REGUL ATION LEGAL AND POLIC Y FR AMEWORK WATER SUPPLY AND INTERGOVERNMENTAL CONTEX T RESILIENCE SANITATION POLICIES, INSTITUTIONS, FINANCING AND REGULATION INS TITUTIONS Adapting to a Changing World SYNTHESIS REPORT AUGUST 2022 About the Water Global Practice Launched in 2014, the World Bank Group’s Water Global Practice brings together financing, knowledge, and implementation in one platform. By combining the Bank’s global knowledge with country investments, this model generates more firepower for transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org/water or follow us on Twitter: @WorldBankWater. About GWSP This publication received the support of the Global Water Security & Sanitation Partnership (GWSP). GWSP is a multidonor trust fund administered by the World Bank’s Water Global Practice and supported by Australia’s Department of Foreign Affairs and Trade, Austria’s Federal Ministry of Finance, the Bill & Melinda Gates Foundation, Denmark’s Ministry of Foreign Affairs, the Netherlands’ Ministry of Foreign Affairs, the Swedish International Development Cooperation Agency, Switzerland’s State Secretariat for Economic Affairs, the Swiss Agency for Development and Cooperation, and the U.S. Agency for International Development. Please visit us at www.worldbank.org/gwsp or follow us on Twitter: @TheGwsp. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION Adapting to a Changing World SYNTHESIS REPORT AUGUST 2022 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Please cite the work as follows: World Bank. 2022. “Water Supply and Sanitation Policies, Institutions, and Regulation: Adapting to a Changing World—Synthesis Report.” World Bank, Washington, DC. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover design: Chris Phillips, Circle Graphics, Inc. Contents Acknowledgments vi Executive Summary vii Abbreviations xi 1. Introduction 1 1.1 Structure of This Report 3 2. Water and Sanitation Policy 4 2.1 Analytical Foundations 4 2.2 Lessons Learned from Practice 4 3. Water and Sanitation Institutions 8 3.1 Analytical Foundations 8 3.2 Lessons Learned from Practice 9 Notes 13 4. Water and Sanitation in an Intergovernmental Context 14 4.1 Analytical Foundations 14 4.2 Lessons Learned from Practice 14 Note 19 5. Water and Sanitation Financing 20 5.1 Analytical Foundations 20 5.2 Lessons Learned from Practice 20 Note 24 6. Water and Sanitation Regulation 25 6.1 Analytical Foundations 25 6.2 Lessons Learned from Practice 25 WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD iii 7. Resilience of Water and Sanitation Services 30 7.1 Analytical Foundations 30 7.2 Lessons Learned from Practice 30 Notes 36 8. Conclusion 37 8.1 Collect data on the impact of PIR on water and sanitation services 38 8.2 Link investments and projects to PIR reforms 38 8.3 Promote collaborative leadership 38 Appendix A. Background on PIR and Aligning Institutions 39 References 43 Glossary 47 BOXES 2.1 Bosnia and Herzegovina: Example of an Effective Policy Dialogue Platform 5 2.2 How a Water Law Can Trigger Shifts in the WSS Sector 6 3.1 Leveraging Public and Private Institutions to Improve Water Services in Urban Areas of Niger 13 4.1 Understanding Political Economy Tensions in Decentralized Water and Sanitation Services 16 4.2 Funding Local Water and Sanitation Infrastructure and Provision: South Africa’s Experience 18 5.1 Performance-Based Water Supply and Sanitation Grants 23 6.1 Kenya—WASREB’s Pro-Poor Key Performance Indicators 27 6.2 The Positive Impact of Regulation on WSS Outcomes 28 7.1 PIR Lessons from Wastewater Reuse to Enhance Water Security 31 7.2 Collaborative Leadership for Improving Resilience: The Cape Town and Sava Experiences 34 7.3 Adjusting Rural WSS Institutional Reforms in Benin 35 FIGURES 1.1 Challenges to Achieving Good Water Management according to Water Leaders 1 1.2 The Policy, Institutions, and Regulation Concept 2 1.3 A “Fishbone” Analysis of Sanitation Service Challenges in Zambia before Reforms 2 3.1 Incentives for Improving the Contribution of Informal Service Provision 10 WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD iv 3.2 Typology of Collaborative Leadership in the WSS Sector 12 4.1 A Framework for Assessing the Intergovernmental Context of Decentralized Water Supply and Sanitation 15 6.1 Evolution of Water and Sanitation Regulatory Reforms in Colombia 29 A.1 Main Trends in Public Sector Reform Since World War II 39 TABLE 8.1 Overview of Key Messages by Chapter 37 WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD v Acknowledgments This report was prepared by a core team at the World Bank Carolina Latorre, Rui Marques, Patricia Lopez, led by Dambudzo Muzenda (Senior Water and Sanitation Mathews Mullackal, Jamie Palalane, Igor Palandzic, Specialist, World Bank) and comprised of: Norhan and Federico Perez-Penalosa. Belinda Asaam provided Sadik (Program Analyst), Jamie Boex (Decentralization excellent administrative support. Specialist and World Bank Consultant), Midori Makino (Lead Water and Sanitation Specialist), Ilan Adler The report benefitted from two rounds of peer review. (Policy Specialist and World Bank Consultant), Chris The core team is grateful to the following peer reviewers Heymans (Senior Water and Sanitation Specialist), and for their excellent and constructive comments and Smita Misra (Senior Water and Sanitation Specialist). inputs: Yogita Mumssen (Water Practice Leader for The report was prepared under the overall guidance West and Central Africa), Tim Williamson (Senior and direction of Gustavo Saltiel, Global Lead for Water Public Sector Specialist, Governance Global Practice), Supply and Sanitation. Craig Kullman (Senior Water and Sanitation Specialist), Chloe Viola (Senior Water and Sanitation Specialist), The team acknowledges the contributions of Ernst & and Oriana Romano (Head of Water Governance, Young’s Sustainable Performance and Transformation OECD). Unit, which undertook several case studies that provided important inputs for this report. Alexis The team thanks Circle Graphics for their inspired Gazzo, Christophe Abraham, and Agathe Chauvin graphic design of the project and recognizes the were important collaborators in this regard. excellent editorial support provided by Fayre Makeig. Several World Bank colleagues provided substantive This work was made possible by the financial contributions to the report, including Christian Borja- contribution of the Global Water Security and Sanitation Vega, Crystal Fenwick, Christian Fischer, Robert Partnership (GWSP), https://www.worldbank.org/en​ Gakubia, Luke Gates, Sarah Keener, Victor Kwadwo, /programs/global-water-security-sanitation-partnership. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD vi Executive Summary Context And Objectives Of The Study quality of, water supply and sanitation (WSS) services. The SDGs set an ambitious agenda that Policies, institutions, and regulation (PIR) are includes universal access to WSS services with the essential to achieving the Sustainable Development requisite quality, reliability, equity, and sustainability Goals (SDGs) related to water and sanitation, essential for overall human and economic development. but need a considerable boost to be effective. A While the financial needs and technical solutions are rich body of analytical work has been developed to well known, there has typically been less appreciation of support this idea. Nevertheless, this report argues the transformational role of sector governance—that is, that the mainstreaming and implementation of PIR the laws, policies, regulations, institutions, and systems into concrete reforms, investment programs and that can help mobilize financial and technical solutions infrastructure is still sporadic at best. At the same time, and enhance their impact on WSS services (Mumssen, the stakes for getting PIR right are higher than ever. Saltiel, and Kingdom 2018). PIR needs to be strengthened, adjusted, and scaled up to meet the needs of a changing world. The World Bank launched the PIR initiative in The World Bank has reviewed the experience of 2016 as a new approach to water sector reform. various countries with PIR and has documented its Previous global initiatives offered a range of insights in a new report. This report has two main promising technical solutions to expand water and objectives. The first is to reflect on the body of PIR sanitation infrastructure but did not have a sufficient knowledge and experiences accumulated globally and understanding of the policies, institutions, and in selected countries to refine the PIR concept based on regulatory framework necessary to improve service lessons learned. The second is to advocate for greater delivery and to operate and maintain water and action on PIR by policy makers, development partners, sanitation infrastructure in a sustainable manner. international financial institutions, and civil society The initial phase of the PIR initiative (2016–19) by using projects and investments as implementation sought to build strong empirical and literary vehicles. A companion piece to this report, the PIR foundations through the seminal report “Aligning Framework Tool, provides more detailed guidance on Institutions and Incentives” (Mumssen, Saltiel, and undertaking policy dialogue on PIR, identifying reform Kingdom 2018). Based on an extensive literature options, and applying PIR concretely in practice. review that analyzed trends and theories on public sector reform as well as the insights gained from 10 country case studies, this report formulated the The Case for an Intensified Focus on initial PIR Conceptual Framework (appendix  A). Water and Sanitation PIR This framework posited that integrated policy, institutional, and regulatory interventions can help Since the adoption of the SDGs, there has been align incentives for more sustainable WSS service increasing global concern about the sustainability delivery. of attempts to increase access to, and improve the WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD vii binding constraints to improved water security. At The second phase of the PIR initiative (2019– the heart of this interest in PIR is the recognition 22) was recently concluded. Its objective was to that infrastructure and investment solutions are not put the concept into practice and learn from its enough to tackle the “wicked problems” facing the implementation to further refine the PIR concept, water sector. draw operationally applicable lessons, and inform the development of a tool for operationalizing PIR The urgency of a renewed and updated focus on PIR in government and development partner programs. stems from several factors. Several cities increasingly The review of the application of the PIR framework face “day zero” events or risk crossing a “tipping point” globally—summarized in this report—reconfirms the at which WSS service provision starts to degrade. importance of policies, institutional arrangements, Water utilities and other service providers, which and the regulatory context in improving governance traditionally had narrow mandates, have to increasingly and the alignment of incentives to support more tackle problems outside their remit, such as the public effective and sustainable WSS service delivery. In health crisis related to the COVID-19 pandemic. The addition, the second phase identified three cross- interconnectedness of water and sanitation with other cutting areas that are key to sustainable WSS services: development priorities such as health, environment, sector funding and financing, the intergovernmental social, and economic goals, is putting pressure on context, and enhancing the sector’s ability to be the siloed approach to WSS services, while new resilient in the face of stresses and shocks. These technologies and innovations offer unprecedented issues have emerged as both the biggest constraints opportunities to transform the water sector. Climate to progress toward SDG 6, and the areas in which change is compelling many policy makers, regulators, governments and other sector actors have expressed and other actors to change their way of developing the strongest need for reforms and technical support. WSS services by adapting to increasing water security challenges. This requires dramatic change in the current course of action to address these growing pressures and Recently, there has been growing recognition that achieve better WSS services for all. The PIR report PIR—and water governance more generally—is provides several examples of how some countries have the missing link for resolving some of the chronic successfully undertaken PIR reforms and interventions challenges undermining WSS services. For example, that have led to improved WSS outcomes. a 2021 survey of ministers, agency heads, and other senior officials in the water sector found that Given the pressing challenges as well as opportunities institutional fragmentation is the foremost challenge facing the WSS sector, the narrow focus on PIR is no to achieving good water management (Water Policy longer enough. In addition to the three fundamental Group 2021). Further, inadequate infrastructure is building blocks of policies, institutions, and regulation, not a top priority for decision-makers in addressing this report proposes an expanded analytical framework water management challenges, with PIR aspects such that includes some important but hitherto less developed as improving data and resolving conflicts among water themes: intergovernmental context financing, and users taking precedence (Water Policy Group 2021). At resilience. Figure 1.2 illustrates this expanded analytical a national level, some countries are realizing that PIR concept of PIR, encompassing a deeper analysis of reforms are essential in the context of more frequent financing, intergovernmental issues, and resilience in a shocks and growing stresses in the water sector. In constant feedback loop. These themes were identified South Africa, for example, where several provinces or through the application of an institutional diagnostic cities are at or close to a “tipping point” (as continuous tool as well as stakeholder consultations; other relevant supply is no longer the norm and many locations are methodologies; and various water, governance, and experiencing intermittent water supply), the National infrastructure assessment tools. Through this process the Treasury and Department of Water and Sanitation are PIR concept and the PIR Framework Tool were updated working with local governments to address PIR-related to provide more granularity on key PIR-related binding WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD viii constraints to improved water supply and sanitation assessments often highlight the same endemic outcomes, particularly around the intergovernmental challenges, such as fragmentation among institutions, context finance, and resilience. political interference in regulation, or tensions between local and national governments regarding WSS roles and responsibilities. But often these assessments only Summary of the Overarching skim the surface rather than identifying the real “pain Messages of this Report points.” For example, assessments frequently point out that a lack of local capacity contributes to the WSS Key Message 1: Understanding the delivery challenges. However, if we probe deeper into PIR context of WSS provision is a the root causes of these challenges, it becomes clear precondition for all other efforts to that the intergovernmental system itself—its design, achieve meaningful and sustainable incentives, and coordination structures—is often WSS outcomes. the real issue, rather than local capacity or national governments’ reluctance to delegate services. In the This report argues that the design and integration absence of a proper diagnostic, initiatives and projects of incentives into WSS operations are still a work consider a lack of administrative capacity or funding in progress that will require more scale-up and as the leading cause of service delivery failure, whereas action to succeed. Mumssen, Saltiel, and Kingdom the reasons might run much deeper or lie elsewhere. (2018) have already pointed to the de jure–de facto gap, More efforts are needed to identify the stakeholders and whereby PIR measures are developed, often with great interests that contribute to service delivery bottlenecks expectations, but fail to be effective due to the lack of and the incentives (including resources) that could necessary measures for their implementation. Their compel them to act differently. report presents findings from various cases showing how incentives such as legislative requirements, budget Several tools and approaches exist to support a root allocations for implementing entities, benchmarking of cause analysis of PIR service bottlenecks, including utilities and other service providers, performance-based the World Bank’s new PIR Framework Tool. The grants, and career opportunities for water professionals tool is an updated methodology for undertaking PIR can all make a difference in the impact of PIR diagnostic assessments and facilitating policy dialogue on initiatives. In addition, while the report echoes previous reforms. It covers the six themes of the PIR Conceptual calls for a reform champion to spearhead reforms, it Framework: policy, institutions, intergovernmental advocates for a collaborative leadership model, where context regulation, finance, and resilience. There are multiple actors at all levels of the sector work together other approaches and methodologies, such as the for change. Despite the positive examples offered, this problem-driven iterative approach encapsulated in report is frank about the paucity of good practices and other analytical work, including the World Bank the need for more deliberate efforts to align policy goals Governance Practice’s GovEnable initiative. Elements with implementation incentives to achieve sustainable of these approaches have been adopted in the PIR WSS outcomes. Framework Tool and are reflected in this report. Key Message 2: Progress in achieving Key Message 3: PIR reforms are long meaningful PIR reforms starts with a term in nature and require mechanisms rigorous assessment of the root causes that foster evaluation, learning, and of WSS service bottlenecks. adjustment. This report argues that part of the reason for While some PIR interventions can and should be done recurrent service delivery challenges is the lack of in incremental steps, fundamentally, all PIR reforms attention paid to identifying the root causes of weak require sustained efforts over a long period of time service performance. Water and sanitation governance for impacts to materialize. The report illustrates this WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD ix by documenting long-term reforms in a selection of Conclusion countries. Deep-dive policy briefs of some of these cases (Bosnia and Herzegovina, Brazil, the city of Chennai in While PIR is an essential piece of the WSS puzzle, it India, Colombia, Mozambique, and Uzbekistan [World is not the only one. The report does not assume that Bank 2022a–f ]) have been developed as a complement the six areas it covers offer the definitive response to to this report. The example of WSS regulation in tackling WSS challenges but it provides insights from Colombia, for instance, illustrates how incremental a wide range of countries that endorse a more robust but intentional and well-conceived steps over a 25-year focus on PIR. It also points to other tools that offer period have positioned the Water and Sanitation more specific resources for topics beyond the scope Regulatory Commission of Colombia (Comisión  de of this report. The PIR methodology will continue Regulación de Agua Potable y Saneamiento, CRA) as a to evolve and be adjusted accordingly as new insights leading regulator. The careful use of regulatory cycles that emerge and lessons are learned from its application in are revised and adjusted every few years to reflect  new participating countries. challenges and opportunities are among the cornerstones of the regulatory successes reviewed under this work. Moving forward, the report advocates for the use of the renewed PIR approach through projects, The WSS sector is in flux—the growing impacts of technical assistance, and structured policy dialogue climate change (which are manifested through the water with key sector stakeholders around the world. The cycle) and COVID-19 are cases in point—and sector systematic use of the PIR Framework Tool in WSS institutions need to develop the adaptive capacities operations (investment projects, performance-based to respond accordingly. A focus on PIR needs to be financing, technical assistance, and advisory services) tailored toward the long term with aligned approaches can help to facilitate stakeholder dialogue, identify that consider how ad hoc laws, policies, regulations, root causes of systematic service delivery challenges, programs, and projects can best contribute to building and lay the groundwork for incremental, long-term and sustaining momentum for WSS reforms over time. reforms. