the context of this study, means creating government-owned water and sanitation companies to replace existing organizations. In Aqaba, the government set up the Aqaba Water Company (AWC) to replace a local agency from the Water Authority of Jordan (WAJ), while in Amman the government created MIYAHUNA to replace LEMA, a private company operating under a management contract with WAJ. The study on corporatization carried out by USAID/ARD in 2006 presents a relevant definition of8 corporatization and its key principle. See boxes 1 and 2. The same study presents experiences of seven corporatized water utilities, including Aqaba. Others were: AQUA, Poland; COPASA, Brasil; Johannesburg Water, South Africa; National Water and Sewerage Company, Uganda; and Sidney Water, Australia. 1 Bromley, Daniel W. Sufficient Reason. Volitional Pragmatism and the Meaning of Economic Institutions. Princeton University Press, 2006. p 9. 2 The term entrepreneur in this study refers to individuals and group of individuals able to influence the sector’s decision making processes. See North, Douglass C. Understanding the Process of Economic Change. Princeton University Press, 2005.
  9. 9. Box 1 Box 2 Corporatization - Concept Corporatization – Key Principle Corporatization is a process by which a public sector service The guiding principle of corporatization provider is transformed to one with the commercial orientation is the intent to capture the advantages of a private company. The transformation would typically include of a privately run company – including three ring-fencing activities: (1) establishment of a distinct legal efficiency, productivity, and financial identity for the company under which the government’s role is sustainability – while retaining clearly identified as owner; (2) segregation of the company’s assets, government accountability. A finances, and operations from other government operations; and successfully corporatized company will (3) development of a commercial orientation and managerial be able to demonstrate positive or independence while remaining accountable to the government or improved performance results. the electorate. Source: USAID/ARD. op. cit. Source: USAID/ARD. op. cit.The corporatization in Aqaba and that the key to understanding and then looks at how theAmman was a complex process. the process of reform is to process took place: the leaders,It involved high-level government appreciate the intentions of the organization, and the choicesofficials, technical assistance, and the entrepreneurs enacting it made. It concludes by reviewingdisciplined and cooperative work and their comprehension of the challenges ahead and theamong government agencies, the issues. 3 Accordingly, after lessons learned, in the hope that 9USAID, and consultants. Often, setting the context for the they may guide policymakersthe required negotiations were country, and for Aqaba and and practitioners both in Jordanmediated by the prime minister’s Amman in particular, the study and and the cabinet of ministers. describes the issues the sectorThis study starts from the premise faced before corporatization, Corporatization was a complex process. Negotiations were often mediated by the prime minister’s office and the cabinet of ministers.3 This approach was chosen following Bromley, op. cit. and North op. cit.
  10. 10. CHAPTER 1 JORDAN: LITTLE WATER, NEGLECTED ECONOMIC DIMENSION “Let us start with the political market, the most crucial market of all.” 4 The corporatization of water the political markets, and in growing population. About and sanitation services in Aqaba favor of bureaucratic allocation 32 percent of its 6.2 million and Amman did not take place of available resources, rather inhabitants in 2008 were under in a vacuum. It took place in a than toward economic markets, 14 years of age. Population country poor in water resources including effective water policies. growth is estimated at 2.4 and with a highly centralized percent a year. This rapid growth public administration. It is also Water policies have been biased is the result not only of the a country where successive toward transactions in political predominantly young population governments have considered markets, and bureaucratic and high fertility rate but also the management of water allocation of available resources, of the significant immigration resources a primary duty. In rather than toward economic flows from neighboring markets. countries. About 80 percent of10 this context, the government the population resides in urban has experimented throughout Country with a rapidly areas. 6 the years with a number of growing population water policies and organizational The per capita income is the arrangements. These policies The Hashemite Kingdom of equivalent of about $4,700 have, however, not always Jordan is a small country (92,300 per year. In terms of share of been successful. Perhaps km2) strategically located in the GDP, 86 percent is generated one of their most significant heart of the Middle East. 5 It is in the services sector, mainly shortcomings has been the bordered by Syria to the north, government, tourism and lack of balance between the Israel and the West Bank to the financial services. The industrial administrative and economic west, the Red Sea to the south, sector generates 10 percent and dimensions of the issues. The Saudi Arabia to the southeast the agricultural sector 4 percent. policies have been strongly and Iraq to the east. The The latter uses about 65 percent biased toward transactions in country has a young and rapidly of available water resources. 4 Liebenthal, Andres, Feinstein, Osvaldo N., and Ingram, Gregory K. Evaluation and Development. The Partnership Dimension. The World Bank, 2004, p.5. The political markets consist of the formal and informal rules needed to play the political game, together with the required enforcement mechanisms. 5 Unless otherwise noted, this chapter is based on two sources: The United States Central Intelligence web page on Jordan, and Haddadin, Munther J (Ed.) Water Resources in Jordan. Evolving Policies for Development, the Environment, and Conflict Resolution. Resources for the Future and RFP Press, 2006. 6 Towns of 5,000 inhabitants or more, as defined in the Population and Housing Census of 2004.
