Municipal Cash Flow by Wamuwi Changai

Wamuwi Changai

Mr. Changai has significant leadership credentials in management of water utility companies with a laudatory record as CEO of two water and sewerage companies in Zambia. He has experience in corporate governance, operations management, procurement, strategic planning, policy development, manpower development, and leadership. He has also worked with stakeholder relationship management, operations and maintenance, asset management, investment financing, along with organisational development and restructuring. We are pleased to have had the opportunity to interview him on the subject of Cash Flow. We hope you enjoy the interview below.

 

The following questions were discussed:

  1. What are the top challenges to managing cash flow with a utility or a municipality?
  2. Is there any kind of software that would you recommend to a utility to assist them in managing their cash flow?
  3. How can utilities and municipalities improve on debt collections when the utility is providing poor service?
  4. From your experience, how can costs be effectively minimized to improve overall cash flow?
  5. Can you suggest ways of transforming the mentality of a utility’s management, such that it thinks of itself as a corporatized or bankable entity, especially when the utility has donors supporting it?
1. What are the top challenges to managing cash flow with a utility or a municipality?

One of the biggest issues is an inadequate balance sheet position or debt. Huge creditor positions that have accrued over the years due to poor cash flow management. An example is unpaid statutory positions, unpaid benefits. Again, this arises from ineffective management of cash flow.

This is also exacerbated by having to pay increasing energy tariffs – sometimes quite significant – requiring a reformatting of cash flow. So, while the government water regulator can in essence constrain (financially) a service provider, based on allowable tariffs to charge its customers, even if the electric utility raises rates, the allowed tariffs may not increase – presenting an obvious second challenge.

Among other things, such companies do not have suitable organizational structures, and the conditions of employment for staff do not include performance contracts or ones based on their productivity. So, there is a structure having a fixed overhead that is disconnected with the capacity of the Consumer Unit (CU) to generate an income.

Moreover, poor complaint management systems are a critical issue, along with weak billing systems. Hence the utility is left unaware of how much it is owed, without any granular knowledge; and each expense appears as just one lumpsum item.

The last challenge is the huge unpaid government debt. Numerous government institutions – hospitals, schools and prisons are the major consumers, yet they do not pay for their water consumption; and it is often difficult to collect this debt, which is problematic as they are representing a significant yet inaccessible cash flow.

2. Is there any kind of software that would you recommend to a utility to assist them in managing their cash flow?

You will want software that can perform budget tracking, so that once budgets have been made and approved, they can be entered into the chosen software. The software should be able to produce budget tracking reports to assist management in projecting cash flow requirements based on statistical evidence from past expenditures. Programmes such as Pastel Evolution are good. However, capacity of staff to use the software is an important consideration.  I did have one case where Pastel Evolution was not able to be embraced by the staff and thus they resorted to a more familiar software – Microsoft Excel.

3. How can utilities and municipalities improve on debt collections when the utility is providing poor service?

One of the main causes of customer dissatisfaction is unaddressed consumer complaints by the complaint management system. When customer complaints, especially in low supply areas, are effectively resolved, it yields confidence in the CU within the community, motivating them to pay their bills on time. Secondly, customers in intermittent supply areas are often not provided with adequate information on service interruptions (i.e., when supply is “on” and when it’s “off”), and/or they are provided water at inappropriate times not matching their expectations.  An example is that, after perhaps not having water throughout the day, all of a sudden, they are provided water at 2AM in the morning – when they are sleeping and can’t take advantage of the water being “on”.

Alternatively, when customers and the CU work together and agree on rationing times, the supplier has to ensure they abide by their commitment – this too establishes trust and results in customers increased willingness to pay their bills. Once a service regime has been agreed on it must be followed no matter what. If there is a deviation in what was agreed to, the utility should not wait for a complaint before conveying new information to clients (e.g., we had a power outage necessitating a change in pumping water into the system). All of this falls under the category of building customer confidence and trust – a critical element of operating a water utility.

4. From your experience, how can costs be effectively minimized to improve overall cash flow?

I have found that there are three challenges encountered with overhead costs. The first being overly bloated organizational structures with entitled managers. I would go to the Board and suggest freezing certain positions in order to create a much leaner structure based on operations and not overhead. This was challenging to achieve – though it ensured savings once some positions were frozen/closed – having been approved by the Board of course.

From my experience there had been a number of service contracts with suppliers, which had received insufficient review; and with them we were unnecessarily losing money. We took it upon ourselves to review all service providers and their contracts, shorten the supply period, monitor the contract more closely, and in some case terminate them and then re-advertising to secure better rates.

 

In terms of operations, the focus should be on travel. There were countless travel requests, by various departments, many of which were unwarranted and not adding value. Therefore, there was a need to reduce travel expenses to manageable levels. This can be accomplished by travelling only when essential and/or by utilizing combined travel between employees and different departments.

Finally, however, we came to acknowledge that without the appropriate performance management, there remained an accrual of expenses despite the costs that had been cut. Hence, we worked with HR consultants to help enhance performance management.

5. Can you suggest ways of transforming the mentality of a utility’s management, such that it thinks of itself as a corporatized or bankable entity, especially when the utility has donors supporting it?

This is a very difficult challenge. I have certainly experienced this in my past as a CEO. In such situations the general attitude of staff is non business oriented. Because, if you want to break even you are looking at two things – pricing and your customer base. In most cases CU’s would lobby the national regulator to review the pricing and allow for tariff increases, neglecting completely to incorporate/add as many customers as possible. So, let’s talk about changing attitudes and change management.

Basically, the change management process can be approached by engaging all staff in a strategic review of the organization and making sure that they are trained to perceive the CU as a business. Yet this would require the support of systems’ change which can be expensive such as converting the CU into a profit centre or on a cost centre basis, whereby each expenditure is allocated to/by the profit centre. Although such an endeavour is expensive, it would be effective, especially for larger CU’s (e.g. the Lusaka Water & Sewerage Company- LWSC). If that is not supported by the government policy, one of the principles is for the CU to attain full cost recovery in the long run. However, the “long run” must be defined. For example, in Zambia, since the enactment of full-cost recovery in 2004, there has not been one (1) CU that has attained cost full-cost recovery in this 15-year period. Therefore, with these policies, there must also be a requirement for the government to ensure that CU’s attain full-cost recovery. Without that policy firmly in place, a CU can come up with profit incentives and make sure that the staff are adequately trained but… there could still be situations, when applying for a tariff increases, where the regulator is influenced/controlled by government, especially during election periods, where even legitimate and necessary increases would be denied.