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD x Abbreviations ARERA The Italian Regulatory Authority for Energy, Networks and Environment CRA Water and Sanitation Regulatory Commission (of Colombia) CSP Cities Support Program FLLD field-level leadership development IFI international financial institution LMIC lower-middle-income country NPM new public management O&M operation and maintenance OECD Organisation for Economic Co-operation and Development PBG performance-based grant PEFA public expenditure and financial accountability PEMANDU Performance Management and Delivery Unit PIR policies, institutions, and regulation RBF results-based finance SDGs Sustainable Development Goals WASH water supply, sanitation, and hygiene WASREB Water Services Regulatory Board WSS water supply and sanitation WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD xi 1. Introduction Since the adoption of the Sustainable Development Recently, there has been growing recognition that Goals (SDGs), there has been increasing global policies, institutions, and regulation (PIR)—and concern about the sustainability of attempts to water governance more generally—are essential increase access to and improve the quality of water for resolving some of the chronic challenges supply and sanitation (WSS) services. The SDGs undermining WSS services. For example, a 2021 set an ambitious agenda that includes outcomes such survey of ministers, agency heads, and other senior as universal access to WSS services with the requisite officials in the water sector revealed that institutional quality, reliability, equity, and sustainability to contribute fragmentation is the top challenge for achieving good to overall human and economic development. While water management (figure 1.1) (Water Policy Group the financial needs and technical solutions are well 2021). The same survey showed that inadequate known, there has typically been less appreciation of infrastructure is not front of mind for decision-makers the transformational role of sector governance, that is, addressing water management challenges, with PIR the laws, policies, regulations, institutions, and systems aspects such as improving data and resolving conflicts that can help mobilize financial and technical solutions among water users taking precedence (Water Policy and enhance their impact for WSS services (Mumssen, Group 2021). Saltiel, and Kingdom 2018). FIGURE 1.1 Challenges to Achieving Good Water Management according to Water Leaders 60 50 % weighted respondents 40 30 20 10 0 Fragmented Inadequate Conflicts Inadequate Inadequate Water issues Inadequate Public Internal water and between public water infrastructure being laws and resistance jurisdictional institutions inaccessible water user awareness relatively regulations boundaries data and groups low priority information for the government N° of countries = 86 Percentage of weighted responses ranked 1st Percentage of weighted responses ranked 2nd Percentage of weighted responses ranked 3rd Source: Water Policy Group 2021. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 1 FIGURE 1.2 The Policy, Institutions, and In addition to the three fundamental building blocks Regulation Concept of policies, institutions, and regulation, this report proposes an expanded analytical framework that includes some important but hitherto less developed themes: intergovernmental context, financing, and resilience. Figure 1.2 illustrates this expanded analytical conception of PIR, encompassing a deeper analysis of financing, intergovernmental issues, and resilience in a constant feedback loop. These themes were identified through the application of a previous institutional diagnostic tool as well as stakeholder consultations; other relevant methodologies; and various water, governance, and infrastructure assessment tools. Through this process, the PIR Conceptual Framework and the PIR Framework Tool were updated to provide more granularity on key PIR issues, particularly those concerning intergovernmental relations, finance, and resilience. An example, drawn from Zambia, illustrates how a careful analysis of sector blockages helped identify how PIR issues were undermining effective service Source: Original to this publication. delivery, in this case, sanitation services (figure 1.3). FIGURE 1.3 A “Fishbone” Analysis of Sanitation Service Challenges in Zambia before Reforms Underinvestment in infrastructure Weak recurrent and capital expenditure Dilapidated sewerage system Dedicated fund (DTF) ends Poor-quality household Reduced WSS budget Dilapidated infrastructure sanitation facilities allocation and weak execution and low access to improved sanitation services especially in peri-urban areas Government programs Commercial utilities focus on bulk (NUWSSP and NRWSSP) water supply and urban areas focus excessively on infrastructure creation No explicit mandate No guidelines for on-site sanitation for peri-urban areas Rehabilitation and maintenance overlooked Limited monitoring of OSS and FSM No institutional incentives Insufficient planning and Gaps in sanitation regulation to serve low-income areas execution of government policies Source: Original to this publication. Based on the Zambia Water and Sanitation Governance Study (World Bank 2020). Note: DTF = Devolution Trust Fund; FSM = fecal sludge management; NRWSSP = National Rural Water Supply and Sanitation Programme; NUWSSP = National Urban Water Supply and Sanitation Programme; OSS = on-site sanitation; WSS = water supply and sanitation. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 2 However, important reforms emerged from this sound The remainder of this report is structured in line with understanding of the blockages, which is already the six clusters of the current articulation of the PIR starting to yield good results for improved services framework; water and sanitation policy (chapter 2); (see chapter 6 on regulation). water and sanitation institutions (chapter 3); water and sanitation in an intergovernmental context (chapter 4); water and sanitation regulation (chapter  5); water 1.1 Structure of This Report and sanitation financing (chapter  6); and resilience of water and sanitation services (chapter  7). Each This report aims to present a detailed synthesis of the chapter comprises two subsections: The first subsection current state of the PIR Conceptual Framework to a provides a summary of the analytical foundations of broad audience, including policy makers, development the framework (generally based on the findings from practitioners, World Bank task teams, civil society, and Phase 1 of the PIR initiative), and the second subsection other interested actors around the world. Appendix A emphasizes the current state of the framework based on of this report presents a background on the foundations lessons learnt from the application of the PIR framework of the PIR concept, as presented in the report “Aligning in practice in a rapidly changing global environment Institutions and Incentives for Sustainable Water (Phase 2). The final chapter of this report, chapter 8, Supply and Sanitation Services” (Mumssen, Saltiel, and provides the conclusion and proposes next steps. Kingdom 2018). WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 3 2. Water and Sanitation Policy 2.1 Analytical Foundations This may entail rational argument, but it also hinges on persuading certain interest groups about how they Previous analytical work provided a solid basis for stand to gain from proposed reforms, while mitigating understanding the substance of policy. The report the drawbacks to groups that gain less. “Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services” notes that The role of champions in advancing sector “policies act as signals: they set the tone for the direction reforms has also been acknowledged. The “Aligning of the overall legal, institutional and regulatory Institutions” report, for example, emphasized the role frameworks that influence the actions and decisions of leadership at multiple levels to facilitate reforms and of all sector (and sometimes non-sector) stakeholders, the need for “distributed agents” to implement change including private investors and consumers” (Mumssen, on the ground (Mumssen, Saltiel, and Kingdom 2018). Saltiel, and Kingdom 2018). Sometimes, countries The World Bank (2016) report, “Providing Water operate without a clear WSS strategy or policy; or there for People in African Cities Effectively: Lessons from are policies or strategies but no necessary resources, Utility Reforms,” demonstrates that reformers need to actionable goals, or indicators to monitor progress. “work with the grain,” starting with “what is,” rather In other cases, goals have been defined but they are than “what ought to be.” The importance of champions unrealistic. The absence of a clear, coherent sector policy seems to be a cross-cutting issue, as evidenced by an framework—consisting of the sector’s policies, laws, analysis of power sector reforms over 20 years which strategies, and plans that together guide how the sector found that more than half the countries lacking a aims to achieve its development objectives by defining reform champion largely failed to deliver on any of who is responsible for what, and how improvements in the reform announcements, whereas all those with service delivery will be achieved and funded—is often a reform champions made considerable progress (World significant obstacle to successful improvement of WSS Bank 2019). As another example, a report on the outcomes. political economy of sanitation found that the support of influential champions helped to move sanitation Previous analytical work on PIR emphasized the investments up on the list of priorities of governments role of WSS laws, a key part of the overall policy (World Bank 2011). framework, in catalyzing reforms. Decrees and ministerial declarations are often used to enact policies and government priorities. The key benefit of having 2.2 Lessons Learned from Practice water legislation is that it reflects political commitment to reform. Moreover, as the experience of power sector 1. It is important to understand the reforms has shown, legislation can also help support historical legacies and political economy long-term sustainability of reforms (World Bank context of water and sanitation services. 2019). However, laws alone rarely shift the policy and operational landscape, and political will demands In Bosnia and Herzegovina, the constitution obliges the alignment of political interests to support change. coalition building among the three ethnic groups. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 4 This requirement reflects some of the peace-building the national government and county governments stem mechanisms built in the country following the civil war in part from the perception by stakeholders that county (1992–95). Moreover, water is perceived as a public good governments are not adequately consulted on the that must be available to all, in part due to the socialist planning and activities undertaken by the water service legacy. For instance, water utilities are legally not allowed boards and that counties often do not agree with the to shut off water service to households that do not pay boards’ project priorities. The lack of coordination can the bills. As another example of history impacting WSS lead to duplication and waste. In Chennai, for instance, services, in South Africa, the municipal model of WSS the Greater Chennai Corporation and Chennai service provision is tied to the political agreement reached Metropolitan Water Supply and Sewerage Board each when the post-apartheid intergovernmental system executed its own geographic information system (GIS) was negotiated in the early 1990s. Understanding this modeling initiatives instead of pooling resources. historical context is important as it guides stakeholders Bosnia and Herzegovina is a counter example with its as to the levers by which sector reforms can be delivered. Platform for Dialogue (box 2.1). More generally, the In South Africa, the locus of responsibility to turn PIR tool offers a comprehensive approach and sound a municipal water business around rests with local methodology to facilitate policy dialogue. governments, which have a large degree of political, managerial, and financial autonomy from other spheres of government (national and provincial), but also must BOX 2.1 Bosnia and Herzegovina: operate within a policy and legislative framework set by Example of an Effective Policy the national government. This includes constitutional Dialogue Platform provision for a national government intervention when a local government is deemed to have failed to meet its The Platform for Dialogue in Bosnia and service delivery mandate. Nevertheless, details on the Herzegovina was launched in 2017 by the types and level of services under this mandate remain Association for Water and Environmental unresolved, and the country has recently fallen behind Protection Sector (Aquasan) Network to some of the targets it would have to meet if it is to facilitate consultations among stakeholders achieve the SDGs (UNDP 2013; Department of Water and to align them on main issues and possible and Sanitation 2018). reforms. The members act as advocates for reforms in the sector by preparing policy papers, organizing regional conferences, 2. Policy dialogue is not only important and communicating with the media. The for integrity purposes, but more results of the consultations were published transparent and inclusive policies and in 2019 as a policy paper, which outlined legislation increase the probability of the key findings in the sector and proposals success. for reforms. One of the reasons for the initiative’s early success is the support of A study in Brazil found that informing mayors about the international community, especially the research on a simple and effective policy increases EU delegation in Bosnia and Herzegovina, the probability by 10 percentage points that their which was an important incentive for the municipality implements the policy (Hjort at  al., participation of governmental authorities. 2021). Yet, despite the importance of dialogue, very In this way, as stakeholders noted, the few countries have well-structured and inclusive Platform for Dialogue shows how the modes of sectorwide reflection and exchanges. While push for reforms can derive more from workshops, conferences, and one-off events are motivated individuals than from the existing common, the assessments suggest that more formalized institutional framework. and ongoing dialogue platforms are rare but sorely needed. In Kenya, for example, the tensions between WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 5 3. Water laws can provide powerful coordinating much-needed investments at the incentives for the adoption of new national level. behaviors, models, or approaches to • Provide resources for implementation of legal service delivery. requirements: One stakeholder noted that “if targets are not set, and funds are not made Concretely, this requires the following actions: available then the law can be considered non- binding.” • Ensure coherence among sectoral and local • Develop clarifying regulations: The 1997 governance laws: For instance, in many countries, Water Supply and Sanitation Act in Zambia, it is not unusual for the Local Government Act to for example, catalyzed a long process that saw assign WSS services as local government functions, utilities expanding their traditional sewerage while the sectoral act (e.g., the Water Act) or the mandate to include on-site sanitation (Kennedy- sectoral policy often assigns de jure and/or de facto Walker et al. 2020). Importantly, the regulator, responsibility for WSS services to the central level. the National Water and Sanitation Council, Chapter 4 on intergovernmental relations explores stepped in to ensure that the provisions of the these issues in more detail. law were translated into action through clarifying • Clarify legal responsibilities for service regulations and the use of licenses and targets as providers: In Uzbekistan, stakeholders have noted regulatory tools for ensuring compliance. that having no legal definition for an operating entity prevents any effective formulation of its Box 2.2 provides an illustration from Brazil, which service obligations and undermines the efficiency adopted a new water law in 2020 that has already had of performance management across the water significant impact on the trajectory of WSS service utilities. outcomes. Lastly, the experience with sanitation in • Provide incentives for decentralized services: In eastern and southern Africa shows how legislation Kenya, the constitution in principle devolves WSS can help bridge the gap between de jure and de facto services to the counties and local governments responsibilities for sanitation. Similar reforms are at but there are no provisions or incentives for early stages in Tanzania, Rwanda, and Kenya. BOX 2.2 How a Water Law Can Trigger Shifts in the WSS Sector The case of Brazil illustrates how a water law can trigger fundamental shifts in reform. The 2020 Saneamento Law includes regulation and private sector participation as key areas of reform across all government levels. First, the law empowers the National Water Authority (Agência Nacional de Águas e Saneamento Básico, ANA) to set policy guidelines for the state-/municipal-level regulatory agencies, support capacity building of these agencies, facilitate coordination on regulatory matters across all levels of government, and mediate in case of disputes. Implementation of this mandate would harmonize regulatory standards across all the states and increase the federal government’s ability to ensure enforcement of its guidelines. The 2020 law also levels the playing field between private water operators and public water utilities, by forbidding direct awards of service delivery contracts by municipalities to state-owned companies. In addition, the contracts in force will be conditional to proof of the economic/financial capacity of box continues next page WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 6 BOX 2.2 continued the contractor, by own resources or by debt contracting. This serves to make the universalization of services in the bidding area viable until 2033 and creates the space for private sector participation in a competitive market. The law has set coverage goals for water (99 percent) and for sewerage collection and treatment (90 percent) by 2033, as well as quantitative goals for reducing water losses and improving treatment processes. To achieve these coverage targets, the new law prioritizes the delivery of services and encourages utilization of private capital to meet investment needs, estimated at R$750 billion ($140 billion). The water and sanitation sector in Brazil is currently dominated by state-owned water utilities that serve three-quarters of the population, while private companies cover less than 10 percent, with municipalities serving the rest. Public and private institutions have already begun adjusting their actions to reflect the new legal framework. The main water and sanitation utility in Rio Grande do Sul state, Companhia Riograndense de Saneamento (Corsan), plans to invest at least R$10 billion ($1.8 billion) through 2033 to improve water and sewage services. Various states have begun launching the procurement process for concessions and public-private partnerships to take advantage of the greater opening toward the private sector that the 2020 law provides. The law has therefore laid the basis for sector reforms that could have positive ramifications over the long term. Sources: IFC 2021; World Bank 2022b. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 7 3. Water and Sanitation Institutions 3.1 Analytical Foundations It is clear that the design of institutional reforms and integration of incentives into WSS operations Sector institutions require strong incentives to make is still a work in progress that will require more them function. As “the humanly devised constraints scale-up and action to succeed. One challenge is that that structure political, economic, and social while the connection between strong institutions and interaction” (North 1990), institutions are the rules of sectoral performance is evident to any experienced the game in a society.1 In the water sector, institutions government official or practitioner, it is hard to pin take various forms—government entities, service down precisely (World Bank 2012). There have providers such as utilities and municipalities, water been attempts to measure the impact of institutional user associations, river basin agencies, and so forth. performance on service delivery. For example, van den The literature is clear, though, that without adequate Berg and Danilenko (2017) suggest that institutional incentives, WSS institutions will not perform as they performance in the case of water utilities can be are supposed to. As the “Aligning Institutions and measured by looking at financial, organizational, Incentives” report (Mumssen, Saltiel, and Kingdom and customer performance. One telling indicator of 2018) noted, incentives act as motivating influences or financial performance is the operating cost-recovery stimuli driving the behavior of organizations, ministries, ratio, which indicates how well a utility can cover service providers, customers, and other stakeholders in its operating costs through its revenues and in turn the WSS sector. This report also distinguished between have the means to provide good-quality services to positive and perverse incentives. customers. Among their findings were: (i) economic development had a positive impact on customer The experience of a wide range of countries shows performance indicators; and (ii) having a regulatory the recurrence of the same institutional issues: weak agency had a positive impact on customer protection, technical capacity, limited sector planning, inadequate an important measure of service quality. However, coordination, and poor data management to name a this work relied on a small sample of utilities and thus few. This is not surprising given how entrenched these cannot be extrapolated too much. Nevertheless, it problems are and the complex interplay of financial does offer a few elements of how to assess institutional resources, long-term commitment, and accountability performance in the WSS sector. mechanisms needed to make sector institutions perform well. As an influential study by the Organisation for Another challenge is that there is significant Economic Co-operation and Development (OECD uncertainty about the institutional forms that are 2011) showed, even developed countries struggle suited for improving public sector performance in with governance gaps in the water sector, specifically any given context. While governments can introduce administrative, financial, objectives, accountability, formal reforms upstream in the public sector results information, and policy and capacity gaps. chain (for instance, by introducing a sector program), it WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 8 is much more challenging to change the actual behavior In Chennai, for example, private water tanker of frontline public agents. Finding effective entry companies, also known as the “tanker mafia,” points for changing engrained behaviors and values is were identified by stakeholders—including end hard. It takes expert judgment to identify such entry users—as an illegal but integral part of the water points, to carefully manage reforms, and to ensure that supply system. Since these informal activities the changes are anchored in sustainable systems and exist because of a failure of the public services, structures. they are tolerated by the established order. WSS stakeholders have noted that many of these informal service providers, if not the majority, 3.2 Lessons Learned from Practice seek to operate formally. They require licenses, to reduce their operational risks and facilitate 1. The traditional understanding of water their access to financial resources. However, in institutions needs to be expanded to Chennai, regulators (the Chennai Metropolitan reflect all service delivery models and Water Supply and Sewerage Board and the Public actors. Works Department department) have failed to meet this need due to an inability to monitor The water sector in most countries is typically the licensing system and its renewal. As noted comprised of multiple actors across many different in a report commissioned for this study, the segments (urban/rural/water supply/sanitation/water opportunities for partnering with WSS service resources management), which can be a coordination providers is strengthened by the finding that and management challenge as well as an opportunity. negative prejudices against slum communities While many government programs and international are very rare among sector professionals (WSUP financial institution (IFI) interventions tend to focus and World Bank 2021). An important first step on formally established entities as the recipients is developing the right incentives, as several of funding and implementing bodies, there needs countries have done (figure 3.1). to be a more pragmatic expansion of “who drives b. Consumers and communities are a powerful actions” in WSS services. The review of country source of information for improving WSS experiences points to certain stakeholder groups that planning and sector performance. Having tend to be overlooked in PIR and service delivery informed and empowered communities involved interventions, but which are crucial to better service in decision-making can be a strong asset to outcomes. Specifically, informal service providers and support reforms that may be socially sensitive, community-based groups can be mobilized for better such as a revision of water tariffs. For this to institutional performance. happen, service providers and government authorities should develop better outreach a. Informal service provision needs to be recast programs to engage with citizens and manage as a modality of service provision among many, public relations (including enough human with incentives needed for it to contribute resources capacity for community engagement, to positive WSS service outcomes. With an structured citizen engagement programs, etc.). estimated 676 million urban dwellers relying However, there is often little effort to understand on off-grid water supplies that are not safe, or respond to the needs of end users. For example, accessible, or reliable (Misra and Kingdom a water consumer survey conducted as part of the 2019), it is pragmatic to accept that informal Chennai PIR assessment found that while many providers will continue to service this consumers had never raised a complaint regarding underprivileged population. The case studies WSS services, of the ones who had, nearly highlight that in many cases informal operators 80 percent were of the opinion that complaints help to fill a void when the formal system fails. raised were not resolved. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 9 FIGURE 3.1 Incentives for Improving the Contribution of Informal Service Provision Incentive category Country example Direct Zambia $ investment $ $ A devolution trust fund created to Provide . financing for WSS infrastructure in Urban areas with Funding a pro-poor focus Performance-based Kenya . financing OBA up to 60% subsidy through the WSTF To provide financial incentives to providers .. Effective mapping .. Adequate data Kenya . . ... . of wash needs . . A well developed mapping of low-income communities the Majidata database) to facilitate targeting and) allocation of WSS incentives Institutional Institutional Zambia alignment role clarity A dedicated ministry far WASH - MWDSEP was created in 2016 to bring all water-related institutions under one umbrella and to improve clarity of function and accountability . Kenya Performance . Rewards for better WASREB gives an annual pro-poor award to the monitoring . performance best performing utility on pro-poor indicators and reporting . Zambia There is a comparative performance reporting and CEO of the year award to stimulate competion among 11 CUs Source: Original to this publication. Note: CU = commercial utility; CEO = chief executive officer; MWDSEP = Ministry of Water Development Sanitation and Environmental Protection; OBA = output-based aid; WASH = water supply, sanitation, and hygiene; WASREB = Water Services Regulatory Board; WSS = water supply and sanitation; WSTF = Water Sector Trust Fund. The 2021 World Development Report notes that and catalyze corrective actions enabling improved user-generated content can be used to map water/ performance of water utilities. For example, Colombia flood events in real time for water management and has a well-established approach to citizen participation food security (World Bank 2021b). Moreover, citizen- in regulatory matters. Following the provisions of the generated data are often used when government data are Constitutional Court in Sentence C-150 of 2003, missing (in regions that are too far or too expensive for the Water and Sanitation Regulatory Commission of government bodies to reach) and to verify government Colombia (Comisión de Regulación de Agua Potable data (Lämmerhirt et al. 2018 as cited in World Bank y Saneamiento, CRA) saw its first citizen participation [2021b]). These groups can also provide oversight process begin with the issuance of Resolution 276 WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 10 of 2003. This participation process is mandatory for the systematically identified, as a motive force for positive issuance of any resolution related to tariff formulas and change. Figure 3.2 offers a preliminary typology. consists of publishing draft versions of the regulatory instruments to receive comments and reactions from the Strengthening water institutions requires public before the issuance of the final instrument. investment in staff across the board—but so far, ad hoc approaches seem to be the default. One of the 2. The role of individuals in designing, major reasons for suboptimal institutional performance implementing, and sustaining reforms identified by WSS stakeholders is the limited or nearly is hard to understand but crucial for PIR absent incentives for individual performance of staff in success. water institutions. In Uzbekistan, remuneration levels are set at unsustainably low levels across all aspects of Individual reform champions, while useful and sector operations (including water utility operations, necessary in many cases, can pose some limitations and regulatory functions, and executive functions), risks. The “Aligning Institutions and Incentives” report disincentivizing diligent and professional performance (Mumssen, Saltiel, and Kingdom 2018) highlighted of duties and promoting corrupt and negligent modes the role of intrinsic incentives—that is, the internal of operation. A lack of career prospects can have a motivation of individual leaders—as a key determinant direct impact on the quality of services. For example, of the success of policy design and implementation. At the Uzbekistan assessment notes that disenfranchised the service level, the importance of a competent utility customers facing poor-quality WSS services, dismissive manager has been identified as a crucial condition for treatment by the water utilities, and unresponsive well-performing utilities (Soppe, Janson, and Piantini treatment by regulators have no incentives to accept 2018; World Bank 2021a). In all the countries analyzed, higher levels of tariffs affording full cost recovery and identifying a leader who can coordinate the reform sustainable mode of operations. implementation and define the roles and responsibilities of other stakeholders was mentioned as one of the 3. Strong water institutions can have conditions for successful reforms. However, while a single a positive impact on service delivery individual can have a major impact on WSS reforms, outcomes, but this link needs to be there is a risk of dependency on individuals whose tenure further explored. may not be secure over the long term and who could be replaced by equally supportive individuals (Andrews, PIR assessments provide insights into what makes Pritchett, and Woolcock 2021). water sector institutions perform well in terms of service delivery. While there were no quantitative or Collaborative leadership, that is, with reform statistical analysis available to inform this report, the champions at every level—policy, legislative, experiences of various countries provide some insights regulatory, service delivery, and citizen—are needed into the factors that make institutions perform well. In for reforms to succeed and be sustainable. In one the PIR context, performance can be determined based specific example, the field-level leadership development on how well institutions meet their objectives, typically (FLLD) initiative piloted by the World Bank between service delivery outcomes, as per the stated goals 2016 and 2019 empowered individual public servants and mandate of the designated institutional entities. in agencies that implement policies and provide WSS Several initiatives exist to assess sector performance in services. The FLLD pilots affirmed the importance of this regard, such as the International Benchmarking public servants who have a high degree of discretion in Network,2 which comprises various indicators of how they conduct their tasks, and whose behavior is a utility performance (e.g., operating costs and revenue) critical determinant of outcomes. Specifically, it showed and the Utility of the Future (World Bank 2022g), that (i) while champions may be a minority, they are which assesses how well water utilities perform based not rare; (ii) they exist at all levels in institutions, and on criteria such as commercial operations, technical not just at the top; and (iii) they can be efficiently and operations, financial management, human resources, WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 11 FIGURE 3.2 Typology of Collaborative Leadership in the WSS Sector The Visionary Understands the links between water and sanitation and sustainable development, the root cause of the crisis, the hierarchy of actions required, and the need for political and even individual commitment. Can be a policymaker. The Administrator Understands how to make organizations—utilities or municipal water departments—function well. While technical expertise is important, good grounding in business and executive management arguably matters as much if not more than engineering expertise. The Technical Expert(s) Understands the nuts and bolts of water and sanitation service provision. Is the implementer of policies, programs, and projects and understands well the infrastructure and service needs on the ground. Typically, has technical expertise in civil engineering, finance, economics, and planning. This level of leadership can be reinforced through the field-level leadership model. The Local Connector(s) Understands the local context in which water and sanitation services are delivered. Is well placed to connect the political, financial, and administrative aspects of these services. Is connected to endusers. Typically, a mayor, member of parliament, governor, or elected official, but can also be a district officer or head of the regional utility or municipal water supply and sanitation department. Citizens Citizens today have many more tools at their disposal than in the past, notably through advances intelecommunications, travel, and social media. This new landscape allows individuals to identify problems, influence and shape opinion, spotlight good practices, and push for change. Source: Original to this publication. and organization and strategy. In addition, based on framed the issue as the “public participation principle,” the classic understanding of institutions as providing which is instrumental in communicating the regulator’s “a structured, predictable manner by which people position on strategic matters to raise public awareness interact” (North 1990), water sector institutions can (Gakubia 2021). also be assessed based on the perceptions of individual— since institutions are ultimately designed to influence As with policies and regulation, other aspects that individual thinking and actions. The use of polls and influence how well sector institutions perform perception surveys, for example, as in the South Africa include: incentive structures (endogenous, exogenous, PIR assessment, could be standardized and provide and intrinsic, e.g., conditional grants provided by the useful insights into how individuals with knowledge of national government to local service providers as in the institutions (both insiders and outsiders) perceive the case of Peru); the feedback loops that exist among key effectiveness of the institutions in question. sector actors including policy makers, regulators, utility staff, management, consumers, unions, consulting firms, Nontechnical competencies are underdeveloped in and contractors (e.g., the Bosnia and Herzegovina Water the water sector but are crucial for strengthening Dialogue Forum); and clear institutional mandates and service delivery. In particular, as the World definition of roles (e.g., Niger) (see box 3.1). Bank’s GovEnable initiative on improving service delivery finds, communication is a skill that is often More detailed study is needed to understand the underdeveloped among service delivery entities such full dynamics of water sector institutions and how as water utilities and municipalities. One regulator to make them perform better. While case studies WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 12 BOX 3.1 Leveraging Public and Private Institutions to Improve Water Services in Urban Areas of Niger After decades of poor water services in Niger, the government launched important reforms in 2001 that focused on improving the institutional arrangements for service delivery in urban areas. The government split service responsibilities into two separate entities. The first, Société de Patrimoine des Eaux du Niger (SPEN) was established as an asset-holding company, with a legal identity as a public corporation and with a 10-year concession contract with the government. SPEN’s responsibilities include developing water infrastructure. In parallel, a private operator, Société d’Exploitation des Eaux du Niger (SEEN), was engaged through a 10-year affermage contract to operate and maintain the facilities in four urban areas, under a lease contract with SPEN. SEEN has a joint ownership structure that includes 51 percent holding by French water operator Veolia, 34 percent by local private investors, 10 percent by its employees, and 5 percent by the state. The contract was renewed in 2011 for another 10-year period. Following a successful initial implementation period, the concession contract with SPEN was also renewed in 2014 for another 10 years. These institutional reforms proved to be successful and have been attributed to Niger’s achievement of the Millennium Development Goals for water access in urban areas in 2015 (91.2 percent). The quality of services also improved, with water supply increasing from an average of 12 hours a day in the capital, Niamey, and other major cities before 2001 to virtually 24/7 supply in the same areas. Other significant service delivery gains include an increase in water distribution efficiency from 78 percent in 2001 to 84 percent in 2015; an improvement in bill recovery from 78 percent in 2001 to 90 percent in 2015; and net profitability for SEEN of CFAF 1,049 million (about $1.6 million) in 2017. As for SPEN, its financial performance has been strong with the company managing to recover both its operating and capital costs, with no need for government subsidies. Part of the reason for the good outcomes in Niger is the clarity of the institutional arrangements. Both SPEN and SEEN had clear legal and regulatory instruments underpin their functioning. There were also strong monitoring mechanisms in place. are valuable to document and illustrate the interplay in service provision. Last, some robust quantitative between water institutions and service outcomes, there analyses could shed light on the determinants of is a dearth of quantitative data and analysis of this institutional performance and water service outcomes. relationship. A first step would be a robust mapping of formal and informal water sector institutions, encompassing the policies, laws, regulations, and service NOTES delivery entities (such as utilities, municipalities), and spanning subsectors (such as rural, urban, water supply, 1. Rules of the game refer to “agreed principles, sanitation, and even water resources). Second is the established through political and/or social processes development of performance criteria that include but and can either be formal (e.g., law, decrees, are not limited to the organizational aspects that have regulations) or informal (e.g., customs, social norms, been so well defined for utilities. There is a need for established relationships, etc.)” (Mumssen, Saltiel, matrices to assess the performance of informal service and Kingdom 2018). providers and community-based groups involved 2. https://newibnet.org/ WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 13 4. Water and Sanitation in an Intergovernmental Context 4.1 Analytical Foundations regardless of the approach to localization. The more that is learned about how policies, institutions, and That global development challenges cannot regulations work in different countries, the clearer it successfully be addressed by a single level of becomes that the vertical or intergovernmental aspects government is increasingly embraced within the of WSS services, and the multilevel nature of water broader governance literature and practice, as well governance, is a major dimension of the sector’s policy as across other sectors. Whereas decentralization framework, as well as of its regulatory structure and was seen by some in the past as a goal in itself, it is financing. increasingly understood as a means to an end, whether that goal is greater public sector efficiency, a more inclusive and responsive public sector, greater political 4.2 Lessons Learned from Practice empowerment and accountability, or better service delivery results (Boex, Williamson, and Yilmaz 2021). 