Increased operational autonomy, performance-related incentives, clear definition of stakeholder roles andresponsibilities, an enabling environment including strong leadership, willingness of all stakeholders to adoptsuch practices, an appropriate policy and legislative framework, and a good monitoring system for reviews—will ensure that service improvements targeted by such agreements remain sustainable in the long run.

Enhancing Water Servicesthrough Performance Agreements

May 2009

Field Note

The Water and Sanitation Programis an international partnership forimproving water and sanitation sectorpolicies, practices, and capacities toserve poor people

Performance Improvement Planning

Institutional arrangements within which water and sanitation services aredelivered are deficient, and accountability issues are the key constraints tosecuring the delivery of improved and efficient services.

Executive SummaryThe challenge of providing improved water and sanitationservices (WSS) in India is substantial. More than 300 millionpeople in urban India are unable to reach or afford safe WSSservices.1 While in recent years investment in, and access to,infrastructure have increased, there are still severe deficienciesin the availability, quality, and equity of these two basicservices. Typically, poor and inadequate water service deliveryoutcomes have been ascribed to the lack of adequate capitalinvestment, poor finances of service providers or capacity, andstaff constraints. Increased investments have not necessarilyresulted in better outcomes but rather in short-livedperformance improvements that remain stand-alone initiatives,unviable in the long run. It is increasingly being recognizedthat institutional arrangements, and the incentives andaccountability measures associated with them, need to changeif services are to improve. Although the 74th Amendment to theConstitution of India has made urban local bodies responsiblefor WSS services, the water departments of these bodiescontinue to depend extensively on central and stategovernments for technical and operational direction. Since theydo not have functional or financial autonomy to run theirdepartments sustainably, incentives to improve servicesremain weak.

Performance agreements could help bring about a change in theway services are delivered in a sustainable manner, through achange in the institutional arrangements and associatedincentives. In recent years, many public water utilities andservice providers across the globe have brought about improvedaccountability and better services through contractualarrangements based on the principles of customer orientationand financial viability.

Performance agreements include arrangements that publicentities and service providers have signed with lower tiers ofgovernment or urban local bodies and operating arms of publicservice providers. Such arrangements have stressed operationalefficiency, sustainable revenue strategies, improved costrecovery, and enhanced service delivery accountability as ameans for improving the delivery of WSS services in a publicservice provision setting. The field note uses global experiencesto explain some of these arrangements and brings out lessonsthey have to offer for the Indian context.

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ContextThe urban WSS utilities and serviceproviders across India continue to becharacterized by deficiencies in thedelivery of services, with access toreliable, sustainable, and affordableWSS services remaining poor ingeneral. Typically, poor services havebeen attributed to poor finances orcapacity constraints. However,increased investments to improve thequality, equity, and reliability of serviceshave not necessarily produced betteroutcomes and commensurate servicedelivery improvements.

So why are WSS services still laggingbehind in India? There is increasingrecognition that (a) the institutionalarrangements within which WSSservices are delivered are deficient,and that (b) accountability issues, andnot investments, are the key constraintto securing the delivery of improvedand efficient services. Even though the74th Amendment to India’sConstitution has made municipalgovernments or urban local bodiesresponsible for WSS services, theiraccountability to deliver better servicesto their customers is hampered bynumerous institutional constraints.

Most water service providers in Indiatoday, whether a department within apublic works department, adepartment in a municipality or asemi-autonomous organizationdedicated solely to the provision of awater and sewerage service, lack theright incentives to plan and implementsteady and consistent improvementsand remain accountable for the quality

1 Indian National Census. 2001.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

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Box I: Can Performance Agreements Lead to Sustained Service Improvements?

The basic aim of the performance improvement series is to help water utilities and service providers understand andadopt mechanisms that promote cost recovery and sustainable revenue strategies, as well as help achieve financiallyviable and sustainable improved services. The objective is to focus not only on specific performance improvement areasby advancing technical, commercial, and operational efficiency—such as leak reduction, billing and collection, customerservice, and tariff setting, among others—but also ensure that such improvements remain sustainable and viable in thelong term through arrangements such as performance agreements, monitoring, and evaluation.

This field note is No. 5 of the series and analyzes performance agreements that have been used across the world forimplementing performance improvements. For such agreements, a conducive institutional framework is needed to foster,incentivize, and sustain service delivery improvements in the long term. Performance agreements are contractualarrangements signed between different tiers of government (national or state government with local governmentdepartments) or between different operating arms of a public service provider and its market-based counterparts.

of service that they deliver. State levelcontrol and dependence has resulted inlittle role for local bodies. In some casesstate monolithic parastatals exist,with little role separation acrosspolicymaking, regulation, and serviceprovision. In other cases, some degreeof decentralization may have occurred,but there remain significantshortcomings in the empowerment ofthe municipal governments and urbanlocal bodies in aspects like staffing,expenditure, and revenue authority todeliver good quality services.