  11. 11. Highly centralized publicadministration The government estimated available water at 145 m3 per capitaJordan is a constitutional per year in 2007. A country is considred water poor when itsmonarchy with executive water resources are less than1,000 m3 per capita per year.powers vested in the king, whoexercises his powers through hisministers. The ministers, in turn,exercise their power through Neglected economic been on regulating transactionstwelve governorates, which dimension in political markets, and onare extensions of the central allocating available watergovernment. Each governorate is At the heart of Jordan’s resources administratively. Anheaded by a governor appointed water resources policies andby the king and supervised by important element of these management is how to optimizethe Ministry of Interior. The interventions has been the the national economic, social,country enjoys significant political government practice of setting and environmental benefitsand economic stability. water prices and allocating from its scarce water resources. water resources on the basis of Optimization is importantLegislative power is vested in the political rather than economicbicameral National Assembly, because economic development and financial criteria. Thisconsisting of a Chamber of itself depends critically on water practice has resulted in tariffDeputies and a Senate. The sector performance. levels too low to cover financialChamber of Deputies’ members Other concerns are the costs, much less environmentalare elected in direct elections imbalance between supply and and opportunity costs.while the Senate’s members are demand and the increasing Borrowing from The Economistappointed by the king. competition among users it could be said that the problem for scarce resources. These with water in Jordan is not thatImportant environmental characteristics of the sector, it is too scarce but that it is too 11constraint taken together, have demanded cheap. 8 the attention of the centralWater scarcity is a key government throughout theconstraint to Jordan’s economic country’s history, as shown bydevelopment. On a per capita its pervasive intervention in allbasis, it has one of the lowest The problem with elements of the water cycle,levels of water resources in water in Jordan is aiming at balancing supply andthe world. The government not that it is too demand and at mediating amongestimated available water at 145 scarce but that it is conflicting interests.m3 per capita per year, in 2007 7 too cheap.and gradually falling as a result of Despite the economic dimensionpopulation growth. A country of water-related issues (imbalanceis considered water-poor when between supply and demand), theits water resources are less than emphasis of the government’s1,000 m3 per capita per year. interventions in the sector has7 The Hashemite Kingdom of Jordan, Ministry of Water and Irrigation. Water for Life 2008-2022. February 2009. Opening Statement..8 The Economist, March 7, 2009, page 39, in reference to water issues in California.
  12. 12. The subsidies, which are whose choices matter, and how in Aqaba and Amman. It is prevalent throughout the such choices get implemented. in charge of implementing system, help to increase the government policies related At present, the main imbalance between supply to providing domestic and and demand and are not organization responsible for municipal water and wastewater justified by their contribution water issues is the Ministry disposal and treatment. Its to economic development or of Water and Irrigation responsibilities are broad. They by their distributive or poverty (MWI), which discharges its include designing, constructing, alleviation impacts. Most sector responsibilities through two and operating municipal services, investments are financed through decentralized agencies: the supervising and constructing loans and grants from bilateral Water Authority of Jordan public and private wells, licensing and multilateral agencies and (WAJ) and the Jordan Valley well drilling rigs and drillers, and are not recovered through Authority (JVA). issuing permits to engineers and tariffs because they are low other professionals performing and insufficient to generate Political markets determine water and wastewater related- enough revenues to service who the political and economic activities . 10 WAJ also submits, loans. Hence, the loans are entrepreneurs are, whose through the minister of water serviced by the government.This choices matter, and how such and irrigation, recommendations practice represents an increasing choices get implemented. to the cabinet of ministers to set fiscal burden that at the same water policies, including tariffs. time jeopardizes efficient Ministry of Water and Irrigation Governed by a ten-member maintenance of infrastructure board of directors, WAJ is and future investments in water MWI was created in 1992 to chaired by the minister of water development projects. manage the country’s water and irrigation and made up of resources. It formulates representatives of the ministries Water political markets and implements water and of planning, agriculture, and wastewater development health, as well as the secretaries12 One result of the government’s programs and recommends general of WAJ and JVA. policies in the water sector water sector policies to the throughout the years has been cabinet of ministers. Jordan Valley Authority the development of political markets made up of a complex JVA was also established in 1988 Water Authority of Jordan as an autonomous agency and structure of institutions (formal and informal norms) and the WAJ was set up in 1988 as was also later incorporated into organizations that have come an autonomous agency, which the MWI. JVA is charged with into existence as a result of was later incorporated into the developing water resources, 9 these norms. This structure MWI. Because of its mandate, towns and villages, infrastructure, determines who the political and WAJ played a leading role in and tourism facilities in the economic entrepreneurs are, the corporatization processes Jordan River Valley. 9 For more on the distinction between “institutions” and “organizations,” see: North, Douglass C. Institutions, Institutional Change and Economic Performance. Cambridge University Press, 1990. 10 Although by Law they should issue permits, WAJ has not done it.
