How to manage the economic impact of COVID-19 on water utilities

How to manage the economic impact of COVID-19 on water utilities

Diego FernandezROCKBlue recently had the privilege to interview Diego Fernandez. Diego is an economist, data analysis specialist and holds and M.A in Economics and Public Policy (1992). He has a wealth of experience in design of public policies and regulations for utilities and the cost-benefit and financial analysis of investment projects including water demand management. This includes the analysis of natural monopolies, institutional organization, national water and sanitations plans, as well as costs, rates and cross-subsidization for water and solid waste sectors. In regulatory and institutional frameworks he has worked in more than 15 countries in Latin America, the Middle East and Africa.


The following questions were answered:

1.     What are you hearing about how much revenue water utilities are loosing in the short and medium term due to COVID-19 and official stay-at-home orders?

2.     Have there been historical precedents in your country that teach us how to mitigate the economic impact of the pandemic?

3.     What measures are government and water utilities taking in response to the fall in their revenues in your country and regions where you work?

4.     What help can you envision from the international development partners that provide loans and grants for water and sanitation systems?

5.     Can you enumerate the factors that a government or utility should consider while deciding how to address the looming revenue shortfalls?

6.     What advice would you like to offer African governments and water utilities on the immediate measures to address the economic impact of the global COVID-19 pandemic and of ways to become more resilient to other such catastrophic events?

1.     What are you hearing about how much revenue water utilities are loosing in the short and medium term due to COVID-19 and official stay-at-home orders?

 

The impact closely depends on the duration of the “confinement” and the degree of formality in each locality. The longer the period that families should be at home, the greater the impact. Countries have started with orders to be at home for 12 to 15 days, but in all countries they have been extended to 30, 40 or more days. At this time, the only country that has lifted the order has been China for the city of Wuhan whose lockdown lasted 76 days.

 

People who depend on the income obtained each day, who do not have an employer who pays their salary every pay period, will be the first to lose their income; they will lose it from the first day of the “confinement”. These people, not surprisingly, will give priority to their small savings or any extraordinary income they can get, for food to avoid hunger (and in fact they will quickly require food aid). When the lockdown order is extended for another 15 or more days, people dependent on small employers, especially in sectors such as restaurants, bars and shops, will also begin to lose their income due to their inability to pay their employees’ wages.

 

Therefore, in those localities where informality is predominant and have a greater proportion of the population in the aforementioned sectors, the water provider will see a quick reduction in the payment of water bills.

 

From the start of the lockdown order, water providers will begin to see the revenue reduction; but it will be lower initially, when the government’s initial announcement is for a relatively short lockdown period (10-15 days). In this first period, only the lowest income families tend to suspend their payments. Assuming the government announces the extension of the closure, many families and even non-residential users will suspend their payments, not only due to the fall in income but also due to the uncertainty of the actual duration of the shutdown.

 

In some small towns (with 1,500 to 3,000 connections) in my country, Colombia, the water utility revenues initially fell from 10 to 15 percent; but, the second announcement that prolonged the shutdown, led to 50 percent or higher non-payment of the invoices issued.

In larger municipalities, with a greater variety of economic activities and, especially, with a greater proportion of the population in formal activities and more people depending on a salary from an employer, the drop in the payment of water service bills is less, with reductions expected of no more than 30 percent.

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2.     Have there been historical precedents in your country that teach us how to mitigate the economic impact of the pandemic?

 

In the face of catastrophic events (earthquakes, avalanches, landslides) that have a significant effect on the economic activity of a particular locality, for several weeks or months, the National Government normally provides significant help to the water provider to continue service to its community.

However, Colombia has not had in the past –at least in the last 20 years- an event that affects the entire country; and therefore there is no previous experience that tells us how to proceed.

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3.     What measures are government and water utilities taking in response to the fall in their revenues in your country and regions where you work?

 

The first measures ordered by Colombia’s government aim to protect the population:

 

a)     Reconnection of water for all residential users with previously cut or suspended service, free of charge, to guarantee access, without implying forgiveness of the existing debt.

 

b)    Supply of water through alternative means (tank trucks) free of charge to residential users in unserved areas.

 

In Colombia, the National Government has not ordered suspension of billing for water service. Instead, it ordered spreading, over a period of up to 36 months, any deferred payment of bills related to consumption during the pandemic closure – for residential users who request this.

 

Bolivia’s government is paying service providers 50 percent of the value of water bills for three months.  Laws in Colombia would not allow such a subsidy for all users, as the water utilities are legally obliged to recover from user fees their full operating costs (minus the stablished subsidies for the poorest families).

Assistance programs for water and sanitation operators have not yet been defined. Water companies in Colombia have been asked to carry out day-to-day projections and report the real evolution in all fields of management, from operational to financial, to help define the national level action plan to assist the service providers. The reporting includes: water availability and water requirements, supplies, materials, spare parts, essential payments, etc.

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4.     What help can you envision from the international development partners that provide loans and grants for water and sanitation systems?


International credit agencies (such as the Inter-American Development Bank and the World Bank) have approved extraordinary credits for some Latin-American countries to face the expenses generated by the pandemic. However, there are still no specific policies to assist water and sanitation companies.

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5.     Can you enumerate the factors that a government or utility should consider while deciding how to address the looming revenue shortfalls?

 

It is essential to guarantee the capacity of water companies to be able to provide water and sanitation services. For unserved zones, local or national governments must assume the extraordinary expenses for guaranteeing tanker truck supply.


For supplies to everyone else, the National Government can create a fast disbursing credit line in favor of water companies, with a grace period of not less than three months. No greater guarantees should be required; water companies will regain their income in the future.

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6.     What advice would you like to offer African governments and water utilities on the immediate measures to address the economic impact of the global COVID-19 pandemic and of ways to become more resilient to other such catastrophic events?

 

The measures listed above, both in favor of users and in favor of companies (especially, assuming the costs of provision to unserved communities with tanker trucks and the fast-disbursing of lines of credit), seem the most appropriate path at the moment in areas where water service providers are obliged to recover their operating costs from consumers. In other areas, governments can consider some combination of these measures and direct budgetary support to consumers and/or the service providers.

Those same measures should be available and quickly activated in response to other catastrophic events in the future.

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