Since the spheres of financing,policymaking and sometimes evenimplementation are all external to urbanlocal bodies, there is very littleownership or accountability on theirpart to ensure cost efficiency andrevenue sufficiency for the delivery ofefficient and reliable services. Inaddition, since regulation andimplementation are usually in the samehands, issues of efficiency, equity, andquality are difficult to address. Theinstitutional structure also lacks theenabling financial incentives that could

encourage improvements in servicedelivery, especially in the context thatsurvival of service providers does notdepend on meeting the objectives ofcost recovery and efficiency. Instead,service providers often survive on theback of virtually unconditionalfinancial support from governmentand, in the absence of ring-fencedarrangements, on numerous opaquecross-subsidies that operate withinmunicipal accounts.

An improvement in WSS services inIndia can be encouraged throughsystematic reforms that provide clearpolicies for universal service and forthe monitoring of service providerperformance on specified standardsof service. This shift will mean that theinstitutional framework clearly definesthe way in which the sector isgoverned, regulated, managed,incentivized, and financed. Theframework will need to create thefoundation and transformation ofservice providers for deliveringsustainable and more accountableservices while ensuring operationaland financial sustainability.

PerformanceAgreements forBetter ServicesUrban water service providers in Indiawill need to significantly enhanceperformance by effectively balancingaffordable service coverage expansionwith financial viability. Suchimprovements must be coupled withinstitutional reform for autonomy andaccountability if they are to remainsustainable in the long run.Performance agreements could providethe means for implementing theseservice delivery improvements in apublic service provision setting on along-term and sustainable basis.

What are PerformanceAgreements?

Performance agreements areformalized contractual arrangements toachieve efficient and financiallysustainable services, signed betweendifferent parties involved in WSS servicedelivery. They attempt a market-basedapproach to the delivery of publicservices. In some cases, theseagreements are internal managerialones signed between different tiers ofgovernment (national or stategovernment with local governmentdepartments). They can also bebetween different operating arms of apublic service provider, between a statewater board and the respective urbanlocal body it is serving, or between an

urban local body and its respectivewater service department.

Such contracts were introduced asearly as the 1970s, in France.2 Theconcept slowly spread to the rest of theworld—to Sub-Saharan Africa; NorthAfrica; Argentina, Brazil, and Mexico inLatin America; and also to South Asia.At that point the success of theseagreements was limited and theybecame less commonly used in the1990s, especially with the emergenceof private sector participation. However,despite their weaknesses, theseagreements are again being used inrecent years for the delivery of WSSservices and, in some cases, they areproducing good results.

Performance agreements provide agood framework for defining roles andresponsibilities of all parties involved inWSS services, as explained in thesubsequent case studies (see Box 2 forsynopses of the case studies). Undersuch arrangements, the public sector,higher tiers of government or state-levelwater boards (Board) contracts withthose who actually provide the service,that is, lower tiers of government, or theoperating arm of the public serviceprovider (the service operator).3

Clarity in roles and responsibilities isimportant for performance agreementsto function well. The Board defines theoverall policies and strategies, theservices desired, and performancestandards, and also monitorsperformance towards these set

objectives. The service operator isresponsible for the actual delivery ofservices in accordance with theseprinciples as set by the Board. Theservice standards may be defined, butthe manner in which the work isperformed is mostly left to the serviceoperator’s discretion. Along withincreased autonomy comes greateraccountability for delivering theservice outcomes, since performanceis measured against somepredetermined targets.

How is a ConduciveEnvironment for ImprovingServices Created?

Performance agreements ensureimproved accountability and acommercial orientation to the delivery ofWSS services.

Commercial orientation: Performanceagreements form a more commercial-based approach to the delivery ofpublic services. Usually formalized as aMemorandum of Understanding, theseagreements operationalize performanceimprovements through the utilization ofprivate sector management principles,especially that of a commercialorientation to service delivery, in apublic setting. In such service deliverymodels, different tiers of government orthe public entity work independently,each responsible for a set ofperformance targets that help inregulating their mutual obligations.Such mechanisms encourageimproved operational efficiencies, bylowering costs and incentivizingperformance improvements.

Increased operational autonomy:Well-structured performanceagreements encourage increasedmanagerial autonomy. Increasedoperational autonomy is encouraged

2 The first two performance contracts in France were then called ‘program contracts’ and were signed in 1969-70 with the nationalelectricity company and the national railways. They defined objectives, and quantified financial performance targets for a five-yearperiod of the agreement. Agreement on the objectives was reached through a process of negotiation between the government and themanagement. The basic idea was to clearly define and set the goals so that management could be provided with some autonomy forenhancing accountability, and it could evaluate the provider on the basis of the achievement or nonachievement of the set goals.In 1983 the French Government concluded 13 performance agreements with nationalized industrial public enterprises.3 Besides performance agreements, a service provider could also opt for engaging with the private sector. These arrangements are thepublic-private models, agreements that are contracting-out arrangements signed between various tiers of government or public serviceproviders and private companies which have assumed responsibilities for some or all elements of service delivery operations for theduration of the contract. This paper does not focus on the public-private arrangements. These options will be dealt with in a separate paper.