  13. 13. JVA is governed by a ten-member board of directors chaired by the minister of water and irrigation and made up of representatives of the ministries of planning, agriculture, and health, as well as the secretaries general of WAJ and JVA. Box 3 shows how the institutional arrangements have evolved since Jordan’s independence in 1946. Box 3 Managing Water Resources and Providing Water and Sanitation Services The Pendulum Swings 11 In Jordan, organizational arrangements for water have swung from centralization of water resources management in the early years of the country to decentralization in later years and back to centralization today. The arrangements for providing municipal water and sanitation services have also been highly centralized. Most of the systems have been operated directly by central government departments. In Amman, however, the government – though maintaining control of the services – has experimented with various organizational arrangements. First, in 1973, it established a government-owned water and sewerage company. Ten years later, it started to operate the water and sanitation services directly through WAJ. Then, in 1999, the government contracted with a private operator to provide the services and created the Project 13 Management Unit (PMU) within WAJ to monitor the performance of the private operator and to oversee the investment program in network rehabilitation for the Amman area. Finally, when the private operator contract expired, the services were corporatized. Roughly at the same time as the corporatization of the Amman and Aqaba services, the government attempted to enter into a management contract to provide water and sanitation services in the Northern Governorates. This initiative was, however, not successful because there were not enough bidders.11 For further information see Haddadin, Munther J. op. cit.
  14. 14. CHAPTER 2 AQABA AND AMMAN: WHY REFORM? “… where conflicting beliefs have evolved, the dominant organizations (and their entrepreneurs) may view the necessary changes as a threat to their survival. To the degree that the entrepreneurs of such organizations control decision making they can thwart the necessary changes.” 12 Public policy is concerned important inside factor was 127,000 inhabitants, growing at with debating the reasons ASEZA’s interest in ensuring 3.5 percent a year. for collective action. Starting a timely expansion of water from this premise, this chapter supply capacity originally thought explores the question of why the necessary by 2007. Aqaba, the fifth largest city in the government of Jordan undertook country, is important because the reform of the water and it is the country’s only seaport. Two important cities sanitation services in Aqaba Amman, the largest city, is the with substantial and Amman. In answering the country’s administrative capital differences question, it is useful to know and commercial center. Aqaba, the fifth largest city in the14 what the cities are like and country, is strategically important whether the demand for reform came from outside or inside the because it is the country’s only sector. The answer appears to seaport. Amman is important be a combination of both. An because it is the largest city and important outside factor was the country’s administrative the reallocation of economic capital and commercial center. It development responsibilities is also the capital of the Amman from the central government Governorate. to the Aqaba Special Economic Zone Authority (ASEZA). Aqaba This institutional change gave impetus to initiatives aiming Aqaba is located at the head at a more autonomous water of the Gulf of Aqaba. In 2008, and sanitation service. An its population was estimated at 12 North, Douglas C 2005, p. 117.