1. Multilevel aspects of water sector Actors within public sector governance are increasingly governance are an important part of the developing tools to ensure that public sector governance enabling environment for effective WSS and public financial management ensure better service delivery. services (e.g., OECD 2019; PEFA 2021; World Bank, forthcoming). The recognition that centralization WSS services typically have a critical vertical or versus decentralization is not a binary policy choice and intergovernmental component, regardless of how that public service delivery often takes place in hybrid centralized or decentralized the sector is. Figure 4.1 (devolved and nondevolved) forms, with nuanced provides a framework for understanding how WSS, PIR, impacts on service delivery outcomes, is increasingly and intergovernmental dynamics all intersect. Until being documented and recognized in health, education, recently, to the extent that the tools available to assess and other sectors (Boex and Edwards 2015; Miller, the governance of WSS services focused on subnational Hart, and Hadley 2021; Smoke, Löffler, et al. 2021). aspects of sectoral service delivery at all, many focused exclusively on sector-specific institutions and processes Managing water for all is often not only a question at different government levels. They paid little or no of resource availability and funding, but equally a attention to the other elements of the multilevel matter of good governance. In places where providing governance environment. For their part, when left to access to WSS services continues to be a challenge, the their own devices, decentralized governance specialists “water crisis” is often largely a governance crisis—which have tended to focus on the political, administrative, and typically has a strong intergovernmental dimension fiscal aspects of decentralization and intergovernmental (OECD 2011). This is true irrespective of the degree relations, without making the connection to sector- to which WSS services are centralized, as they have specific institutions, frontline service delivery facilities, a critical vertical or intergovernmental component, or service providers. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 14 FIGURE 4.1 A Framework for Assessing the Intergovernmental Context of Decentralized Water Supply and Sanitation Political Administrative Sectoral Fiscal decentralization decentralization decentralization decentralization government Effective Intergovernmental Intergovernmental Ministry of Water central Intergovernmental political planning and regulator fiscal system architecture administration bulk providers local government Effective and inclusive Local water Local revenues and Local political Local planning and supply and sanitation local public financial leaders administration department/unit management providers Effective Water supply and Water supply and Tariffs/ Board sanitation planning sanitation service financial management/ and administration provision capital finance and engaged Empowered civil society Public Participation Engaged Payment of taxes participation and oversight consumers and tariffs Source: Original to this publication. The intergovernmental system is key to or ineffectiveness of sectoral service provision, and understanding WSS binding constraints. As the governance, administration, and financing of the noted in the Introduction, the failure to look at provider and/or the government level that owns the the intergovernmental context of WSS services in provider and to which the service delivery provider is a comprehensive manner may result in a diagnosis (or should be) accountable. that identifies proximate causes of poor WSS service delivery (i.e., the symptoms) rather than the root causes The design of a country’s intergovernmental system of the public sector’s failure to ensure adequate access to often pits service delivery goals against political water and sanitation. A wider analytical lens—one that economy motivations. PIR analyses suggest that considers the entire intergovernmental context—allows recent decentralization reforms—as well as the analysts to draw linkages between the effectiveness resulting design of intergovernmental (fiscal) systems— WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 15 in Kenya, Nepal, and Mozambique were mainly driven decentralization to provide space to a wider range of by conflict dynamics and political economy forces political actors) and service delivery motivations, such as unrelated to sectoral service delivery issues (box 4.1). to “get the job done.” Nonetheless, there is widespread Multilevel governance arrangements in many countries hesitance within the sector to structurally engage with reflect tension between political motivations (e.g., using local governments, which are seen as having politicized BOX 4.1 Understanding Political Economy Tensions in Decentralized Water and Sanitation Services Kenya. The Constitution of Kenya (2010) states that “[t]he functions and powers of the county” include “county public works and services, including . . . water and sanitation services.” Despite this fact, the Water Act of 2016 established a number of water works development agencies under the Ministry of Water and Sanitation. In 2019/20, development expenditures under the Ministry of Water and Sanitation accounted for K Sh 49.6 billion, while no sectoral support was provided to county governments. The Council of Governors has contested the constitutionality of the act in a court case (still underway) and does not accept the role of water works development agencies. Nigeria. In 2018, President Muhammadu Buhari declared a national emergency to tackle the water and sanitation crisis in Nigeria amid a rampant outbreak of cholera and other waterborne diseases. The declaration of a national emergency resulted in the Partnership for Expanded Water Supply, Sanitation and Hygiene (PEWASH) and the National Action Plan for the Revitalization of Nigeria’s WASH Sector (2016). Despite this national crisis and the National Action Plan, the federal government does not take an active role in the regulation of water and sanitation provision and—although it is willing to on-lend international donor financing to state governments—does not provide sectoral funding for state and local water infrastructure. Nepal. Prior to 2006, a single parastatal company—the Nepal Water Supply Corporation—had a monopoly on urban water and sanitation provision in the country. In 2006, policy reforms and legal reforms were made to abandon this central government provider and to transition to a situation where each urban area (or urban conglomeration) in principle was to have its own Water Supply Board. Despite the introduction of a new federal constitution in the intervening decade, the Nepal Water Supply Corporation continues to exist, and the country continues to experience difficulties transitioning to more decentralized local water boards (which would be fully in line with the new constitution). Mozambique. Subnational or intergovernmental tensions can occur even in deconcentrated contexts. In Mozambique, the Law of Local Organs of the State (LOLE 2003) and its regulations (2005) assigned the responsibility for water and sanitation provision to provincial- and district-level administration. In practice, however, the National Directorate of Water and Sanitation (Direcção Nacional de Abastecimento de Água e Saneamento, DNAAS) not only formulates and proposes policies, but also controls the sectoral budget and directs the implementation of activities across the WSS sector, rather than building the capacity of provincial departments to take on this responsibility. The passage of new decentralization laws in 2019 and 2020 provides a renewed opportunity for decentralization. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 16 decision-making, being administratively weak, and designed in a manner that does not lead to optimal being unwilling or unable to contribute their own service delivery outcomes. Unless the differences in resources to water investments. perspectives and incentives are understood and resolved through effective dialogue and coordination, central 2. Problems related to weak local government efforts to bypass or minimize the role of capacity for water and sanitation service devolved local governments tend to create contentious provision cannot be resolved by technical relationships between WSS stakeholders at different solutions alone. government levels. Given common challenges with local WSS delivery 3. Recognizing the unique features of at the local level, there is a tendency to focus on WSS service—and aligning them with the the local PIR dynamics rather than the overall prevailing intergovernmental framework— intergovernmental system. For instance, there is is often the key to successful service a common expectation in the water sector that local delivery outcomes. government leaders should ensure that local WSS providers collect adequate tariffs; and that they Although there are advantages and disadvantages to both monitor the performance of these providers and centralized and decentralized public sector systems, it hold their managers accountable. In reality, local is generally accepted that—if local governance systems government officials often face conflicting political or work well—it is better to have effective WSS providers institutional incentives: they may face political party that are owned and operated by local governments than pressure from higher levels to resist imposing higher to have a national water monopoly that is bureaucratic tariffs and may lack political or institutional incentives and nonresponsive. to strengthen local water departments or to monitor the performance of a WSS provider. This is especially Assigning part of the functional responsibility for true if local governments have few—if any—levers to water and sanitation to the local government level ensure more inclusive or effective performance of WSS does not necessarily mean that all aspects of WSS providers. On the other hand, sector line ministries at service delivery should be decided by local officials. the central government level—and their counterparts For instance, if tariff setting tends to be politicized in the development community—tend to pursue at the local level, the power to set or approve tariffs technical interventions or programs that limit the role could be assigned to a national-level regulator (with of local governments in WSS provision or that bypass the caveats indicated in chapter 6 on regulation). local governments, rather than pursuing reform of Likewise, the degree of local government involvement intergovernmental systems that would systematically in the development of WSS infrastructure can be strengthen local governments’ role in WSS provision.1 attenuated in proportion to the effectiveness of local government stewardship over sectoral services. While Upon closer inspection, local weaknesses are often in some countries, providing support to local WSS found to be proximate causes of poor WSS service services through sectoral infrastructure grants may be delivery rather than the root causes of the public appropriate (i.e., through local government accounts, sector’s failure to ensure adequate access to water and as in Indonesia), channeling funds directly to local sanitation. It is therefore important to interrogate why water utilities may be more appropriate in cases local politicians lack the incentives to promote better where local government accountability (and local local services; why both sector ministries as well as involvement in WSS provision) is weaker (e.g., as in elected local leaders often fail to invest in administrative the Philippines). capacity within the sector; and why intergovernmental fiscal systems often fail to shift resources where they Intergovernmental fiscal transfers are a major and are needed most. This leads back to the point raised permanent element in funding frontline services above, that the intergovernmental system itself is often as part of a sound multilevel governance system. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 17 These transfers can broadly be categorized into: government. Box 4.2 provides an example of how (i) unconditional transfers or equalization grants; funding has flowed in an intergovernmental context in (ii) conditional sector grants that leave a degree of South Africa. Given the political economy forces that discretion for subnational officials; and (iii) earmarked characterize WSS service provision, sectoral grants and conditional transfers that must be allocated to specific subsidies are often underused tools to promote inclusive programs of investments approved by a higher-level and effective WSS services in many countries. BOX 4.2 Funding Local Water and Sanitation Infrastructure and Provision: South Africa’s Experience In South Africa, the provision of water supply and sanitation (WSS) services is constitutionally assigned to the local or municipal government level. By law, the WSS service function is allocated either to the district municipality or to the local municipality for a given area. Municipalities have almost complete administrative authority and autonomy over local service delivery, including WSS services. Virtually all local governments provide WSS services directly themselves (in-house, through their own WSS departments), rather than through a municipal-owned utility company or contracted service providers. In line with the country’s collaborative, multilevel governance approach and its commitment to equal access to public services, South Africa’s intergovernmental fiscal system plays an important role in ensuring that local governments are in a financial position to provide municipal services to indigent households (defined as those who cannot afford to pay for such services through user fees). Like many countries, South Africa’s national government provides a series of conditional local infrastructure grants to provide funding for the development of municipal WSS infrastructure, including extending water and sewer connections to public housing developments. In addition, however, South Africa’s intergovernmental fiscal system is unique in that it explicitly recognizes that local governments are expected to provide services to all residents, including local residents who cannot afford to contribute to basic municipal services through either property taxes or service fees. As such, the Basic Services window of the country’s unconditional grant schemes—the Local Government Equitable Shares (LGES) grant—is computed as the amount of funding needed for each municipality to provide municipal trading services (including electricity, water, sanitation, and solid waste management) to all indigent households. Although the LGES is unconditional (and thus does not require local governments to use these resources for WSS services as a condition of the grant scheme), the mechanism provides local governments with the necessary resources to ensure basic service provision for all residents (and adequate operation and maintenance of WSS infrastructure), thereby preventing a common downward spiral that results from underfunding, reductions in operation and maintenance spending, declining service delivery, reduced tariff revenue, and further underfunding. Source: Based on World Bank 2017. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 18 NOTE 1. It is not unusual for sectoral ministries to limit in countries where local water providers are legally the negative impact of local politics on local WSS owned and managed by local governments. For services by limiting the power of local officials over instance, in line with the prevailing legal framework, local water providers; ensuring that WSS providers the Philippines Department of the Interior and have a high degree of operational autonomy; and by Local Government reminds local authorities with funneling resources directly to the WSS providers some regularity against interfering with local water (i.e., circumventing local government budgets), even district operations (DILG 2019). WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 19 Water and Sanitation Financing 5.  