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Performance agreements could help bring about a change in the wayservices are delivered in a sustainable manner, through a change in theinstitutional arrangements and associated incentives.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

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Box 2: Synopses of Case Studies

The Delhi Jal Board, provider of water services to Delhi, the capital city of India, was in the process of designing aPerformance Memorandum of Understanding in 2005. The aim of this agreement was to define the (a) framework withinwhich water and sanitation services reforms were to be undertaken; and (b) conditions for generating greateraccountability and performance tracking. Even though the agreement did not go through, the engagement had importantlessons to offer.

Haiphong Water Supply Company in Vietnam has used performance agreements to encourage operational improve-ments through the adoption of the phuong4 model since 1993. It focused on decentralizing service delivery functionsdown to the lowest administrative level and bringing about improvements focusing on an overhaul of water services.

India power sector reforms were initiated since the early 1990s through a series of reforms in the power sector’s legalframework, institutional structures, policies and procedures that collectively attempted at improving the performance ofthe sector in delivering more reliable and efficient services. The power sector structural reforms replaced governmentcontrol by autonomous and independent regulatory oversight for providing the institutional support for performanceenhancement of power utilities through incentive-compatible performance contracts.

ONEA, Burkina Faso, is an autonomous water board that is responsible for water supply and sanitation serviceprovision in all urban areas with more than 10,000 inhabitants. Reforms have strengthened ONEA by focusing onimproving performance of the public operator through internal reforms, especially through the three-year performancecontracts (Contrat plans) since 1993 that it signed with the Government of Burkina Faso. The performance contracts set thetargets for technical, financial, and commercial performance through 34 performance indicators that are monitored regularly.

Tanzania has used performance agreements since the late 1990s for bringing about urgent reform of its water sector,through the creation of semi-autonomous Urban Water and Sewerage Authorities to operate and maintain water suppliesin the urban towns. It designed a unique performance agreement that detailed operational guidelines, including personnel,financial, commercial, technical, procurement, reporting and monitoring mechanisms, within which the authorities wouldoperate. The performance agreements also provided an incentive scheme for encouraging improved performance inservice delivery and operations.

Uganda started its urban water sector reform process in 1997 with a series of short-term performance improvementinitiatives for improving the management of its urban water services. The reform process initiated performance contractswithin the areas of operation of its national water utility—the National Water and Sewerage Corporation. Since then theCorporation has used various programs, including Area Performance Management Contracts and Internally DelegatedManagement Contracts, for encouraging operational and financial efficiencies within a more professional environment forimproving services.

through the decentralization ofdecisionmaking to the business unitsoperating in the smaller towns, thelower tiers of government or theoperating units at the city level.Performance agreements hence targetimproved performance by breakingdown overall strategic goals intospecific operational processes andoutput-oriented targets in exchange forincreased operational autonomy andperformance-related remuneration orincentives. The operator faces reduced

external interference, is grantedreasonable autonomy in day-to-daymanagement and operational decisions,and is ensured adequate resources tobring about performance improvements.This incentivizes the operator to becomemore accountable for delivering ontargets and for improving services in acost-effective manner.

Improved accountability: Well-designed performance arrangements areexpected to result in service

improvements since they introducecommercial principles of operationthrough explicit performance targets,well-defined budgets linked to revenuesfrom users, and greater managerial andfinancial autonomy. The roles andresponsibilities of various institutionalparties are defined and allocatedupfront, and then a performanceagreement is drawn up.

4 The ward or phuong is the smallest local unit of the socialistgovernment in Haiphong. More details in Box 6.

A formalized agreement specifiesclearly the performance targets,outcomes and timeframes, and howthe outcomes will be monitored andmeasured. The operator is monitoredagainst performance targets that aredefined in a performance standards’chart and is encouraged to exceedthese targets through financialincentives set out in an incentivecompensation chart. Internal incentivessuch as bonuses, rewards, and cashprizes are used for encouragingmanagerial efficiencies and forsurpassing performance targets.Hence, performance agreements holdoperators more accountable for theirparticular function and performance,since the operator needs to meet thespecific targets as defined in theperformance agreement.

Key Featuresand Elements ofPerformanceAgreementsWell-structured performanceagreements are characterized by thekey elements of simplicity andperiodic updation, role separation andclarity, a commercial orientation toservices and financial viability,increased autonomy in operations,performance standards, regulatoryaspects, and improved accountability.

Simplicity and Links to aStrategic Business Plan

Performance agreements must bekept short and simple so that

adjustments can be made easily,especially updations for performancestandards and incentive compensation.Such agreements must also allow forincorporating results accruing fromperformance improvements.

The design of these plans must besupported by a strategic businessplanning exercise that forms the basisfor drawing up such agreements. Astrategic business plan supported by asound baseline allows the utility tounderstand the shortcomings in servicedelivery. The planning exercise alsohelps identify the specific areas thatrequire performance improvements, aswell as the actionable areas andbusiness objectives that need to beaddressed to overcome theidentified shortcomings. Such aplanning exercise can help in identifyingthe expected levels of performancewhich, when achieved, could supportthe provider in meeting its overallbusiness strategy and objectives.5

Role Separation and Clarity

Performance agreements mustexplicitly define, separate, and allocateroles and responsibilities of allstakeholders, so that there is no conflictand confusion between different roles.This appears simple but the fact is thatthe ambiguity of goals and conflictingobjectives is one of the major obstaclesto the effective and efficientperformance of public enterprises.