  15. 15. Aqaba and its environs were Ammantransformed into the Aqaba The law empowers ASEZASpecial Economic Zone (ASEZ) In 2004, Amman’s population to develop infrastructurein 2000. The transformation was about 2 million or 37 and provide services. Notfaced strong opposition because percent of the country’s total surprisingly, it triggeredit was perceived by many as a population of 5.4 million. The negotiations between ASEZAthreat to the centralized public city is governed by a municipal and government agencies withadministration prevalent in council and a mayor, who heads branches in Aqaba.the country. The opposition the municipal administration.was neutralized, however, by The government has a strong Despite the broad powersthe strong support of the king influence in the administration vested by the law in ASEZA,himself and by the establishment since it appoints the mayor and the scope of the reform in theof a government body for the half of the council. The other water and sanitation sectorzone (ASEZA) made up of six half is elected by popular vote. was incremental and “pathmembers, all appointed by the The population growth rate dependent” rather than large-cabinet and reporting to the of Amman is estimated at 2.5 scale. It was incremental becauseprime minister (Law No. 32 of percent a year and inhabitants the MWI and WAJ led a strongthe year 2000). USAID was a are expected to increase to and effective opposition to large-strong supporter of the zone. 13 about 3 million by 2020. scale changes allowed by the law. It was path dependent because The Aqaba Special Economic Zone faced strong opposition the direction of the incremental because it was perceived as a threat to Jordan’s centralized public change was broadly consistent administration. with Jordan’s centralized public administration. Also, in line withThe law, in Article 17, assigns Why reform? this direction, the negotiationsbroad powers to ASEZA between ASEZA and WAJ were In Aqaba, the need for reform often mediated by the primeincluding the responsibility for 15developing the Aqaba port, was largely driven by the minister’s office or the cabinetairport, and utility services provisions of Article 17. This of ministers. USAID providedinside the Zone. This broad article not only empowers assistance to the parties duringdelegation is, however, balanced ASEZA to develop infrastructure the negotiations as a provision under which and provide services but also In Amman, the reform wasmajor decisions (like contracting explicitly overrides all other arguably generated by thewith third parties to provide the legislation conflicting with the coincidence of two factors:services or borrowing to finance article. Not surprisingly, these first, the experience of Aqabaprojects and activities) require provisions triggered negotiations and, second, the end of thethe approval of the cabinet of between ASEZA and central management contract withministers. government agencies with the private operator (LEMA). branches in Aqaba, as was the This coincidence provided case of WAJ . 14 government officials who did13 For further information on ASEZA see: Kardoosh, Marwan A. The Aqaba Special Economic Zone, Jordan: A Case Study of Governance. Universitat Bonn. Center for Development Research, January 2005.14 WAJ’s law confers special powers to negotiate, different from other governmental entities.
  16. 16. not support the management policies and decisions on the WAJ-Aqaba. The authority contract with the opportunity to operation of the two services WAJ delegated to the local make a case for ending it. Their and, thus, on their quality and branch was limited to day- case was based on the limitations sustainability. to-day operations, and the of the management contract resources allocated to it were The arrangements had a discussed later in this chapter scarce and closely controlled common element: the influence and the potential benefits of by headquarters. An example of government policies and creating a government-owned of this limited delegation decisions on the operation and company modeled in the and tight control was the maintenance of the services and successful experience in Aqaba. management of the services’ on their quality and sustainability. This meant that the rewards of cash flows and the investment the change were high, as they As a framework for the program. Cash collected from could create the conditions for analysis of the services before the customers was deposited further improvement in the corporatization, this report in a WAJ headquarters account, services. It also would allow uses six operational attributes: from which WAJ headquarters central government organizations Customer base, Quality of periodically transferred funds to to take control of the services services, Infrastructure stability, the branch, in accordance with again. It was also a low-risk Water resources adequacy, headquarters’ estimates of the approach inasmuch as it was Financial viability, and Employee branch cash requirements. WAJ based on an experience broadly and leadership development. 15 headquarters also reserved the perceived as successful by many authority to implement and in the government. The operational attributes of the finance investment programs. two utilities were largely similar, despite the different roles of Government as major the government. One major player in the water and difference was the continuity of sanitation sector the water services; Aqaba had a16 continuous water supply while Before the corporatization, the role of the government Amman had only intermittent The authority in the water and sanitation service. The other difference WAJ delegated to services in Aqaba and Amman was the size of the companies. its local branch in was important but substantially The main attributes of the two Aqaba was limited different in each city. In Aqaba, utilities are described below. to day-to-day the services were provided by operations, with a local branch of WAJ, while in Aqaba: a branch office scarce resources Amman they were provided by a with little autonomy and tightly controlled by private company under contract good service quality headquarters. with WAJ. Despite this major Water and sanitation services difference, both arrangements before the corporatization had a common element: the were provided by WAJ through strong influence of government’s the local branch known as 15 The attributes used to describe the utilities were adapted from Effective Utility Management. A Primer for Water and Wastewater Utilities. June 2008. Association of Metropolitan Water Agencies, American Public Works Association, American Waterworks Association, National Association of Water Companies, United States Environmental Agency, and Water Environment Federation. The data about the services are from the corporatization consultants’ reports.
