WATER GLOBAL PRACTICE Public Disclosure Authorized Public Disclosure Authorized Aligning Institutions and Incentives for Sustainable Water Supply and Public Disclosure Authorized Sanitation Services Report of the Water Supply and Sanitation Global Solutions Group, Water Global Practice, World Bank MAY 2018 Yogita Mumssen, Gustavo Saltiel, and Bill Kingdom with support from Berenice Flores, Norhan Sadik, Ilan Adler, and Economic Consulting Associates Public Disclosure Authorized About the Water Global Practice Launched in 2014, the Word 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 at @WorldBankWater. Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services Report of the Water Supply and Sanitation Global Solutions Group, Water Global Practice, World Bank MAY 2018 Yogita Mumssen, Gustavo Saltiel, and Bill Kingdom with support from Berenice Flores, Norhan Sadik, Ilan Adler, and Economic Consulting Associates © 2018 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. 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Contents Acknowledgments vii Executive Summary ix Abbreviations xxiii Part I Global Study Objectives and Approach 1 Chapter 1 Introduction 3 Policies, Institutions, and Regulation: Incentives for Sustainable Service Delivery 4 Structure of this Report 9 Chapter 2 Literature Review and Main Findings 11 Historical Context of Institutional Interventions: Trends in Public Sector Reform 11 Policy, Institutions, and Regulation in WSS in the Literature 14 Political Economy Perspectives 25 Notes 27 Chapter 3 Case Studies 29 Diversity within the Selected Case Study Countries 29 Overview of the Policy, Institutional, and Regulatory Arrangements in the Case Study Countries 30 Notes 38 Part II Understanding Drivers for Reform and Policy, Institutional, and Regulatory Incentives 39 Chapter 4 Framework for Analysis and the Nature of Incentives 41 Framework for Analysis 41 Defining Incentives 41 Who Should Be “Incentivized”? 43 Categories of Incentives 45 Note 48 Chapter 5 Drivers for Reform and the Enabling Environment 49 Endogenous Drivers Come from Understanding Water Supply and Sanitation Challenges 49 Endogenous Drivers Can Be Influenced by Exogenous Factors 52 Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services iii Exogenous Drivers Need to Be Internalized and Adapted to Local Conditions 53 Findings on Drivers for Reform and the Enabling Environment 55 Note 58 Chapter 6 Water Supply and Sanitation Service Policy and Incentives 59 Policy and Incentives 59 Note 70 Chapter 7 Water Supply and Sanitation Institutions and Incentives 71 Institutions and Incentives 71 Notes 81 Chapter 8 Water Supply and Sanitation Service Regulation and Incentives 83 Regulation and Incentives 83 Independent/Autonomous Regulatory Entity 86 Regulation by Contract 87 Other Regulatory Arrangements 90 Regulatory Functions that Create Incentives for Performance 91 Notes 94 Chapter 9 The Need for a Holistic Approach 95 Aligning Incentive Structures 95 Interlinkages of Institutional Interventions 97 Institutional Interventions Designed Specifically for the Water Supply and Sanitation Sector 100 Incentives and Sustainability 104 The Importance of Learning 111 Notes 113 Part III Main Take-Aways 115 Chapter 10 Key Messages, Guidance, and Next Steps 117 Drivers and Incentives for Reform 119 Guiding Principles to Generating Positive Incentives 121 Some First Steps to Exploring Policy, Institutions, and Regulation in a Specific Context 123 iv Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services Part IV Appendixes 125 Appendix A Incentive Structures in Case Study Countries 127 Appendix B Incentives Created through Institutional Interventions—Summary of Case Study Findings 147 Appendix C Characteristics of Countries Selected for Case Studies 159 References 161 Boxes 5.1. The Enabling Environment in Different Reform Episodes in Brazil 51 5.2. Isomorphic Mimicry: Explaining the Gaps between de Jure and de Facto 54 5.3. Continuity of World Bank Involvement in Mozambique’s WSS Sector Reforms 57 6.1. The Kyrgyz Republic—Need for Policy Direction 61 6.2. Lessons from the Philippines Water Revolving Fund Experience 63 6.3. Nepal—State Budget Advocacy 64 6.4. Performance-Based (Results-Based) Financing 67 7.1. Jordan—Roles and Responsibilities 73 7.2. Israel—Corporatization of Municipal WSS Services 74 7.3. Indonesia—Water as an Economic Good as well as a Social Good 76 7.4. Taking Community Views into Account 77 7.5. Kerala State, India—A Mixed Experience of Decentralization 78 7.6. Bolivia’s Decentralization Experience—Allocation of Funds and Community Participation 80 8.1. Zambia—Governance Structure of Zambia’s National Water Regulator 85 8.2. Regulation by Contract in Senegal’s Urban Water Sector 88 8.3. The Role of Conselho de Regulação de Águas (CRA) in Mozambique’s WSS Sector Reforms 91 8.4. Pro-Poor Regulation in Low Income Countries 92 9.1. Unique Characteristics of the Water Supply and Sanitation Sector 100 9.2. Indonesia—State Budget Allocation in the Water Supply and Sanitation Sector 103 9.3. Community Led Total Sanitation in Bangladesh 108 9.4. Lessons from Two Institutional Reform Projects in Cameroon 110 9.5. Learning Process Supported Reforms in Mozambique 112 Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services v Figures ES.1. Schematic: Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation xi 1.1. Trends in Official Development Assistance Grants, Loans, and Non-Concessional Lending (Disbursements) 4 2.1. Main Trends in Public Sector Reform since World War II 12 2.2. Market Failures and Scope of Regulation in the Water Supply and WSS Sector 25 4.1. Framework for Analysis 42 4.2. Schematic: Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation 46 6.1. Water Supply and Sanitation Sector PPP Investments in 2015, by Region 65 B8.2.1. Public-Private Partnerships in Urban Senegal: The Actors and Contract Types 88 9.1. Correlation between the Enabling Environment and Policy, Institutional, and Regulatory Interventions 96 9.2. Incentives of Key Actors in the Water Supply and Sanitation Sector 105 Map 3.1. Map Showing Location of Case Study Countries 30 Tables 1.1. GLAAS 2017 Water Supply and Sanitation Indicators 4 3.1. Overview of Policy, Institutional, and Regulatory Arrangements in Case Study Countries 31 4.1. Typical Stakeholders Involved in the Water Supply and Sanitation Sector 43 6.1. Incentives in Private Sector Participation 66 A.1. Incentives from the Enabling Environment 127 A.2. Incentives from Institutional Interventions 136 B.1. Incentives Created through Institutional Interventions—Summary of Case Study Findings 147 C.1. Economic Indicators, 1980–2010 159 C.2. Access to Water Supply and Sanitation and Infant Mortality, 1980–2010 159 C.3. Access to Water Supply and Sanitation in Rural Areas, 1980–2010 160 C.4. Access to Water Supply and Sanitation in Urban Areas, 1980–2010 160 vi Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services Acknowledgments This report is a product of the World Bank Water Global Practice’s Global Study on Policy, Institutions, and Regulatory Incentives for Water Supply and Sanitation Service Delivery (P159124), and forms part of the Water Supply and Sanitation Global Solutions Group (WSS GSG) agenda. This work was financed by the World Bank’s Global Water Security and Sanitation Partnership and the Swiss State Secretariat for Economic Affairs (SECO). The global study and this report have been developed by a World Bank team led by Yogita Mumssen (Senior Infrastructure Economist) and Gustavo Saltiel