Performance agreements delink serviceprovision from policy and regulation

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Performance agreements are formalized contractual arrangements thatspecify clearly the performance targets, outcomes and timeframes, and themonitoring framework for measuring performance.

5 In some cases, the operator is allowed to take some monthsto focus only on constituting a sound baseline. The incentiveduring this period is, therefore, not to meet improvedperformance targets but to collect data and constitute arobust baseline through the implementation of sound datacollection and storing systems including businessmanagement and reporting systems.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

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functions, and create the appropriateregulatory and enforcementmechanisms for making serviceproviders more accountable (Figure 1).This role clarity leaves no room forambiguities or overlap in functions. Byclearly allocating responsibilities anddefining the performance targets thatare sought to be achieved at the end ofthe contract period, it is also possibleto control and monitor service deliveryperformance more effectively, structureadequate sources of funding and, atthe same time, hold the appropriatestakeholder responsible for itsrespective and designated function.

Performance agreements are aninternal reform tool, where theownership and regulation of the waterand sanitation facilities remains withpublic entities while specific servicedelivery functions are handed over tothe operating units. They attempt atseparating the day-to-day operationalfunctions from that of policymaking,performance monitoring, and regulationso that accountability can be enhancedat the operational level.

The policymaking function guides themanagement of the utility, its service

Figure 1: Unbundling of WSS Functions

delivery objectives, and qualitystandards. As a rule, the higher tiers ofgovernment or the Board would retainthe functions of policy, strategy, andregulation; the service operator wouldretain responsibility for service deliveryfunctions. Their accountability would bestrengthened through performancestandards and incentives, to ensurethat service delivery remains efficient.The role of the Board shifts from theexisting role of an operator or serviceprovider to that of one that defines thestrategy and priorities for the operator.While the Board sets the guidelines anddefines overall objectives of a plan forperformance improvements, theoperating units define what is neededto implement the performance plan andcomply with overall objectives.

An appropriate regulatory frameworkmust also exist to monitor compliancewith obligations and service standardsin the agreement, and ensure thatissues such as tariff determination areefficient and commensurate withservice quality while protecting theinterests of all consumers. Theseregulatory functions could be lookedover by the Board, or in some cases,

an independent regulator, for approvingand monitoring business plans, andregulating the operations andobligations of the contracted operatoragainst set performance standards.Ideally, though, the policymakingfunctions should be separated from theregulatory ones.

As demonstrated in the case ofUganda in Box 9, the roles andobligations of both the operator and theBoard were clearly defined andallocated. The obligations of theoperator (the area offices in therespective towns) includedsafeguarding, using, maintaining andcontrolling assets, providing operationand maintenance managementservices, carrying out rehabilitation andextension of systems, and billing orcollecting revenues. The obligations ofthe Board (the head office) includedsetting tariffs, rates, charges, payingmanagement fees, monitoring andevaluating performance, providinggeneral strategic guidance, andcarrying out major capital works.

Commercial Orientationand Financial Viability

Performance agreements attempt atensuring improved commercialmanagement through higherefficiencies in current operations andenhanced service quality—bothadequacy and reliability. Suchagreements use the same parametersthat business units use and target thedelivery of improved services byapplying the principles of operationalefficiency and financial viability andsustainability. They result in improvedand accountable services by focusingon both the demand side in terms ofoptimizing water revenues, and thesupply side in terms of cost efficiency.

Performance agreements introduce improved commercial orientation andrequire that every water and sanitation service provider undertakes a tightercontrol over existing revenues and cost.

A commercial orientation to serviceswould require that every WSS serviceprovider undertakes its functions andresponsibilities as a business entity,realizing that such a business hasincome and costs, needs cash flows tosurvive, and requires capital to invest.Such agreements would henceundertake a tighter control over existingrevenues and costs through financialplanning and management and bylinking performance measures tooperations. This is, however, not inconflict with an orientation to provideaffordable services to everybody, withspecial consideration to poor people(as demonstrated through the casestudy of Delhi in Box 3). Deliveringaffordable services to poor populationsrequires a detailed involvement withfinancial issues, for example, for settingup cross-subsidization mechanismswithin tariff setting for keeping tariffsaffordable for poor people.

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Box 3: Performance Memorandum of Understanding in Delhi

The Delhi Jal Board is the primary service provider of water supply andsewerage services in the north Indian city of Delhi that has a population ofapproximately 16 million people. WSS services suffer from severe deficienciesthat are a result of institutional weaknesses, large gaps in service delivery,operational efficiencies, low cost recovery, and excessive reliance on financialassistance from the Government of the National Capital Territory of Delhi.

The Delhi Government was in talks for a Performance Memorandum ofUnderstanding with the Delhi Jal Board in 2005. The PerformanceMemorandum of Understanding, to be developed for a six-year period,would have defined the framework within which WSS reforms and conditionsfor generating greater accountability and performance tracking could beundertaken. It was to be updated annually to reflect actual pastachievements and hence update the assumptions and achievements. Eventhough developments, largely of a political nature, led the Government ofDelhi to put things on hold, the engagement had important lessons to offer.