  17. 17. Customer base Most of the wastewater was discharged into a treatmentThe customer base for water and sanitation services in Aqaba is lagoon located in the northwestmuch smaller than Amman in terms of both number of customers part of the city, while smallerand volume of water supplied, as seen in Table 1 quantities of wastewater onbelow. 16 the south coast were treated in underground septic systemsTable 1 and percolated into the ground.Aqaba Customer Base 2002 Additional wastewater collection and treatment facilities were under construction to satisfy demand until about 2030. Infrastructure stability The utility’s performance under this attribute was not satisfactory. The coverage of the fixed assets inventory was incomplete, andAn interesting characteristic Quality of services there were no defined plans,of the Aqaba customer base schedules, or standards for The quality of water supply and replacing and rehabilitating the weight of nonresidential sewerage services in Aqaba was Despite investments in systemcustomers on volume and generally good. The water supply rehabilitation in early 2000 andvalue of the water billed. was continuous, and customers’ the favorable topography (noNonresidential customers, 3 complaints about water service significant differences in elevationpercent of the total number of interruptions or sewer back- within the service area), thecustomers, account for about 75 17 ups were resolved promptly number of water pipeline leakspercent of the water billed and (about three hours on average). and breaks and the frequency of85 percent of the value of the This service standard was sewage collection system failuresbills. The difference between the accomplished with the help of were higher than best practice.relative weights of the volume substantial investments in system For example, nonrevenue waterand value of water billed is due expansion and rehabilitation, was estimated at 37 percent17to the differential tariffs between and with the installation of a of water production comparedthe residential and nonresidential computerized maintenance to less than 20 percent bestusers and the progressive tariffs management system in the practice, and the number ofaccording to consumption. two or three years before bursts/leaks per year per km ofAqaba’s nonresidential water corporatization. The investments water main was estimated at 2customers are few but account were financed by a USAID grant compared to less than 0.2 bestfor a disproportionate share of to WAJ. practices.volume and value of water billed.16 Additional indicators of the attributes for both Aqaba and Amman are shown in Annexes 1 and 2.17 A contributing factor to this high number is the free delivery of water to various Bedouin villages located near the well field.
  18. 18. In practice, tariffs in Aqaba Only five had university degrees. Despite investments in system before the corporatization Training programs were limited, rehabilitation in early 2000, the allowed the service to generate and there were no performance number of water pipeline leaks an operational cash flow to incentives in place. and breaks and the frequency of transfer to WAJ19 . This cash flow sewage collection system failures Amman: inadequate was made possible by four main were high. incentives, autonomy and factors. First, the high volume of quality of services water sales to large nondomestic Water resources adequacy consumers, which paid high Before they were corporatized, The main source of water tariffs; second, the low operating water and wastewater services in (Disi well field18 ) for Aqaba cost of the system, which Amman were the responsibility should satisfy demand until required little or no pumping; of a private company (LEMA), about 2013. Additional sources third, the good groundwater under a management contract were expected to come from quality coming from the Disi awarded by WAJ in 1999 desalinated water. At the time of aquifer, which required only through competitive bidding, this study, desalination projects chlorination; and, fourth, with World Bank assistance. The were still under consideration as WAJ’s practice of postponing bidding process started with well as other alternatives such as infrastructure rehabilitation and ten qualified bidders and ended a second pipeline from Disi to maintenance. with only two offers20. LEMA was Aqaba. a private consortium formed The practice of postponing by Suez Lyonnaise des Eaux Financial viability infrastructure rehabilitation (currently Suez Environment) and maintenance was one and Montgomery Watson The government’s financial way to help generate an Arabtech. The original four-year policy for Aqaba water supply operational cash flow in Aqaba contract was extended twice and sanitation services did to be transferred to WAJ’s until December 2006. not provide for their financial headquarters.18 viability. The operating revenues The responsibility for supervising were to be sufficient to cover contract performance was operating expenditures but not Employee and leadership WAJ’s, which discharged this full maintenance or investment development responsibility through the Project requirements. Any operational Personnel management was one Management Unit (PMU). cash surplus was to be absorbed of the issues confronting WAJ- LEMA’s technical and financial by WAJ. Capital expenditures Aqaba. The salary scale was not performance was also audited were to be financed by competitive with the industry once a year by independent government subsidies, which due to limitations mandated auditors funded by USAID. in turn were to be financed by by MWI/WAJ primarily related loans and grants from multilateral The terms of the management to their own salary caps. WAJ- contract, however did not and bilateral organizations, Aqaba managers lacked authority internal debt, and current include enough incentives to to staff the utility, and the existing promote excellence in the government revenues. personnel lacked qualifications. provision of services. This was 18 The Disi well field extracts water from a fossil aquifer underlying southeastern Jordan and northwestern Saudi Arabia. 19 Aqaba’s cash transfers to WAJ proved later to be one of the major obstacles to corporatization due to WAJ reluctance to relinquish those in favor of the new company. 20 Odeh, Nancy. Towards Improved Partnerships in the Water Sector in the Middle East: A Case Study of Jordan. Ph.D. dissertation, Massachusetts Institute of Technology, June 2009. Page 93.