5.1 Analytical Foundations as well as the repayment of capital investments—are funded through a mixture of revenues from the so-called According to the UN-Water Global Analysis and “three Ts”: tariffs, taxes, and transfers (OECD 2018). Assessment of Sanitation and Drinking Water, However, the division of responsibilities for recurrent released in 2017, a radical increase in water and WSS services among different government levels on sanitation investments is required to finance SDG 6. one hand, and between general government entities Achieving SDG 6 for water and sanitation by 2030 and WSS providers on the other hand, complicate requires estimated investments of $114 billion per policy decisions regarding the appropriate level and year. The present value of the total investment needed composition of sectoral funding sources. is $1.7 trillion—excluding operation and maintenance (O&M) costs. Investments in water compete with other sectors for financiers’ attention, driven primarily by the 5.2 Lessons Learned from Practice attractiveness of the risk-return profile. This depends on two factors: (i) a stable revenue stream; and (ii) how 1. There is an urgent need to build the range of risks related to water investments are institutional capacity to plan and monitor shared between public and private actors. Mobilizing WSS funding and financing. commercial finance, in particular domestic sources, needs to be based on policy reforms of the water sector While the global investment needs for WSS have to promote efficiency gains, cost reduction, and cost been identified, the PIR contributions to the recovery, as well as improving the balance of tariffs and financing agenda are less well understood. The taxes as sources of finance (OECD 2018). United Nations estimates that about $114 billion a year needs to be mobilized to meet SDG 6. Over 80 Insufficient financing as well as inadequate financial percent of countries report insufficient financing to planning and management appear to be binding meet national WASH targets, let alone the higher level constraints to improving access to WSS services. Over of service that is the focus of SDG 6. The financing 80 percent of countries report insufficient financing to challenge is certainly considerable, but the experience meet national water supply, sanitation, and hygiene of various countries shows that it is more than simply (WASH) targets, let alone the higher level of service a question of mobilizing funds. Equally important is that are the focus of SDG 6. While over 70 percent of investing in the planning, execution, and monitoring countries use data when deciding how and where to capacities of institutions that need to generate and allocate funds, only one-third of them have financial execute these funds for infrastructure projects, O&M, plans that are defined, agreed, and consistently followed. and social and environmental priorities. The PIR framework recognizes that the way in which WSS is Whereas the financing requirements of WSS funded and financed is an important driver of effective investments receive considerable attention in the service delivery. Not only do funding and financing sector, the recurrent funding requirements of WSS arrangements constrain or empower actors to improve are often treated as an afterthought. Recurrent infrastructure and services, but these arrangements can funding requirements—including the cost of O&M, also provide incentives—either positive or negative— WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 20 for different institutional stakeholders to perform and tariff increases without corresponding service delivery. act in an efficient and accountable manner. Consequently, only 5 percent of service connections are metered. Against the backdrop of investment needs, it is often difficult to generate a complete picture of total WSS The link between the financial resilience of service revenues and expenditure. While information on some provision and water security is coming into focus. funding sources—such as central government spending A study of COVID-19 responses in Latin America on water infrastructure or support by IFIs—is relatively (World Bank and IDB 2020) found that water utilities easy to collect, other funding streams, including those with sound, accountable systems of financial and at the local level, are more elusive. It is also difficult operational management tend to be better equipped to develop a solid understanding of WSS costs, which to deal with challenges to resilience than those without have knock-on impacts on tariffs (Andres et al. 2021). such systems. In Colombia, service providers with sound In federal and other multitiered, devolved countries, financial information and management systems in the intersection of intergovernmental transfers, general place were more able to quantify existing and projected municipal revenues, and WSS-specific revenues further funding gaps, shift priorities, buy time, and offer short- exacerbates the challenge of dissecting water revenue term relief without fundamentally compromising their flows in a clear and transparent way. Nevertheless, long-term viability. While the pandemic showcased the there are some good practices and exceptions, such financial vulnerability of utilities to shocks, in some of as in South Africa, where municipalities account for the cases considered for this report, the lack of stable and water revenues and expenditures as part of their regular sufficient revenues has undermined efforts to invest in budget. In addition, the National Treasury has recently technical innovations that could buttress water services published service-level financial reports for the first from shocks. The Chennai case, for example, illustrates time on its website. While some challenges related to the importance of aligning long-term financial resilience financial transparency remain, these practices provide a with overall water security. After 20 years without any sound basis for additional reforms in the future. tariff revisions, the local government implemented a sharp increase without adequate communication or Water service providers often lack the capacity to planning. Consequently, the population switched to prepare business plans or execute investments. drilling boreholes, thereby contributing to the already Technical capacity for absorbing budget allocation alarming depletion of vulnerable groundwater sources. and executing a program of expenditure for WSS Strengthening the financial resilience of the sector by projects appears weak, particularly at the municipal ensuring adequate revenue for operations, maintenance, and local government level for all studied countries. and investments while ensuring the affordability of end In the case of Brazil, budget execution for WSS users is critical to protect water resources and prepare channeled through the social assistance, health, and for future shocks. environment government functions presents very weak execution rates, often at 70 percent of the allocated 2. Performance-based financing is an amounts. In basic sanitation, well under half of the emerging area that can be a game- funds committed were disbursed between 2015 changer for service provision. and 2019. Other common concerns related to WSS planning and budget formulation include the extent To maximize transparency and autonomy, it is to which sectoral policies, planning priorities, and important for countries to adopt formula-based sectoral spending are actually connected. In addition, transfer allocations. In particular, fiscal transfers stakeholder interviews have found that water users are should be allocated to close fiscal gaps and deliver not fully aware of the real cost of WSS services and have the services where needed. The allocation of fiscal affordability concerns. In Chennai, for example, there transfers often results in interjurisdictional fiscal has been considerable public resistance to metering and inequality. While the distribution of unconditional previous attempts have failed amid fears of unjustified grant resources is often formula based, the allocation WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 21 of conditional sector resources is less commonly done obligations, and policy decisions all provide incentives based on an allocation formula. This is especially true for utilities to prioritize good corporate governance and in countries where WSS infrastructure is severely cost recovery. For example, in Colombia, the regulator, underfunded. Central government budget allocation CRA, requires regulated entities to maintain certain decisions in the water sector tend to be made on a financial performance targets, such as cost efficiency discretionary basis—often driven by a mix of political as practices. Even in countries without a dedicated and technical considerations—instead of relying solely regulator, the use of performance contracts between the on evidence-based resource allocation rules. It is not state and the utility typically includes financial targets unusual for WSS funding to be mostly detached from which, if well enforced, could propel the utility toward the financial and operational performance of water creditworthiness. utilities, entailing no incentives for sustainable or improved institutional performance. This is the case The quality of the legal and regulatory framework in Uzbekistan, as reported by WSS stakeholders, who is a key determinant of private investment in WSS note that the worst-performing utilities tend to be the services. For example, a study commissioned by the priority for receiving state subsidies and benefitting Inter-American Development Bank to assess investor from IFI projects. Sometimes, the worst performers sentiment showed that regulatory uncertainty was by are granted flexibility from the Ministry of Finance to far the most significant barrier to increasing investment increase water tariffs to address the poor conditions of in sustainable infrastructure in Latin America and the their assets and operations. Caribbean, behind the quality of project pipelines and financial transaction issues (IDB 2020). The PIR The use of performance-based financing mechanisms assessments also bear out this finding. In Mozambique, is relatively rare in the water sector, although there private operators must overcome administrative is increasing interest in them. Box 5.1 provides an burdens, such as the complex taxation model. Complex overview of how these instruments work. A conditional procurement procedures and delays generated by grant is an example. It provides local governments investment obligations by public agencies can also be a with predictable formula-based capital (development) deterrent to private actors. funding when certain minimum conditions are met. In addition to providing local governments (that meet Reform-minded service providers have a higher certain minimum conditions) with greater access to likelihood of attracting financing. In the case of capital development resources, performance-based Brazil, the federal government’s new legal framework grants (PBGs) typically provide local governments with expanded the economy’s financing alternatives and a higher grant allocation (e.g., a 20 percent “performance promoted capital markets as a long-term source of bonus”) if a qualifying local government adheres to funds, especially for infrastructure projects. Law certain good governance practices or satisfies specific 12,431/2011 was introduced to lower the cost of institutional performance standards as determined by an accessing the capital market, and to strengthen bank annual performance assessment (typically conducted by competition so that the financing conditions of private a neutral third party).1 Performance incentives should banks could be more attractive. An International be considered and tailored to the baseline situation of Finance Corporation (IFC 2021) study noted that the service provider. these improvements in the legal framework have helped addressed long-standing binding constraints to 3. PIR is often the binding constraint, and public and private investment in Brazil’s water sector. opportunity, for increasing financial flows in the water sector. The trade-offs of each funding source (tariffs, taxes, and transfers) need to be well understood and Utility creditworthiness is a precondition for alternatives identified accordingly. In the case of accessing commercial finance and requires the Brazil, 37 percent of WSS investments over 2017–19 application of PIR principles. Legislation, regulatory came from public development banks, including WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 22 BOX 5.1 Performance-Based Water Supply and Sanitation Grants A performance-based grant (PBG) is a particular type of conditional grant, providing funds from the central government to regional or local governments for a specific development objective. Rather than merely providing regional or local governments (or service providers) with greater capital development resources, PBGs tie access to these resources to improvements in institutional governance or administration. PBGs are commonly used in governance operations (e.g., the Bangladesh Local Governance Support Project) and urban operations (e.g., the Kenya Urban Support Project). While less common in the water supply and sanitation (WSS) sector, conditional grants and PBG operations are increasingly used in support of decentralized WSS provision. For instance, under the Second Kerala Rural Water Supply and Sanitation Project in India, gram panchayats (rural local governments) will qualify for access to project funds on compliance with minimum eligibility criteria, including the availability of up-to-date accounts and acceptable audit reports. Similarly, under the PAMSIMAS water supply and sanitation project in Indonesia, grants are provided to districts and villages on the basis of water and sanitation Community Action Plans. These plans are required to meet certain local co-funding requirements and approval conditions related to sustainability and equity in order for local governments and their communities to be eligible to receive grant funding. In more advanced PBGs, it is not unusual for minimum conditions and performance standards to be determined as part of a formal annual performance assessment process (typically conducted by a neutral third party) to assess the institutional performance on the basis of which PBGs are allocated or released. For instance, under Egypt’s Sustainable Rural Sanitation Services Program-for-Results, WSS companies must meet a number of institutional performance conditions (including in the areas of operations, financial management, institutional development, and citizen engagement) in order to receive performance-based capital grants from the Ministry of Housing, Utilities and Urban Communities. By tying access to funding to the attainment of minimum conditions and performance standards, the PBG construct leverages the capital funding provided to the local level by not only producing the direct benefit of the infrastructure investment itself, but by using the capital development funds as a carrot for local political buy-in and/or local institutional strengthening. At the same time, the sectoral funding scheme could be used as a carrot for the central line ministry to pursue (or accept) certain institutional reforms, primary among them acceptance of a (non-earmarked) conditional sector grant modality itself. The experience in the application of PBGs so far has been mixed, but mostly positive. Among the lessons learned is the need to use the grant schemes to incentivize institutional reforms as well as short-term improvements in service delivery results to ensure more sustainable improvements in service delivery outcomes. Another lesson learned is that PBG schemes should not impose excessively detailed performance standards (ostensibly to incentivize adherence to program requirements), as this merely imitates the excessive top-down controls associated with the centralized projects or earmarked grant schemes that formula-based PBGs are supposed to replace. A balance between rigorous standards and flexibility for beneficiary entities in meeting them seems like the right approach. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 23 Caixa Econômica Federal and the National Bank The role of private operators, service contractors, and for Economic and Social Development (BNDES). other arrangements should be explored in addition to However, private financing is limited or nonexistent financing as they can generate significant operational in all studied countries. In Mozambique, the WSS and managerial efficiencies, which can be impactful for sector is heavily reliant on grants and concessional the achievement of WSS goals. loans from development partners. This has contributed to increased unpredictability of funding and inhibited budget planning efforts, leading to increased risk and NOTE uncertainty about sector programs. Similarly, relying on tariff revenues alone can be disastrous where there 1. Results-based grants form a general category of is little appetite or means of increasing tariffs for end results-based finance (RBF) mechanisms. While users. PBGs could be considered a specific type of RBF scheme, a typical RBF scheme provides funding Partnerships with the private sector can be a based on specific service delivery outcomes or results. powerful means of improving service performance For instance, in the WSS sector, a sector program and efficiency, provided that the enabling PIR may provide a local government or a WSS provider framework is in place. While the results are mixed in an output-based grant per household based on the Chennai (India), Tashkent (Uzbekistan), and Maputo number of households connected to piped water in (Mozambique), the experience in the Minas Gerais and the previous year. RBF schemes—unless carefully Ceará states of Brazil show that the private sector can designed as a permanent part of the grant system— be more agile in the execution of contracts compared risk doing little to transform public sector systems to the public sector. While the public sector executed in a sustainable manner. By contrast, PBGs tend only 16 percent of contracts signed six years back, to be designed as an integral part of the country’s private entities achieved 100 percent completion of grant system and aim to incentivize the adoption of contracts within the same period (World Bank 2021d). improved institutional/governance practices. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 24 6. Water and Sanitation Regulation 6.1 Analytical Foundations financial sustainability; improving service provider performance; increasing accountability, transparency, The realm of regulation should be explored within and consumer voice; and pro-poor regulation (World specific country contexts. In low- and middle-income Bank 2018). countries (LMICs), legal and administrative institutions are less developed, with weaker enforcement, transparency, and accountability—and the presence 6.2 Lessons Learned from Practice of local history, customs, and traditions can play a significant role in determining reform outcomes. Based 1. While there is strong interest in the role on this context, the objectives of regulation in LMICs of regulators, it is just as important to may be different. For example, increasing access, understand how regulatory functions are especially to peri-urban and rural areas, and improving mapped across various entities. quality and efficiency of services, are common objectives (World Bank 2018). Country experiences demonstrate an increasing recognition of the value of WSS regulation, with LMICs have predominantly imported or designed strong interest to establish sector regulators. new WSS regulations in the form of a dedicated Stakeholder consultations in Bosnia and Herzegovina, sector regulatory agency. However, the most effective Uzbekistan, and Chennai (India) reveal growing regulatory forms in these countries have been varied, and demand to establish a dedicated regulator to advance depend on a multitude of factors, including the country’s sector policy and promote institutional reform. In legal system, sector policies, governance structure, Mozambique, the new decentralization framework the extent of decentralization, and whether national enacted in 2019–20 was matched with legal reforms state-owned enterprises already exist. The literature on to the regulatory framework. With the redesignation regulation discusses measures that can reduce political of CRA (the Water Supply Regulatory Council of interference such as investing in relationships and Mozambique) as Autoridade Reguladora de Agua forming allies within and outside the sector, anticipating (AURA) (Decree 8/2019), the regulator is now formally political pressures, identifying political costs and benefits given greater authority, more strongly defining its role driving interference from politicians, and taking steps in sanitation as well as water supply; this includes to diminish losses (Jamieson and Castaneda 2017). authority to require and collect performance data, and The Organisation for Economic Co-operation and to impose fines for noncompliance (WSUP and World Development (OECD 2014) has proposed principles Bank 2021). In Nigeria, performance-based contracts for the good governance of regulators. between the state government and state water agencies (entities that provide water services in Nigeria, under Regulators can use numerous tools to strengthen the authority of state governments) are currently being and incentivize WSS service providers to improve implemented (World Bank 2021c). While there is no sectoral services and achieve sector objectives. formal regulator, this form of regulation is an approach Key regulatory functions and their associated tools adopted by many countries where public water utilities and approaches found in LMICs include improving are under the supervision of state or federal authorities. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 25 The sharing of regulation functions across different WSS regulation can be effective in promoting entities is even more pronounced in federal inclusive, affordable WSS services for lower-income countries. In Brazil, for example, enforcing a common households. Box 6.1 provides an example from Kenya, regulatory framework across 26 states requires close where the regulator is using its data reporting and intergovernmental coordination between the federal, collection functions to incentivize utilities to provide state, and municipal regulators. Although tariffs are set water services to the poor. by local governments in the country, federal and state- level entities can play an important role in defending the 2. Strengthening governance interests of operators to achieve regulatory objectives. arrangements for regulation as well as the For example, the main operator in the state of Ceará, technical capacity of regulatory entities is Companhia de Água e Esgoto do Ceará (CAGECE), crucial for effective regulation. requested a 15 percent tariff increase to cover O&M and investment needs—but the state public services The accountability relationship between policy regulation agency, ARCE, ruled against the tariff makers and the regulator needs to be strengthened. increase. A combination of regulatory models can offer Typically, regulators are held accountable by a potentially more effective approach to meet regulatory government, who exercise oversight over regulatory objectives. entities, as well as legislatures such as Parliament in some cases. In practical terms, as one regulator There is an emerging move toward a more noted, mitigating the risk of political interference collaborative relationship between regulators requires a clear legal mandate spelled out in legislation and utilities. As demonstrated by the experience that delegates authority to the regulator to carry out of Kenya’s Water Services Regulatory Board fundamental functions, such as establishing prices and (WASREB), establishing relationships, building service standards, enforcing decisions, determining partnerships with politicians, and understanding whether regulations are meeting policy goals, and political values and priorities can help regulators adjusting  rules, procedures, and decisions as needed balance political interests and deliver political value (Gakubia 2021). While the regulator cannot “regulate” without compromising integrity and risking political the government, there could be ways to enhance interference. dialogue and common understanding, as described in the following subsection. In Chennai, for instance, Regulators cannot be viewed in isolation. there is demand for introducing independent members Regulatory independence and autonomy will on the governing boards of water utilities, as well as always be exercised within a much broader performance matrices across service and functional governance landscape that includes policy and areas and public information disclosure policies to hold politics. Managing undue influence on regulation decision-makers accountable. does not necessarily require absolute independence, but rather good governance principles like clearly While many countries have some data collection defined roles and responsibilities, transparency, and and monitoring mechanisms in place, a common accountability. It is important to work with the grain, constraint is lack of capacity to deploy them building on the regulatory functions and overall fully. Data and information systems are crucial for governance framework as they are, rather than solely regulators to carry out their mandated functions. the regarding the lack of a dedicated regulator or weak Regulatory Agency for Water Supply and Sewage independence of the existing regulator as a stumbling Services of the State of Minas Gerais (ARSAE), leads block to good regulation. More deliberate effort is the “Projeto Sunshine” initiative, which aims to needed to develop a cadre of regulatory professionals evaluate the performance of WSS service providers in in the WSS sector. Stakeholders agree that this municipalities on eight key performance indicators requires robust and competitive recruitment processes annually. However, despite the well-intentioned design, as opposed to political appointments and improved suboptimal institutional capacity and lack of effective compensation to attract talent. tools for data collection and validation have impaired WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 26 BOX 6.1 Kenya—WASREB’s Pro-Poor Key Performance Indicators The regulatory framework of Kenya’s Water Services Regulatory Board (WASREB) includes a pro- poor metric, often referred to as “the 10th KPI,” which it has collected and published for three years, for an increasing number of utilities now including all of Kenya’s “very large” and “large” utilities. WASREB’s most recent utility performance report states that: “The regulator, has continued to assess utility efforts with respect to improving services in [...] marginalized areas. Ensuing from the development of the guideline, the tool has been further refined to put more emphasis to impact rather than process. The following are the four dimensions assessed with their corresponding weights: • Governance (30%): The sub-indicator has three components namely: adoption of a pro-poor policy; establishment of a pro-poor unit; board representation/ constitution. • Access and service levels (30%): Level of access (water); level of access (sanitation); growth in access over time; service levels with focus on rationing programmes • Planning (20%): Availability of low income areas (LIAs) specific plans (development and implementation); mapping (baseline and regular updating); pro-poor business model • Financing (20%): LIA budget drawn from the plan; resource provision (disbursements) vis a vis budget; equitable allocation of financing For the reporting period 2018/19 a total of 52 utilities [of a total of 82] submitted complete data on their pro-poor performance compared to 36 utilities in the previous period, a clear indication that utilities are increasingly prioritizing service inequalities within their jurisdictions.” Source: WSUP and World Bank 2021. its full effectiveness. In Bosnia and Herzegovina, public of difficult access or management, including areas in service agreements between local government and which security conditions prevent personnel from utilities define performance monitoring responsibilities. carrying out micrometer readings, areas that do not However, challenges in terms of lack of capacity and have access to operating vehicles, and areas that do not decentralization are cited by stakeholders. Similarly, in have basic habitability conditions. These regulatory Chennai (India), stakeholders cite the lack of robust tools allow operators in those areas to integrate performance monitoring mechanisms and insufficient progressively to the system, providing exceptions to data as major impediments to effective regulation. Even supply and coverage targets, measurement, and the long-established regulators with substantial resources, overall implementation of the tariff methodology such as Ofwat and The Italian Regulatory Authority billing services based on estimated values. According for Energy, Networks and Environment, note that data to government figures, the program Agua al Barrio collection and monitoring can be problematic. has been implemented in 13 cities, benefiting about 171,000 inhabitants (including providing services Nevertheless, there are good practices to start to 61,204 people that did not have access) living in tackling data challenges within the field of informal settlements in the cities of Bello, Itagüí, regulation. In Colombia, one way to address data Medellín, and Pasto (Ministry of Housing, City and collection and management challenges is through Territory 2022). Chapter 7 explores other ways of “differential schemes” applicable in rural areas, areas tackling data constraints within the WSS sector. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 27 3. Regulators are gradually shifting from delivery through a recently approved tariff policy and regulating monopolies toward regulation setting process, directly linked to midterm service of economic, social, environmental, and performance improvement plans, which facilitate health externalities. investments in operational efficiency. These regulatory incentives were introduced to allow utilities to capture Tariff setting remains a core regulatory function, and retain efficiency gains to improve energy efficiency but country experiences reveal new objectives for and reduce energy costs through an energy savings economic regulation. For example, the evolution of capture model to overcome challenges due to the lack tariff-setting methodologies in Colombia’s CRA has of adequate and sustainable financing (Limaye and led toward incentivizing strengthened resilience to the Welsien 2019). impacts of climate change through its upcoming tariff cycle (see box 6.2). Regulation can be an important tool for enhancing water security between water resources and water Some countries are making progress toward services. Brazil offers good lessons in this regard. In incentivizing green service delivery. In Uzbekistan, the State of Ceara (Brazil), due to recurring drought the Ministry of Housing and Communal Services and events, a contingency tariff was implemented to Ministry of Finance are incentivizing green service promote water demand management in Fortaleza and BOX 6.2 The Positive Impact of Regulation on WSS Outcomes The tariff methodologies of the Water and Sanitation Regulatory Commission (CRA) of Colombia evolved organically over 28 years (three frameworks since 1995) from encouraging cost recovery toward encouraging efficiency and regulating externalities (e.g., investment planning incorporating environmental considerations). This process has not been linear—while each regulatory cycle built on the previous one, developmental dissimilarities in the market demanded continuous efforts to achieve each cycle’s objectives simultaneously. The development of each regulatory cycle was guided by sector policies, sector evaluations, and public participation. The first cycle (1994–2006) aimed to build the financial standing of water and sanitation providers through cost-recovery mechanisms, overcoming artificially low tariffs, and improving coverage indexes and service quality standards. The second cycle (2006–16) incentivized efficiency gains by incorporating incentives to encourage economic efficiency and sustainability through incorporation of the cost of environmental taxes within the methodology and better alignment with municipal urban planning. The third cycle (2016–present) moved toward an operators’ output approach and reinforced environmental protection by adding the costs related to the protection of basins and water sources, regionalization, and green growth (incorporating differential schemes and environmental investments) to the methodology. Reforms have been successful, allowing continuous improvement of services during the past decades. However, rapid population growth (+12.5 percent from 2005 to 2018, according to Colombia’s National Administrative Department of Statistics, DANE) and increasing climate-change-related risks will continue to challenge their effectiveness. Source: World Bank 2021d. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 28 FIGURE 6.1 Evolution of Water and Sanitation Regulatory Reforms in Colombia Implement risk based Maintain and Achieve Implement Design Increased efficiency management, consolidate the sustainable integrated incentives and productivity in adaptation to climate achievements develepment water resources to promote use of water, energy change and COVID-19 made goal-SDG 6 management regionalization and materials lessons learned 2021 2016 Fourth stage In design 2006 Third stage Results-oriented management 1994 Second stage Promote administrative and operational economic efficiency First stage Guarantee financial sufficiency (recover the cost of service provision) Source: Polania 2022. 17 other municipalities in the metropolitan region. sustainability through appropriate cost-recovery and The revenues are earmarked for investments in water tariff setting to a much more sophisticated and impactful resource augmentation and are allocated to a special role in overall WSS delivery outcomes (see figure 6.1). account managed by the regulator. In September 2019, The shifts in CRA’s regulatory model have been driven revenues from the contingency tariff amounted to by both internal and external factors—including the R$290 million ($52 million). deepening of technical competence, increases in staff and resources, and responses to emerging challenges Long-established WSS regulators provide insights and opportunities such as climate change and service into how regulation can adapt to evolving contexts delivery improvements (World Bank 2021d). Key over time. Countries seeking to establish WSS lessons learnt from these experiences include the regulators cannot benefit from hindsight, but they can need to phase implementation of regulation and look to the experiences of regulators that have been align regulatory standards with the level of maturity active in the sector for a long time. Colombia offers of service providers. Regulators need to assess their a good illustration of how regulation—and the work own functions, tools, and resources; monitor the WSS of the regulator, CRA—has evolved from a limited landscape; and take the necessary steps to ensure both focus of ensuring that WSS providers achieve financial are aligned. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 29 7. Resilience of Water and Sanitation Services 7.1 Analytical Foundations as well as the institutional modalities to respond to shocks and stresses in an effective way. Moreover, the One of the biggest risks facing the international PIR linkages to resilience stem from the opportunities community—and especially the developing world— that crises present. Previous studies have found that is water insecurity. Between 2010 and 2019, over a catalytic event—such as a cholera outbreak, a water 1.3 billion people worldwide experienced extreme shortage, or an upheaval in the broader political weather events, with floods and droughts accounting environment—can create a space for reform (World for the greatest human impacts, well beyond the Bank 2016). It is therefore important to understand physical damage. Such extreme weather events have the levers available for building resilience through an a negative impact on water security through service enlarged PIR lens. disruptions, damage to infrastructure, and declining rainfall and water quality. The World Bank’s recent Water in Circular Economy and Resilience (WICER) 7.2 Lessons Learned from Practice report (Delgado et al. 2021) shows how climate change exacerbates preexisting water stresses, with measurable 1. Understanding risks and planning effects on urban water availability, the water cycle, for stresses and shocks are crucial for distribution of water, and quality of water. The report maintaining momentum on reforms. shows the scope for the water sector in reducing greenhouse gas emissions through energy efficiency Promoting more resilient institutions and systems measures, self-generation of renewable energy, and reuse requires the application of core PIR principles as of wastewater. Significantly, this is not only important described below. Box 7.1 provides some real-world from an environmental and climate point of view, but examples of the application of these principles for also conducive to achieving financial sustainability, and enhancing water security. contingent on improved governance. A regular assessment of risks is a valuable but Resilience is defined as the ability of individuals, underutilized element of managing WSS services. communities, institutions, businesses, and systems A seminal 2012 study on understanding water risks to survive, adapt, and thrive in the face of stress and noted that water planners and engineers are concerned shocks and to transform when conditions require it with uncertainties associated with extreme events like (Delgado et al. 2021). Recent analyses by the World natural disasters (UNESCO 2012). This concern is Bank and others identify three features of resilient certainly still valid, but the PIR assessments highlight systems: persistence, adaptability, and transformability that the risks facing the water sector have become more (Boltz et al. 2019). These characteristics are closely varied, ranging from natural disasters like floods and connected to PIR because they depend on both the droughts to public health crises (COVID-19, Ebola, planning and guidance set by policy and regulation, and cholera) and financial pressures. While there is a WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 30 BOX 7.1 PIR Lessons from Wastewater Reuse to Enhance Water Security • Effective national-level policy requires being specific about the problem that policy addresses. For example, Jordan’s 2016 Water Substitution and Reuse Policy clearly states a commitment to wastewater reuse. Such clarity reduces the risk of “isomorphic mimicry,” that is, that governments mimic others’ successes uncritically, without attention to local conditions. • Strong political leadership can advance wastewater reuse. The governor of Florida (the United States) issued an Executive Order in 2019 to ensure environmental and water resource protection and regulation, showing commitment that mobilized the administration. • Public outreach and awareness raising, and pilot projects could address public concerns about wastewater treatment and reuse. Japan’s treatment of mining wastewater, which ends up in the city’s municipal water supply, has helped confirm the integrity and reliability of wastewater treatment plants. • Strong regulatory frameworks can incentivize wastewater reuse and other resilience measures and reinforce institutional capacity. The United Kingdom’s code of practice for sewage sludge in agriculture provides a practical model for safe use of sewage sludge in agriculture. • Explicit disaster response plans, such as Chile’s Superintendency of Sanitary Services (SISS), require utilities to formulate “response plans” to any disaster risk. Before being sent to the SISS, these response plans are discussed with local governments, social actors, and other members of the state with competencies in disaster response to agree on the type of measures to be implemented to ensure resilience in force majeure situations. The plans that the utilities must formulate aim to address situations or events that exceed their installed capacities and negatively impact the quality and continuity of services. In addition to requiring the plans, SISS developed guidelines in 2012 regarding the preventive and response actions that utilities should adopt in emergency and disaster situations. This instrument has made an important contribution to the incorporation of disaster risk management as one of the focuses of development in the water and sanitation sector in Chile. • Institutional arrangements could be vital in creating incentives for change and performance. Australia’s National Water Initiative encapsulates a shared commitment by all state governments to increase efficiency of water use, based on sound pricing principles for water supply and recycled water, for application by all state governments. Policy development typically lies with national governments, but functions like planning, investment, implementation, and coordination can be delegated or shared between levels of government. • Cross-sector collaboration could prove pivotal to optimize impact. River basin councils in Mexico, for example, actively help coordinate government institutions, water users, and social organizations in shaping and executing programs to improve regional water management and preserve river basin resources. rich body of quantitative work on some of the threats Surveys of top water officials provide helpful to water security, such as climate change and water insights about how they perceive the main risks pollution, systematic assessments to gauge stakeholders’ and challenges affecting water service provision. perception of the risks that can undermine the quality The introduction highlighted the findings of one such and sustainability of service delivery are not yet report. Importantly, risk assessments and surveys can common. be valuable tools for policy dialogue and can help WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 31 identify levers for politically acceptable reforms. Some outcomes rather than dogmatic adherence to prefixed countries are starting to adopt this good practice at the institutional models and policy priorities. national level. In South Africa, the government has officially taken some steps to review water risks and COVID-19 has reinforced the importance of their potential impact on the economy.1 A poll of risks institutional agility to deal with shocks. A recent was undertaken with water managers in South Africa’s study has found that WSS service providers with viable biggest urban areas. A water risk rating was assigned financial planning and institutional systems in place to each of the country’s eight metropolitan areas, with to plan for and perform their core functions are more a “high” water security risk signifying that demand able to mitigate short-term financial shocks (World could exceed supply at a 98 percent level of assurance Bank and IDB 2020). Integrated, green, resilient, and (currently, or within five years). These efforts in South inclusive development strategies are needed to repair the Africa, spurred in part by its water-scarce context and structural damage caused by COVID-19 and accelerate recent shocks such as the so-called “Day Zero” threat climate change mitigation and adaption efforts while in