The Performance Memorandum of Understanding was to address two keyissues of (a) a performance improvement plan that would focus mostly on animprovement and rehabilitation of the water distribution system in twooperational zones; and (b) a financial recovery plan that would include anincrease in the Delhi Jal Board’s operating revenues, a reduction in operatingcosts, and a capping of operating subsidies from the government so that theBoard could reach full cost recovery. This was to be achieved and monitoredthrough a financial model.

To support the preparation and implementation of the PerformanceMemorandum of Understanding as well as provide the Delhi Jal Board andthe government with an effective tool for monitoring progress in implementingthe reform milestones, a Performance Assessment and Management Systemset out key performance indicators. These included operational indicatorsrelated to the performance of the WSS system (such as coverage, meteringlevel, technical and commercial losses, energy efficiency, continuity ofservice, water quality, and quantity and quality of wastewater disposed),institutional indicators (for instance, organizational staffing, redressal ofcomplaints, and status of any special projects), and financial indicators (suchas operating ratio, unit cost of water produced and sold, collection efficiency,extent of cross subsidy, and debt service coverage).

The engagement also opened a broader debate around the true facts ofservice delivery as they exist currently in Delhi. It improved the understandingof issues in providing services to poor people, particularly of providingwater through group connections, that was taken up for consideration bythe Jal Board.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

6 In some cases the entire operations and management ofwater service delivery may be outsourced through variouscontracting arrangements such as leases, managementcontracts, concessions, and so on, which are beyond thepurview of this paper. A subsequent field note will discuss thesecontractual models.

These agreements help introduceimproved and enhanced productivity,managerial capacity, technicalexpertise, revenue collection practices,and investment strategies in specificareas of operation and strive to acquireand efficiently use capital investments.The efficiency gains and improvedmanagement practices help provideincentives for improving operationalefficiency. Box 4 illustrates the keygoals of commercial orientation thatrequire to satisfy the twin goals ofrevenue adequacy and cost efficiency.

In some cases a commercial orientationmay also mean that utilities and serviceproviders look for opportunities to lowercosts through outsourcing certainfunctions, but keeping the corefunctions of service delivery forthemselves. This attempts at makingmore use of market forces and

Box 4: Commercial Orientation and PerformanceImprovement Agreements

The objectives of performance improvement agreements are to bring abouta commercial orientation to service delivery for efficient and reliableservices, improved internal organizational accountability, and a customerorientation to service delivery by satisfying the twin goals of (a) revenueadequacy; and (b) cost efficiencies in service delivery.

Revenue Adequacy Cost Efficiencies in Service Delivery

! Nonrevenue water ! Nonrevenue water

! Appropriate tariff design ! Energy efficiencies

! Effective billing and collection ! Staff cost rationalization

! New connections including ! Chemicals efficiencypoor people

providers is to outsource certainfunctions such as informationtechnology and related services,engineering design and projectimplementation, maintenance ofbuildings and equipment, billing andcollection functions (including meterreading, meter maintenance, andrepair), data management systems,and so on. Outsourcing is usuallyundertaken because such ‘noncore’functions may be better performed byprivate contractors that specialize inthese functions.6 However, thesefunctions must be carefully defined sothat it is clear that the subcontractors,to whom the functions are beingoutsourced, are in control and runthese functions efficiently. Asdemonstrated in Box 5, ONEA inBurkina Faso has used performanceagreements for improving overall WSSservices and, within them, service

inculcating more market-styleincentives within their organization,even within the ambit of a performanceagreement. One option for service

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contracts for bringing aboutimprovements in specific areasof performance.

Autonomy

Performance agreements require thatservice providers have increasedautonomy in operational decisionsand resource management.Autonomy is concerned with thedegree of independence that utilitymanagers have from externalinterference for undertaking importantdecisions that could significantlyaffect their performance.

For instance, providers need to havethe independence to take important

Setting well-defined and targeted performance standards in performanceagreements ensures that expectations and goals are identified clearly rightat the start.

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Box 5: ONEA, Burkina Faso

The national water utility in Burkina Faso, ONEA, was restructured between 1990 and 1998 to create a commerciallyviable enterprise while expanding services to the poor and low-income areas with a commitment to ensuring that thepoor people pay affordable rates. The utility is responsible for producing and distributing drinking water to the populationin urban and semi-urban centers in Burkina Faso. It is in charge of water supply and sanitation services in over 35 citieswith more than 10,000 inhabitants.

Reforms in the water sector in the country have mostly focused on improving the performance of the public operatorthrough internal reforms, especially with the three-year performance contracts (Contrat plans) since 1993 that it signedwith the Government of Burkina Faso. The performance contracts set the targets for technical, financial, and commercialperformance which ONEA is expected to deliver upon. The performance agreement specifies 34 indicators that aremonitored regularly to check if ONEA’s performance is in compliance with these indicators.

The implementation success of the performance contract is assessed through these performance indicators by anexternal technical auditor and a follow-up committee that includes representatives from the government as well as fromONEA and consumers. The committee meets thrice a year and submits a report to the Board of Directors on theperformance of ONEA as against the performance indicators that are included as a part of the performance contract.While the monitoring arrangements are good, the performance contract does not have a system of incentives anddisincentives and does not provide for penalties or rewards for rewarding or penalizing performance.