  19. 19. primarily because the fixedmanagement fee constitutedthe bulk of the contractor’sremuneration, while theincentives and penalties basedon performance were small in WAJ reserved for itselfrelation to the management important functions relatedfee. The performance incentive to bulk water supply andended up being 5% of the capital investment decisionsimprovements in financial leaving LEMA’s managementperformance21. without enough tools andUnder the management contract, conditions to make a majorWAJ reserved for itself important difference in services.functions related to bulk watersupply and capital investmentdecisions leaving LEMA’smanagement without enoughtools and conditions to make amajor difference in services. Thisimbalance in the distributionof functions and authority had limited authority to manage its for providing water to LEMA.significantly negative implications. working capital. Cash collected Measuring Amman’s waterFirst, there were coordination from customers was deposited and sanitation services usingand accountability issues like in in a WAJ account and then the six attributes used forany other management contract. WAJ transferred the funds to Aqaba, it is clear that servicesWAJ delegated to LEMA LEMA. This process significantly before corporatization wereauthority for the daily operations extended the time required for 19 below best practice and belowof the water and sanitation LEMA to receive cash from its Aqaba standards. To be fairservices but retained for itself customers and, thus, affected its it is, however, important tothe authority for financing and capability to meet its obligations, mention that the differencesimplementing capital investment particularly with suppliers. in topography between theprograms. The issues arising Third, there were uncertainties two cities have a substantialfrom this split authority were for LEMA’s management impact on the operation of thehighly disruptive to the day-to- regarding the availability of water services. Aqaba is a city withday operation of the service and resources. These uncertainties minor differences in elevationto the planning for growth and were not only the result of while Amman has an elevationmodernization. the country’s water poverty difference of about 400 metersThe second effect of the but rather the result of WAJ’s between the highest and lowestimbalance in functions was and JVA’s control of bulk water points.that LEMA’s management had without an adequate protocol21 Odeh, Nancy, Op cit. P. 124.
  20. 20. Customer base rotating the water supply among the different zones into which Amman’s customer base for water and sanitation services during the distribution system is divided. recent years has grown rapidly as a consequence of natural Most zones receive water only population growth and immigration. The city has been able to two consecutive days per week. incorporate the additional population into its water customer base but is lagging in sewerage services. The main characteristics of the Since customers have always 2004 customer base are as shown in Table 2. lived with the rotating system, they have learned to cope by Table 2 investing in internal networks in Amman - Customer Base 2004 their houses including roof and ground or underground tanks, pumps, valves, and, in some cases filtration systems. They also may purchase water from trucks between the days of supply and carry out the most water- intensive activities, like laundry, on the days water supplies come. Middle- and high-income Quality of services to cost rationalization and, most customers with high water- importantly, increased customer storage capacity (up to 10 to Despite the significant 20 m3) are less affected by satisfaction. But, the quality of administrative and operational the rotation. Conversely, low- the water supply services was improvements introduced by income customers with low deficient, mainly because of the20 LEMA under the management company’s inability to overcome storage capacity (1 to 3 m3) face contract, the overall quality significant shortages. the rotation delivery of water of the water and sanitation to customers that started in Another drawback of a rotating services in Amman before the the 1970s in response to the water supply is damage to the corporatization was still deficient. central government’s allocation distribution network as a Improvements included the of insufficient water supplies consequence of the sudden reduction of NRW from 54% to urban areas combined with changes in water flows (“water- to 43%, the establishment and extremely high water losses. The hammer effect”). The rotation consolidation of a modern call- operational practice of rotating practice also adds to operating center, the reduction of the ratio water supply among the different costs (including staff to open and of employees per subscriber, the zones into which the distribution close valves), to the complexities introduction of computerized system is divided leads to most of operating pressure-reducing meter-reading devices, and the zones receiving water two valves in some 330 distribution establishment of decentralized consecutive days a week and a zones, and to the difficulties of customer service centers. These few receiving continuous supply. detecting and repairing water accomplishments contributed Rationing in Amman means leaks.