Cape Town (box 7.2), offer worthwhile lessons on restoring momentum on poverty reduction and shared how technical assessments and risk ratings could feed prosperity. Institutions must be able to adapt to change, into the policy dialogue process, facilitating better facilitate dialogue among different interests, ensure common understanding of risks and possible mitigation accountability for goals and outcomes, and mitigate measures. pressure.3 2. The alignment among policies, Achieving universal access to water and sanitation institutions, and regulations determines will not be possible without integrating policies and the sustainability of reforms to a great institutions outside the water sector. Mechanisms are extent. needed for collaboration with other sectors, particularly with those related to water resources, such as agriculture, PIR can be a means of ensuring greater integration energy, and environment, but also in frontline services between water resources management and WSS like health and urban planning, among others. For services. Clear institutional and statutory mandates example, bulk water and reuse cannot be addressed for water institutions reduce uncertainty, enhance exclusively in the scope of WSS provision. Some of this accountability, and open the scope for citizens’ integration can be facilitated through well-designed participation in planning and strategy development intergovernmental mechanisms. The Council of for water resilience. In addition to water resources Governors in Kenya, for example, provides a platform management and WSS, institutional arrangements are for discussion on all developmental topics among the needed across transboundary, international entities, county governors. It has a secretariat that organizes national and subnational governments, civil society conferences of the governors and showcases innovations groups, and community organizations, and key and good practices from across different sectors, among sectors such as agriculture, industry, trade, and energy. other tasks.4 In South Africa, the National Treasury However, good examples of these integrative, whole-of- initiated a Cities Support Program (CSP) in 2011,5 water-sector institutional models are rare,2 suggesting which is billed as a “vehicle for collaboration and that more reflection is needed on ways of formalizing integration” across South Africa’s major metropolises. collaboration among water and nonwater actors on Among other activities, the CSP supports cities in cross-cutting issues. As chapter 2 noted, policy dialogue emergency preparedness and response, development can create opportunities for coalition building across planning, and promotes learning and knowledge various actors in the water sector. Because resilience exchanges among cities on cross-cutting topics like is a transversal outcome, pragmatism is needed in climate resilience. The CSP is a support program, setting and adopting goals, and deliberative processes and the institutional reforms that it advances will be of dialogue, collaboration, and decision-making must telling for longer-term sustainability (World Bank and help shape movement toward ”best-fit” contextual CSP 2022).6 As with the example from Kenya, the key WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 32 to the success of this approach lies in the provision concerted collaborative leadership to enhance the of an institutional anchor and financial and technical resilience of WSS services during periods of shock and resources to support it. crisis (box 7.2). While emergency measures can help plug gaps 3. Mechanisms are needed to bridge in service delivery, they can create a false sense the gaps between policy setting and of security. While several governments introduced implementation. urgent measures during the COVID-19 pandemic to ensure the continuity of water services, they also There are examples of central delivery units effectively revealed an inconvenient fact—that having sound monitoring progress toward policy goals. Examples institutions in place during normal business reduces include the Performance Management and Delivery the need for unsustainable, temporary measures to Unit (PEMANDU) in Malaysia, described as one of the resolve systemic weaknesses. Moreover, in a study largest and most prominent in the world, and established of countries in Latin America, utilities that had in 2009 (World Bank 2017). One of the factors attributed sound financial systems in place were better able to to PEMANDU’s success is the development of “the Lab,” withstand the shock brought about by the pandemic. a consultative process in which an extensive stakeholder In Chennai, which has been impacted by recurrent engagement workshop is regularly held for a period of droughts, floods, and pandemics, the dependence on six to nine weeks, bringing together stakeholders to private tankers in emergency situations has highlighted focus on a priority area and design solutions to identified systemic weaknesses in water supply. When crises hit, policy challenges. Another success factor has been its there have been arbitrary increases in prices, thus institutional model. PEMANDU is a special purpose exacerbating rather than alleviating an already difficult vehicle in the prime minister’s office and is not limited situation. The SDG 6 call for “universal,” “equitable,” to hiring only civil servants and does not follow the civil and “adequate” access requires a stronger focus on servant pay structure. Consequently, it has been able long-term planning and collective actions of diverse to attract staff from the private sector and to develop a and interdependent stakeholders—moving from a results-oriented corporate culture. contingency approach toward a water security and safety one (as noted in IWA 2018).  In South Africa, Operation Vulindlela8 is in the same vein as Malaysia’s PEMANDU. It is a governmentwide Institutional resilience depends as much on systems approach driven by the Presidency and the National as on leadership, but it is more effective if it is Treasury to monitor the progress of ministries, collaborative in nature. The role of individual leaders departments, and entities charged with implementing is very important during crisis events given their reforms and policy commitments. Importantly, a dynamic nature and complexity (e.g., an indebted special unit was established within the Presidency; it utility confronting a public health crisis), and the is staffed with a dedicated team and provides technical need for quick decision-making. Research on public support to implementing departments to overcome leadership suggests that the most effective leaders play any implementation obstacles. Other examples of a limited set of no more than three roles—namely central delivery units can be found in India, the United authorizing, convening, and motivating others to Kingdom, and Tanzania, to name a few. Some general oversee crisis response.7 Because some actors can principles of their effectiveness include: “making capitalize on crises to extract maximum gains for their sure there is strong, highly visible political backing; own limited interests, collaborative leadership can committing to a tightly defined remit; anchoring the be a way to identify and manage different interests. unit close to a political sponsor; adopting the right hiring Ongoing and institutionalized platforms for policy strategy, organizational structure and leadership model; dialogue can be useful in these cases. South Africa’s ensuring cross-government ownership of the delivery Western Cape Region and Bosnia and Herzegovina’s unit’s results agenda; and putting routines in place to Sava and Drina corridors have been benefitting from review effectiveness and refresh operations” (Hudson, WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 33 BOX 7.2 Collaborative Leadership for Improving Resilience: The Cape Town and Sava Experiences The 2015–18 drought in South Africa’s Western Cape Region led to severe water restrictions in Cape Town, some 30,000 job losses, and economic losses in agriculture estimated at almost $400 million. The bulk water Western Cape Water Supply System was caught in the midst of these pressures and came under severe stress. Under the World Bank and National Treasury supported City Support Program, a hydroeconomic analysis was undertaken to help align the stakeholders toward a resiliency plan for the shared water system. Participants included the City of Cape Town, the National Water Department, and private sector, agricultural, and other urban users. The analysis seeks to simulate the economic impacts of water resources management decisions. To mediate tensions between competing stakeholders, the process has placed emphasis on developing stakeholder economic narratives in a participatory mode that capture the value of water and lived experiences of water users beyond macroeconomic indicators, facilitating dialogue toward collective solutions to the current sense of uncertain futures. This is important since most of the opportunities for resilience require political and funding support by the diverse institutions at different levels of government. Early indications are that stakeholders are willing to make trade-offs and find collective understanding and solutions for the water resources and economic system. In Bosnia and Herzegovina, limited cooperation among the riparian countries along the Sava and Drina Rivers have constrained economic development over many years. The effects were powerfully exposed during dry spells and mass flooding in 2010–14, exacerbated by poorly maintained and outdated hydraulic infrastructures. A report commissioned under a World Bank operation projected the Sava basin generating over 20 percent of employment in Serbia, 35.3  percent employment in Croatia, and 54.4 percent employment in Slovenia, and highlighted the vast potential of the Drina corridor for hydropower generation, food production, and tourism (World Bank, 2015). This made a strong case for increasing cooperation between riparian countries on water management issues to support economic growth. The report led to the adoption of the $332 million World Bank– financed Sava and Drina Rivers Corridors Integrated Development Program in 2020. The program aims to improve management and development of the Sava and Drina River Corridors, financing construction and rehabilitation of dykes, improving watershed management, and promoting long- term and climate-smart investments among the four riparians (Croatia, Serbia, Montenegro, and Bosnia and Herzegovina). While the program is still in the early stage of implementation, it points to a new model of promoting long-term sustainability of water resources and water service by leveraging financing, infrastructure, and technical studies. Hunter, and Peckham 2019). Other PIR tools such as OECD countries still face challenges with collecting regulatory impact assessments can help track regulations and analyzing data, particularly on economic, financial, that have been introduced to gauge their effectiveness. and institutional dimensions of water management (OECD 2016). A customized approach that tailors “Working with the grain” is a reasonable approach data and reporting requirements to the local context— to tackling the difficult challenge of WSS data. also known as “working with the grain”—can be a Almost all countries report data challenges regardless practical and effective way of dealing with data gaps. of their level of development. For instance, many The use of differentiated targets and indicators for WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 34 water and sanitation practiced in Colombia is a good sustainability. The optimism and momentum that example (see chapter 6). It is also important to build characterize the launch of some reform initiatives on what works well. For instance, the PIR analysis can sometimes fizzle out over time, as the realities of showed that South Africa does not suffer from a lack implementation set in and the needed modalities— of data in the water sector per se but rather from a funding, personnel, political leadership, and data dearth of time series data on performance. Moreover, a collection, for example—often fall short of the needs. survey of OECD countries found that they had made While some of these factors, such as political support considerable progress in terms of water quality and for reforms, can be difficult to control or predict, water quantity data, as opposed to economic, financial, others—such as learning and monitoring mechanisms, and institutional dimensions of water management can be instituted in a purely technical manner. The (OECD 2016). Greater precision about what kind of use of regulatory review cycles, such as in Colombia, data are available and where the biggest needs for data for example, is a case in point. On the policy and improvement lie is essential. institutional front, the case of Benin (box  7.3) offers another example of how long-term reforms in the Reform initiatives can sometimes face setbacks, but rural water sector were adjusted after an initial good evaluation and redress systems can ensure implementation phase proved untenable. BOX 7.3 Adjusting Rural WSS Institutional Reforms in Benin In 2007, the government of Benin introduced measures to facilitate the delegation of water services by municipalities to private operators, under the belief that professional water operators would be able to deliver better services than municipalities which suffered from weak capacity. However, this ostensibly noble initiative yielded mixed results with only half of water systems delegated to private operators after the first 10 years of implementation. The government and its development partners, in evaluating the causes, realized that weak capacity of municipal authorities to manage the process of contracting and delegating the water services to private operators was one of the key bottlenecks to making the delegation of services work. Moreover, the initial expectation that private operators would have the requisite financial and managerial resources to provide effective services proved to be only partially true. In reality, local operators did not have the business know-how or track record to be able to successfully bid on contracts to seek financing from commercial banks. In response to these challenges, the government and its development partners evaluated the initial experience with the new service delivery approach and concluded that without addressing the financial, human resources, and technical capacity gaps on both the municipality and private operator sides, the service delivery model would continue to falter. The government therefore undertook a second phase of reforms, with the support of the World Bank and other development partners, in 2017. It started by creating the National Agency for Drinking Water Supply in Rural Areas (ANAEPRM, after its French acronym) based on a thorough assessment of human resources needs for rural water supply. ANAEPRM is an executive agency under the authority of the Presidency and is responsible for implementing all rural water infrastructure projects and supervising small water operators on behalf of the state and the municipalities. While it is still in its early days, ANAEPRM has box continues next page WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 35 BOX 7.3 continued to date been effectively designing and supervising the bidding process of more than 100 rural water supply systems, which shows its capacity to implement investment programs. A second axis of the 2017 reforms aimed at improving the capacity of private operators. It developed a well-structured technical assistance program for private water operators, including offering training to distribution network operators and rural water technicians. Simultaneously, small operator contractors were regrouped into three larger regional affermage contracts, with support from international financial institutions to develop the requisite bidding documents. The contracts will be for 10 years and will focus on rehabilitation and subsequent operation of rural water systems. The bidding process was faster. The key lessons from the Benin experience are: (i) PIR interventions can sometimes fall short of expected results; (ii) it is important to course correct and make adjustments as needed to keep the focus on good service outcomes; and (iii) candor in identifying root causes of suboptimal results, as well as strong buy-in of government leaders, is crucial so that reforms ultimately improve services. Source: Global Water Security and Sanitation Partnership 2020. NOTES 4. Council of Governors of Kenya: https://www.cog​ .go.ke/. 1. This review was commissioned by the National 5. Cities Support Program: https://csp.treasury.gov.za​ Treasury in 2017 (see Eberhard 2018). /csp/home. 2. An example of such a model is the National Water 6. The recently reported PIR assessment for South Authority Board of Israel, which was established in Africa, a joint CSP–World Bank effort, identifies key 2007 as a means of gathering all water stakeholders— issues and intervention points in the institutional including from outside the water sector—to sit at a frameworks and practices for the country’s common decision-making “table.” metropolitan municipalities. 3. Relevant analyses and collaborative events on 7. See, for example, work by Matt Andrews of the these subjects include Hodgson (2004, 2006, 2016); Harvard Kennedy School (Andrews 2020). Salman and Daniel (2008); and Stephenson et al. 8. https://www.stateofthenation.gov.za/operation​ (2007). -vulindlela. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 36 8. Conclusion Developing PIR as the foundation for all WSS overarching messages through the six clusters of the interventions, addressing the root causes of endemic PIR framework. In this section, an action plan is WSS challenges, and promoting resilience over the proposed around three main axes that should help long term—these are the challenges and opportunities leverage these opportunities. Table 8.1 provides the in achieving the WSS SDGs. This report provides proposed actions, some examples of good practices, and evidence and illustrations to bolster these three resources for additional reading. TABLE 8.1 Overview of Key Messages by Chapter Policy • It is important to understand the historical legacies and political context of water supply and sanitation (WSS) services. • Policy dialogue is not only important for integrity purposes, but more transparent and inclusive policies and legislation increase the probability of success. • Water laws can provide powerful incentives for the adoption of new behaviors, models, or approaches to service delivery. Institutions • The traditional understanding of water institutions needs to be expanded to reflect all service delivery models and actors. • The role of individuals in designing, implementing, and sustaining reforms is hard to understand but crucial for policies, institutions, and regulation (PIR) to be successful. • Strong water institutions can have a positive impact on service delivery outcomes, but this link needs to be further explored. WSS in an • Multilevel aspects of water sector governance are an important part of the enabling intergovernmental environment for effective WSS service delivery. context • Problems related to weak local capacity for WSS service provision cannot be resolved by technical solutions alone. • Recognizing the unique features of WSS service—and aligning them with the prevailing intergovernmental framework—is often the key to successful service delivery outcomes. Financing • There is an urgent need to build institutional capacity to plan and monitor WSS funding and financing. • Performance-based financing is an emerging area that can be a game changer for service provision. • PIR is often the binding constraint and opportunity for increasing financial flows in the water sector. Regulation • While there is strong interest in the role of regulators, it is just as important to understand how regulatory functions are mapped across various entities. • Strengthening governance arrangements for regulation as well as the technical capacity of regulatory entities is crucial for effective regulation. • Regulators are gradually shifting from regulating monopolies toward regulation of economic, social, environmental, and health externalities. Resilience • Understanding risks and planning for stresses and shocks is crucial for maintaining momentum on reforms. • The alignment among policies, institutions, and regulation determines the sustainability of reforms to a great extent. • Mechanisms are needed to bridge the gaps between policy setting and implementation. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 37 There are several efforts that policy makers, IFIs such as • Political economy analysis is incorporated in the World Bank, and other development partners can all project design. As this report has emphasized, undertake to strengthen the focus on PIR. there needs to be a greater understanding of how water sector governance is connected to overall water governance. 8.1 Collect data on the impact of PIR • Operations are founded on country ownership on water and sanitation services through dialogue. The systematic use of the PIR tool can help ensure that interventions reflect The updated PIR tool can be used to undertake reform priorities identified by stakeholders and stakeholder consultations, policy dialogue, and that there is full ownership of the proposed PIR assessments. It is expected that future PIR activities by implementing entities. This approach support to Bank client countries will make use of will also ensure that the challenge of vested the PIR tool. Over time, a body of responses will interests (identified in chapter 3) is mitigated. be collected, providing a rich source of data for • Operations—even if short term in nature—are quantitative analysis. For example, once there is a anchored in a reform narrative. As this report substantial number of country responses to the PIR has highlighted, PIR reforms take time, and an questionnaire, statistical analysis can be undertaken— incremental approach is needed for long-term cross-referencing other sources of data such as the success. However, this reality often does not International Benchmarking Network and the World align with the urgent priorities of the day—of Development Indicators Database—to understand developing a lending operation or responding the relationship between PIR and parameters such as to an unexpected crisis. The PIR approach can access to WSS, utility performance, expenditure, or ensure that each WSS intervention is anchored development funding. This analysis should help move in a long-term narrative. The use of reform PIR from the realm of qualitative analysis to more chronologies (see the CRA example in chapter 6, robust quantitative assessments. as well as country brief examples) will be a key tool in this regard, as they will compel teams to take stock of previous reform milestones, situate 8.2 Link investments and projects to the WSS sector at present, and build a vision for PIR reforms future reform actions. While many governments and IFI investment 8.3 Promote collaborative leadership programs and projects include some aspect of PIR, it would be no exaggeration to state that most of The report has highlighted the need for strong, these PIR interventions are small scale, ad hoc, or collaborative leadership across the entire water sector short term in nature. Examples include developing and beyond. It has also cautioned against investing institutional diagnostics, tariff studies, or utility only in individual reform champions but rather performance assessments; technical assistance grant (a) thinking of reform champions across different facilities to utilities to improve their operational levels of the sector and (b) building a coalition of and organizational performance; and training and champions. More work is needed to advance this knowledge exchanges for staff working in WSS idea by exploring the role of leadership through institutions. While these interventions are important, knowledge events, profiles of effective teams, and and often impactful, the next phase of PIR support case studies. The field-level leadership development should aim to enhance investment operations initiative is a promising example of collaborative (projects, technical assistance, and infrastructure leadership that can be scaled up and supported, with programs) further by ensuring that: stronger integration of PIR. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 38 Appendix A. Background on PIR and Aligning Institutions This appendix provides the background on the only broad macro policies. This transitioned in the 1990s foundations of the policies, institutions, and to more comprehensive fiscal policies and articulating “best regulation (PIR) concept, as defined in “Aligning practices” amid the “Washington Consensus” embrace of Institutions and Incentives for Sustainable Water open markets. Public Sector Management (PSM) reforms Supply and Sanitation Services” (Mumssen, Saltiel, began to incorporate public sector incentives but paid little and Kingdom 2018). Key excerpts from the report attention to the role of political actors. The importance are included to provide the reader with concepts and of institutions emerged in the 1990s in response to “New definitions. Growth Theory” and stagnating development results. Institutions including the World Bank began seeking to The Aligning Institutions and Incentives report draws on match reform content to broad institutional contexts. case studies and a literature review to construct a PIR analytical framework. First, it contextualized PIR in the These concepts grew deeper in the 2000s as political broader context of public sector administration: constraints and the incentives of political actors received more attention in PSM theory. Figure A.1 captures the After the Second World War, public sector reform focused main trends in public sector reform since the Second World on expanding role of the state to satisfy demand for public War. TPA, with the state expanding to meet public service services. To address shortcomings of traditional public obligations, was replaced by New Public Management administration (TPA), during the 1960s and 1970s (NPM), which aimed to improve efficiency through public policy regarding infrastructure sectors largely introducing markets, PSP, and decentralization. This in focused on building up “technical” capacity, considering time gave way to New Public Governance (NPG), which FIGURE A.1. Main Trends in Public Sector Reform Since World War II Traditional public administration New public management “New public governance” and • Separation of political and administration functions other alternative approaches • Accountability Expansion of role of state due Refocus on efficiency and result Shift towards incentive creation, • Consolidation • Consultation to rising expectations and based performance due to lack tailored solutions based on identified demand for services of resources and questioning problems due to admission that there role of state is no “one-size-fits-all” solutions • Rule of law • Hierarchical • Efficiency and result based • Inclusive, participatory, networks • Professional public servants • Markets and competition • Political economy and problem driven • Merit based appointments • Decentralisation • Good enough governance • Process oriented • Private sector managements • Ownership, commitments, champions principles 1945 1970–80s 1990–2000s Post World War II Source: Mumssen, Saltiel, and Kingdom 2018. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 39 focuses on incentives and tailored participatory solutions to • Political economy approaches and identification of service delivery challenges. specific problems and entry points for stakeholder collaboration and finding solutions. • The concept of “good enough governance,” as New Public Governance and Other promoted by Grindle (2004, 2007), which focuses Alternative Approaches on feasible, implementable, and best-fit solutions (as opposed to “best practice”), rather than assuming In the last two decades, the weaknesses of new public perfect or standards “solutions”; and management (NPM) led to the need to have tailored • Focus on promoting ownership, identifying reform approaches to reforms, which focus on creating incentives champions, and creating commitment and collective for service delivery rather than applying one-size-fits-all action from interest groups, institutions, and people solutions. Hyndman and Liguori (2016) use the term NPG more generally within the country undergoing reforms. for this shift in public sector thinking which is characterized by: (1) a focus on inclusivity, participation, and networking These characteristics also come with their own limitations. between the public sector (governments), private sector Implementing accountability measures becomes more (businesses), and civil society; and (2) negotiated and challenging as reform processes become more complex as consultative-based solutions. These characteristics imply results are more difficult to measure. However, Pollitt that governments must successfully administer and (2014) asserts that the NPG reforms can be a positive promote effective coordination mechanisms vertically development, in that: across different intergovernmental levels, and horizontally across organizations. This challenge is commonly referred • Reforms in developing countries are no longer limited to as the “coordination problem” in which national and to model NPM packages, but mostly are not linear. sub-national governments experience fragmentation and • The emergence of cultural and context-specific an absence of coordination (Peters 2015). frameworks provides growing knowledge on what solutions can work for what problem and how they Politically, individuals and organizations may pursue may need to be adapted to achieve impact; and specific policy and political goals which are divergent • Having specific interventions to address specific to each other and thus reduces incentives to coordinate problems may make it more manageable to monitor for fear of reducing probabilities of reaching those goals outcomes than was the case in large-scale reform (Peters, B. Guy. 2015). Issues of vertical coordination programs. are becoming more important as “multilevel governance” becomes a common challenge for governments. Even in Within this context, 11 deep-dive case studies were a centralized institutional context, subnational levels of selected to analyze the role of policies, institutional government exercise some level of autonomy which requires arrangements, and regulation in water supply and a desirable level of coherence among decisions makers sanitation (WSS) sector reform. Complemented by across the different levels of government (Peters, B. Guy. consultations with stakeholders and sector experts, 2015). Federal institutional arrangements, however, will the report sought to define and identify the types of permit greater levels of diversity in program delivery as the incentives which may contribute or impede the delivery intention of a federal design is that local conditions and of WSS services: local preferences may be expressed more clearly in policy choices, and hence vertical coordination is less of a concern […] “incentives” within the WSS sector are defined (Peters 2015), but devolved semi-federal systems – such as as: Motivating influences or stimuli driving actors Kenya and South Africa have also experienced challenges (organizations, ministries, service providers, due to national-subnational contestation. In addition, individuals) in the WSS sector to pursue certain Brinkerhoff and Brinkerhoff (2015) identify other objectives or to behave in a certain way. More alternative approaches to public sector reforms post-NPM: specifically incentives can emanate from: WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 40 • The enabling environment, which in turn are the which are being used to good effect in various countries (as drivers for reform that shape the creation of specific described in the Brazil and Mozambique case studies) and policies, institutions, and regulations; and new PBF instruments being tried out, such as the World • Specific institutional reform interventions, developed Bank’s Program for Results). Incentives can be enhanced to meet specific objectives, and with success through the use of performance-based contracts (through determined by many factors including the ability to for instance design-build-operate contracts; build-operate- effectively implement the interventions (i.e., de jure transfer contracts; etc.) with the private sector, which versus de facto). involves payment to contractors being directly linked to the • Policy, institutions, and regulation that provide timely and quality delivery of results. the incentives for the delivery of specific actions and resulting outcomes. For example, tariff regulation Incentives created through institutional arrangements policies can incentivize demand management on the include corporatization / commercialization of WSS part of consumers and encourage efficiency gains on services, which create incentives for a more commercial, the part of service providers. customer-oriented provision of services. Evidence for this comes from examples as disparate as NSW and Zambia. The relative success of these interventions in achieving The effects of these incentive effects can be further enhanced the desired outcomes depend on how the interventions through PSP (the Philippines, Colombia, Brazil, etc.). are designed and implemented. This rarely is a linear process, as the actors involved in and/or affected by the Decentralization is intended to create incentives for implementation of the reforms include institutions and improved service delivery in a more responsive, inclusive, individuals responsible for demand and supply of WSS and accountable manner, as local government are the services such as the managers and staff of regulatory closest level of government to citizens. However, several organizations, government ministries, service providers of the case studies (Indonesia, Colombia, the Philippines, (public or private), and consumers. Albania) reveal a mixed picture because of a variety of problems at the local government level. On the other hand, Incentives created through policy. Policy that inspires lack of managerial and technical capacity and the desire to WSS actors and creates incentives to perform may be achieve economies of scale may lead to the move to aggregate through the promulgation of formal policy statements service providers or jurisdictions (Portugal provides an (Burkina Faso, Mozambique, and Zambia) as well as example of a successful approach to aggregation). through governments announcing WSS development strategies backed by sufficient finance for targets to be met Incentives through regulation. Some successful WSS (Brazil is a good example). The difference between de facto reforms have had the establishment of an autonomous and de jure will hinge on implementation capacities, and national regulatory agency as a central feature (e.g., on the enabling environment (i.e., the importance of the Albania, NSW Australia, Mozambique, Portugal, and feedback loop). Zambia), while other reform efforts which have arguably also been successful do not feature a national regulator Mostly, a central incentivizing element is policy on the and have much more dispersed and opaque regulatory financing of the WSS sector, such as through conditional arrangements (e.g., Brazil, Indonesia, the Philippines). access to finance. Access to finance can be conditional In part, this is a question of the scale of the WSS sector on demonstrating central government requirements have and the country’s governance structure. For example, been met, for instance the formulation and approval of a in Colombia the heavily decentralized structure of the five-year plan or other sector improvement process. Brazil, WSS sector has rendered regulation costly and extremely Indonesia, and Portugal provide examples of governments demanding, requiring regulators to effectively regulate the committing to sector financing, with actors incentivized 1,300 service providers over which they had oversight. to access the available resources to improve WSS access A regulatory framework can quite directly impact the and service quality. Financial incentives can be enhanced efficiency in the sector through the creation of incentives through performance-based financing (PBF) mechanisms, such as performance requirements in tariff awards or the WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 41 more informal approach of national benchmarking which and in turn requires “shareholders” to win or lose depending encourages emulation of the best performing utilities. on the performance of the WSS utility. Such cases include ONEA in Burkina Faso and SONES in Senegal, which The Portuguese and Albanian cases provide good examples regulate through contracts. Also, establishing a reliable of regulators working closely with utilities and provides benchmarking mechanism may allow highlighting the capacity building. Regulation by contract can also create better and worse performing service providers, thereby incentives to improve sustainable service delivery. 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Funding Funding refers to the ongoing collection and expenditure by governments and providers of recurrent own-source revenues (including tariffs and fees, as well as tax revenues and other nontax revenues) as well as the receipt of intergovernmental revenues (or intergovernmental fiscal transfers). Incentives Incentives are motivating influences or stimuli driving actors (organizations, ministries, service providers, individuals) in the water supply and sanitation sector to pursue certain objectives or to behave in a certain way (Mumssen et al. 2018). Institutions Institutions are commonly defined as the social, political, and economic relations governed by formal and informal rules and norms. They provide a structured, predictable manner by which people interact and shape incentives for people and organizations, which in turn can also contribute to institutional development (North 1990). Institutions shape service provision as they outline the roles and responsibilities of actors from national policy makers to frontline service providers. They also determine the costs and benefits associated with alternative choices available to institutional actors as well as the legitimacy of their actions (Mumssen et al. 2018). Intergovernmental The intergovernmental context can be defined as the interacting network of institutions context and stakeholders at different levels of government or administration (national, regional, and local), created and refined to enable public sector institutions at different levels to achieve their respective policy and service delivery objectives. Policy Public policy is a highly flexible concept but can be described as a framework by which governments undertake decisions that guide specific actions with the objective of achieving specific goals (Mumssen et al. 2018). Policies act as signals: they set the tone for the direction of the overall legal, institutional, and regulatory frameworks that influence the actions and decisions of all sector stakeholders (and sometimes nonsector stakeholders), including private investors and consumers. Some countries operate without a clear water and sanitation strategy or policy; or there are policies or strategies but with no actionable goals or indicators to monitor progress. Sometimes, goals have been defined but they are unrealistic. WATER SUPPLY AND SANITATION POLICIES, INSTITUTIONS, AND REGULATION | ADAPTING TO A CHANGING WORLD 47 Regulation Regulation in the broad legal sense can be defined as “the sustained and focused control exercised by a public agency over activities that are valued by a community” (Ogus 1994). It involves setting rules and ensuring that those rules are enforced. Regulatory functions can be categorized into economic regulation and other forms of regulation. Economic regulation refers to the “setting, monitoring, enforcement and change in the allowed tariffs and service standards for utilities” (Groom, Halpern, and Ehrhardt 2006). Other regulatory functions include service standard setting, performance monitoring, pro-poor regulation, enhancing accountability and transparency, and use of natural resources. Multiple regulatory models exist, such as sector-specific national regulators, subnational regulators, multisector regulators, regulation by government departments, and regulation by contracts (public-private and public-public contracts). Resilience Resilience is the ability of individuals, communities, institutions, businesses, and systems to survive, adapt, and thrive in the face of stress and shocks, and even to transform when conditions require it. Three capabilities characterize a resilient system: persistence, adaptability, and transformability (Delgado et al. 2021). 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