The utility has also outsourced some of its functions to bring about cost efficiencies while inducing improvements inservices through performance contracts. In 2001, it entered into a five-year service contract for strengthening commercialmanagement and the financial and accounting systems of ONEA. The contract aims at optimizing the commercial andfinancial management of ONEA and creating a customer services department so that customer satisfaction is improved.

Up until now, the performance criteria of the contracts have largely been met. The utility has seen marked improvement inwater supply coverage, water losses, collection efficiencies, metering, and cost recovery through all these initiatives.

decisions that can have a significantimpact on their performance. Thesecould include making tariff proposalsbased on prudent cost and revenuepractices, allocating resources,procurement and personnel decisions.The example of Haiphong city inVietnam (Box 6) shows thatdecentralized services to the lowestadministrative level helped servicedelivery improvements in a sustainablemanner because of the increasedautonomy that it placed on its wardlevel offices at the operational level.The case of the Indian power sectorreforms (Box 8) also demonstratesefficiency improvements, resultingfrom the operator’s increased

autonomy in putting forward tariffproposals that are consistent withoverall revenue requirements.

Performance Standards

Setting well-defined and targetedperformance standards in performanceagreements ensures that expectationsand goals are identified clearly rightat the start. This also enables theappropriate measurement ofperformance results as per the desiredgoals and targets set in theperformance agreement. Appropriatelyset performance targets ensure thatthere is improved coordination andcooperation between all stakeholdersinvolved with WSS service delivery.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

Any performance target must portray allrelevant aspects of the water serviceprovider in a true and unbiased manner,allowing for a global representation ofthe system so that there could be easycomparison with better performersfrom the better performing utilities. Theindicators should be specific, clearlydefined, and easily measurable, witha concise meaning and a uniqueinterpretation for each indicator. Theymust be realistic and time bound andshould be easy to verify, especiallysince they need to be monitored andchecked regularly.

7 The ward or phuong is the smallest local unit of the socialist government in Haiphong.

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Box 6: Decentralized Service Delivery in Haiphong, Vietnam

The Haiphong Water Supply Company is a public utility that provides watersupply services to the urban population in Haiphong city in Vietnam. The city isdivided into five urban districts with a total population of 1.7 million people(year 2002), of which 0.7 million people live in urban areas. The companyreports to its owner, Haiphong Provincial Peoples’ Committee, through aregulator, the Department of Transport and Public Work Services. TheHaiphong Provincial Peoples’ Committee has considerable influence over thecompany and is responsible for decisions relating to investments and tariffs,but does not interfere much in the day-to-day functioning of the utility as longas there are no problems in the provision of water services.

The utility has witnessed impressive performance improvements and isconsidered a turnaround utility in the Vietnam water sector. It set itself amission to provide an adequate supply of good quality water for all users andthe responsibility to plan, implement, and operate the water supply system inthe most effective way possible. As a first step, it decentralized responsibilitywithin the company to the lowest possible level through the implementation ofthe phuong model, whereby it started the rehabilitation of the water supplynetwork in 1993 at the individual ward level.7 The target was to operationalizeimprovements through the phuong model by completely overhauling the watersupply services of a whole phuong at a time, installing master meters to recordinput flow, installing consumption meters to every household, and setting up alocal consumer service office at the phuong to offer easily accessible andprompt services to the customers. The phuong model also addressed theconcerns of the poor population living in Haiphong. The company madespecial efforts to bring improvements in Dong Quoc Binh, a ward distant fromthe major treatment plant and the city center that housed primarily poor cityworkers, so that they were not left out of service improvements.

The phuong model enabled the creation of ward-level local consumer servicesuboffices, staffed with five or seven members of the community, including amanager, two water meter readers, two bill collectors, and a technician whowere responsible for the overall operations and maintenance functions of thephuong. These offices undertook meter reading, maintenance, and revenuecollection once the network was rehabilitated and established, thus being heldcompletely accountable for water service delivery at the ward level. Annualperformance agreements between the Haiphong Provincial People’sCommittee and the Haiphong Water Supply Company made the latteraccountable for revenue and water production as well as for water quality. Theutility is expected to submit quarterly and annual reports to the Local FinancialDepartment on its financial performance. Service standards are set by thecompany itself that include pressure in the network, continuity of supply, andresponse time to complaints as indicators for the service standards. Staffmembers are also incentivized to exceed performance through a performanceenhancing incentive system that gives staff financial rewards for meeting theservice standards.

Performance agreements can also meet the objectives of regulation,especially since they can incentivize utilities and water service providers toachieve a mandated level of performance.

8 Reference: Tynan, Nicola, and Bill Kingdom. April 2002. A Water Scorecard. The World Bank Group, Private Sector and Infrastructure Network.9 The cases of Uganda, Vietnam, and Tanzania are illustrated in Box 9, Box 6, and Box 10, respectively.