  21. 21. Customers have learned to cope Infrastructure stability at 43 percent of the waterby storing water in roof and WAJ and LEMA’s performance introduced into the distributionground or underground water system and there were 11 under this attribute was nottanks and by carrying out the burst/leaks per year per km of satisfactory, as observedmost water-intensive activities, water main23 . Both estimates through three quantitative andlike laundry, on the supply days. compare unfavorably with best qualitative proxy indicators. The fixed assets inventory, including practice (less than 20 percentThe company’s inability to conditions assessment, was nonrevenue water and less thanreduce water losses and insufficient to build an effective 0.2 burst/leaks per year per kminadequate control of the water asset management program. of water main). This representeddistribution system has resulted Further, the company did not an enormous waste of a worrisome decline in the have defined standards for The treated water lost orhours of service, as shown in renewing and replacing assets consumed without generatingTable 3. and, thus, decisions on asset revenue for the water provider renewal and replacement were exacerbated the water deliveryTable 3 problem.Amman – Declining Service driven by availability of funds,Hours including loan proceeds for Sewer back-ups and overflows this purpose 22. For example, by far exceed best international after years of neglecting the practices of <0.1 per km infrastructure, WAJ replaced of network per year. They about 10 percent of Amman’s amounted to about 18,900 cases tertiary network during the life in 2004, or 9 stoppages per of the management contract. km of network per year. This This investment was financed problem presents an increasing with a World Bank loan and bottleneck to the development the program stopped once the of new real estate projects. It World Bank funds were used. also signals the need for urgent 21Wastewater service coverage USAID and other donors funded system rehabilitation.under LEMA and Miyahuna additional programs to replace a significant portion of the primary Water resources adequacyis low. Only 78 percent ofthe population had access to and secondary supply system Water resources were a majorthe network in 2006 and was around the city. issue for Amman because waterincreased to 80% in 2008. Most As another indication of weak usage (127 million m3 in 2004)of the sewage was pretreated performance, the number of was close to the capacity ofin a lagoon plant, and the rest in water pipeline leaks and breaks the sources (150 million m3 intwo secondary treatment plants. and the frequency of sewage a year of average rainfall). ForIn addition, WAJ was building a collection system failures were the medium term (less than tenlarge secondary treatment plant much higher than best practice years), Amman’s water sources(As Samra) which entered into indicators. For example, in 2004 were expected to be augmentedfull operation in 2008. nonrevenue water was estimated by WAJ through the new22 LEMA managed three investment budgets: i) funded by WAJ for the O&M investments, ii) financed by WAJ for investments outside of LEMA contract, and iii) investments financed by a loan from the World Bank.23 Currently there is no information available of the breakdown of losses between commercial and technical causes.
  22. 22. Zara-Ma’in source which began provide for a good balance consisted of people hired operations in 2008. between operation and directly by LEMA with market- For the longer term, WAJ just maintenance expenditures on driven salaries and benefits; finalized a BOT contract to one side, and revenues on the the other comprised WAJ- bring 100 million cubic meters other. This lack of balance was seconded employees with civil per year from the Disi aquifer due to tariff levels set by the servant salaries and benefits. in 2013. The capital cost of this cabinet of ministers on the This lack of coherence in salaries project is about JD 800 million. basis of political considerations and benefits naturally created and without explicit rules, and dissatisfaction among employees. Financial viability without enough discussion Despite these difficulties, of whether the tariffs were LEMA recruited and retained Owing to the government’s sufficient to cover maintenance an increasingly competent policies in the water and and rehabilitation. workforce. It also significantly sanitation sector, and the increased opportunities for terms of LEMA’s management Employee and leadership professional and leadership contract, the provision of water development development through training. services in Amman were not Unfortunately, what was financially viable. They were Personnel management was achieved was insufficient to dependent on LEMA’s operating another difficult issue under close the gap between current revenues and on government the management contract performance and the continuous subsidies. Broadly speaking, because there were two groups improvement required to raise the company’s own revenues of employees. One group service standards. should cover operation and maintenance expenditures, while government subsidies should cover investment requirements. The government subsidies were22 financed by loans and grants from multilateral and bilateral organizations, internal debt, and current government revenues. The timing and amount of the investments in system expansion and rehabilitation were dictated by the availability of external and budgetary funds and not by the requirements of the service. In addition to the constraints on financing capital expenditures, the financial model did not