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Box 7: Typical Performance Targets as Used in Different Performance Agreements

Performance can be measured against several indicators as demonstrated in the cases of Uganda, Vietnam, andTanzania.9 In Uganda, performance was monitored against indicators such as billing and collection efficiency, bad debtrecovery, improved water distribution, coverage and connectivity, and operation and maintenance management to reducewater losses. In Tanzania, better cost recovery and efficiency was continuously monitored for assessing if serviceoperators were truly improving performance for delivering better WSS services. In Haiphong city, Vietnam, servicestandards monitored include pressure in the network, continuity of supply, nonrevenue water, and response time tocustomer complaints.

Some of the common performance standards include the following:

Working ratio: Ratio of operating expenses (less depreciation) over operating revenues/income that is considered to beaccruing from the billings and hence is a measure of how costs are minimized while increasing the income. It would showthe possible savings and, thus, the extent of cost recovery.

Unaccounted-for water and nonrevenue water: Percentage of water produced that is not sold. It represents thelosses that may be physical or administrative. Unaccounted-for water is used as measure for investment efficiency andasset maintenance. In some cases, even nonrevenue water is monitored, which is measured as the difference betweentotal water produced and total water sold, expressed as a percentage of total water produced. This indicator highlightsthe extent of water produced that does not earn the utility any revenue.

Staff productivity: Measured as the number of staff members per 1,000 connections and is used as a measure of theefficiency of the workforce. It also partly projects on the employee-related costs. Staff productivity is an indicator ofoperating efficiency.

Coverage and new connections: Coverage includes the total number of households in the service area that areconnected to the water supply network with a direct service connection, as percentage of the total number of householdsin that service area. The number of new connections is usually looked at, since most contracts look for improving servicecoverage. New connections are measured as the number of connections that are newly registered in the year, and reflectmainly on the responsiveness of the operator to the consumers’ demand for increased coverage and access. Both theseindicators reflect on the commercial orientation of the operator through widening the customer base.

Collection efficiency: This is defined as the current year revenues collected, expressed as a percentage of the totaloperating revenues for the corresponding time period. It is an indicator for commercial efficiency as it measures howeffectively a utility is able to collect revenues from the services it bills the customers.

Literature reviews suggest that theperformance of water utilities could beassessed using four broad measures,which are responsiveness toconsumers, efficiency of investment,efficiency of operations andmaintenance, and financialsustainability.8 An indicative listing oftargets typical of performancecontracts are listed in Box 7.

Performance Contractsas a Regulatory Tool

Performance agreements can alsomeet the objectives of regulation,especially since they can incentivizeutilities and water service providersto achieve a mandated level ofperformance. Through performancecontracts, water service providers canbe made to focus on various

performance parameters such asquality, continuity, and reliability ofservices. At the same time,performance contracts serve as aregulatory tool and check if utilities areactually promoting efficiency andeconomy in their operation as well asproviding a fair deal to their consumers,through indicators such as pricing,investment and cost of services, quality

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

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Box 8: Regulatory Experience of the Power Sector in India

The power sector in India faces similar challenges as the water sector when it comes to quality of service and theassociated costs of service delivery. It is characterized by high transmission and distribution leakages, inefficiencies inmetering and collection, and highly subsidized tariffs that have resulted in deteriorating the financial health of providers andhence the quality of services that they offer. To address some of these challenges, power sector reforms in India were initiatedin the early 1990s. A series of reforms in its legal framework, institutional structures, policies and procedures, collectivelyattempted at improving the performance of the sector in delivering more reliable and efficient services.

Under the new institutional arrangement, a regulator was expected to provide incentives to the utilities by designing incentive-compatible performance contracts. The regulator would act as a buffer between the service provider and the consumer,hence distancing the government from the politically sensitive task of tariff-setting. The regulator enjoyed a certain degree ofautonomy and authority that enabled it to take independent decisions, establish clear guidelines, fix tariffs, issue licenses, setstandards, and so on. These were to be documented in the form of a license issued to the service provider (licensee) by theregulator.10 Independent Electricity Regulatory Commissions were created to scrutinize and evaluate the performance of theproviders on various performance parameters including quality, continuity, and reliability of services by the licensees as well ascheck whether licensees were promoting efficiency and economy in the electricity industry. Regulators were also expected toinspect the aggregate revenue requirements and subsequent tariff orders that power utilities placed for approval, to see ifcost estimates of service providers for explaining tariff proposals were justifiable and valid, and if they were indeed increasingtheir revenues through efficiencies in technical and commercial operations. Utilities were hence encouraged to become moreaccountable to the regulators for the delivery of improved services.

For instance, in the state of Uttar Pradesh, the Electricity Regulatory Commission devoted a full chapter of its Tariff Order inreviewing the actual performance of the licensees with respect to sales, revenue collection and losses, and expenditurecontrol. Tariff orders could also be put up for public review; only after they were cleared could the regulator decide on therevenue requirement. In the case of the city of Delhi, several respondents filed their responses to the petition filed by NorthDelhi Power Limited, one of the licensees in Delhi, and objected to the high level of Aggregate Technical and Commerciallosses,11 pilferage and theft of energy, and so on. The licensee was asked to justify the expenditure and take action forcurbing technical losses by improving cable faults, faults in transformers, and faults in feeder lines.