  23. 23. CHAPTER 3 THE PROCESS: A DISCIPLINED APPROACH TO REFORM “For any given project, knowledge creation has to happen in a caring atmosphere, one in which organizational members take an active interest in applying the insights provided by others.” 24Water and sanitation sector Demand for reform The perceived success of thereform is a complex and risky reform in Aqaba was, arguably The law establishing ASEZprocess. Reformers, to be a major factor in stimulating the appears to have provided strongsuccessful, should display not demand for reform in Amman. impetus for water and sanitationonly a strong commitment but These two cases, in turn, are reform in Aqaba. The lawalso put in place a systematic likely to lead the government to made ASEZA responsible forand disciplined approach to experiment with organizational the development of all utilitiesdesigning and implementing arrangements in other parts to accompany the ambitiousreform. What made the reform of the country, particularly process of development in theprocesses in Aqaba and Amman in the Northern and Middle Zone. The impetus for reformso expeditious? The answer Governorates. was further encouraged by theto this question appears to lie perception in Aqaba that WAJ Strong political support 23in an unusual combination of would be unable to developfactors that included strong The reform in both Aqaba a new source of water thatdemand for reform; political and Amman was led by the the entrepreneurs in Aqabasupport accompanied by a clear cabinet of ministers through the estimated necessary by 2007.mandate to the staff responsible Ministry of Water and Irrigation, Later during the process it wasfor designing and implementing which heads the water sector demonstrated that the newthe reform; and highly structured in the country. The cabinet of source would be required onlydecision-making processes to ministers, according to Jordan’s by 201325.ensure that the outcome of legislation, is the decision maker.the reform was consistent withthe intentions of the decision The ASEZA law provoked strong demand for water andmakers. sanitation reform in Aqaba.24 Von Krogh Georg, Ichijo, Kazuo, and Nonaka, Ikujiro. Enabling Knowledge Creation. How to Unlock the Mystery of Tacit Knowledge and Release the Power of Information. Oxford University Press, 2000, p. 9.25 The Water Resources and Demand Assessment published in 1998 by Montgomery Watson/Arabtech Jardaneh estimated that in 2007 the population growth would require additional water resources. An updated demand projection made by the TAPS project in 2003 postponed the date for additional demand until
  24. 24. The government understood vested authority in ASEZA In addition, high-level that the corporatization to develop utilities services. government officials participated process needed continuous, This law conflicted with WAJ’s in the committees. This was strong political support, as authority in the water and essential for timely and effective well as high-level government sanitation sector and, thus, the communication with the decision experts and officials leading government and Aqaba needed makers: the prime minister and the process from day to day to find a political solution. the cabinet of ministers through The solution they found was the minister of water and and making recommendations to appoint WAJ and ASEZA irrigation. It was also critical in to the cabinet of ministers. representatives to the reform making sure that the committee’s It also understood that the recommendations were committee. organizational arrangements for politically feasible. the reform had to be adapted to The ASEZA law conflicted with the political and administrative WAJ’s authority, and thus the Specialized assistance realities in the two cities. In government and Aqaba needed The MWI and USAID hired Aqaba, the process was carried to find a political solution to the specialized consultants to out by a coordinating committee conflict. assist the government in the made up of representatives reform. The consulting firms, of both ASEZA and the Safe spaces to share under contract with USAID, government authorities, while knowledge were responsible for analyzing in Amman it was handled The committees established various organizational models by a committee (Project by the government to help and recommending to the Development Team) made up in the reforms represented a committees one suitable for only of WAJ representatives26. practical, realistic, and innovative water and wastewater services. Representatives from USAID approach to carry out reform. To accomplish their assignments, They were expected to be “safe the firms used multidisciplinary and the consultants participated24 in both committees. spaces” in which the participants teams made up of expatriate and could share, create, and apply local experts, specialists in sector The different composition of sector knowledge relevant to reform, utility management, the committees in Aqaba and the corporatization. This idea is regulation, engineering, Amman reflects differences in reflected in their role, which was economics, law, finances, the political and organizational to develop a collective vision of human resources, information relationships between the the organizational arrangements technology, communications, and government and the two cities. for the entities that provide training. In both cities, there was a water and wastewater services. tradition of government control of the water and sanitation The committees represented a practical, realistic, and services. Yet the economic zone innovative approach to carry out reform. They were had created a novel situation expected to be “safe spaces” to share, create, and apply in Aqaba because the law had sector knowledge. 26 In this study committee and Project Development Team are synonymous.