To improve reliability and quality of supply, the Electricity Regulatory Commissions also notified ‘Standards of Performance’ tobe adhered to by the licensees. Some of the performance indictors include collection per unit power input, cost of powerpurchase per unit of input, cost per unit of power purchase, database management, commercial losses, and metering andbilling. Regulatory commissions review these standards and, in some cases, also prescribe the compensation payable toconsumers for noncompliance of the standards. In other cases, the commissions could also incentivize performanceimprovements. For instance, in Delhi, the regulator adopted certain incentive mechanisms for incentivizing loss reduction, byrewarding the operator with a part of the additional revenue that accrued as a result of loss reduction. In Maharashtra, thecommission specified compensations in case of failure to meet the specified standards of performance, and punitivedamages have been specified by the regulator in case of failure to meet the standards set by the commission for theparticular supply activity.

(including service standards andservice obligations), and the rate ofreturn on the assets. An interestingcase of using regulatory tools to createincentives for improving accountability

and delivering improved services is thatof the power sector reforms in India(Box 8). Even though power sectorreforms have had mixed success in thecountry, the regulator was accorded an

important role for being a catalyst incommercializing the traditionalstate-owned monopolies andintroducing customer service-orientedmanagement by developing

10 Under the Electricity Act 2003, licenses are issued for a period of 25 years. Prior to the implementation of the Electricity Act 2003, ERC/State Reform Acts prescribed varying durations for the license.For instance, in Andhra Pradesh, licenses were issued for 30 years. Licenses contain the terms and conditions under which the utility (service provider) should operate. Violation of terms of the licensecould invite penalties that can even extend to cancellation of the license.11 The determination of Aggregate Technical and Commercial loss involves the estimation of three parameters, namely the transmission and distribution loss, collection efficiency, and units realized.

Performance agreements put in place a monitoring process, which aids theutility to compare its own performance over time, and also with betterperformers, and helps to judge if it is on track with the performance standards.

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Uganda introduced its urban water sector reform process in 1997, facilitated by a series of performance improvementinitiatives in the operation and management of its National Water and Sewerage Corporation (NWSC).12 Performanceimprovement was operationalized through the utilization of private sector management principles in a public setting,where the head office and the operating unit of the NWSC would work independently, each responsible for a set ofperformance standards that would help in regulating their mutual obligations. These performance improvement strategieswere crystallized as a three-year Corporate Plan that outlined the yearly strategic goals for each operating unit of theCorporation. As demonstrated below, the plans were, in turn, operationalized through subperformance contracts signedwith respective operating areas of the Corporation.

The basic principle to the performance drivers for the Corporation’s performance contracts related to increasedmanagerial autonomy, through the decentralization of decisionmaking to the business units operating in its service towns.There was a deliberate effort to separate day-to-day operational functions from that of performance monitoring andregulation to enhance accountability at the operational level. The internal reforms of the organization also stressed theimportance of increased commercial, cost-effective, and customer-based orientation to service delivery.

The performance agreements used a commercial orientation to improving services through internal incentive contractingwith financial incentives for encouraging managerial efficiencies. All utilities within the Corporation, with the exception ofKampala, went through two sets of performance contracts in 2000 and 2004. Signed between the Government ofUganda and the NWSC, the contract clearly defined the operating framework including the contract duration, obligationsof stakeholders, termination conditions, and arbitration terms. It also detailed a set of annual performance targets, which ifmet, were rewarded.13 For instance, staff members were incentivized to meet targets as they would receive bonuses overand above their regular salaries.

The contracts also specified some disincentives if performance was not up to the mark: if the quarterly target reviewassessment showed less than 85 percent achievement in all targets, the area management team would forfeit25 percent of the three-month basic payment to be deducted in three equal installments in subsequent consecutivemonths. Further, if there were three consecutive months of less than 85 percent of target achievement, the NWSCwould reserve the right to withdraw the area manager after giving a month’s notice. These incentives ensured that theemployees worked hard to meet their performance targets and become more accountable.

The implementation of these initiatives to improve services in the Corporation service areas resulted in a markedturnaround in its performance. Unaccounted-for water was reduced from 51 percent in 1998 to 39 percent in 2003 forthe entire region; there has been an increase in total connections served by 13 percent between 1999 and 2003; andmost areas now have 24-hour supply. A marked improvement was also seen in its staff productivity, which—expressedas a percentage of staff cost relative to total operating costs—improved from 45 percent to 26 percent between1999 and 2003.

12 The National Water and Sewerage Corporation is the key executing agency responsible for the planning, provision, and management of urban water supply and sewerage services.13 A series of short-term enhancement programs were also used for accelerating the achievement of performance improvement. These included the 100-Days Program (February–May 1999) and theService and Revenue Enhancement Programs (August 1999–August 2000).

Box 9: Using Incentives within Performance Agreements in Uganda

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appropriate incentives and institutionalmechanisms to discipline and improvethe performance of state-run utilities.The reforms targeted an improvementin operational efficiency and a rationali-zation of tariffs to encourage the supplyof electricity under more efficientconditions in terms of costs (pricingstrategies and investments) and quality(continuity and reliability of service).

Encouraging and ImprovingExternal Accountability

External accountability refers to theaccountability that the utility has to fulfillto external stakeholders who play animportant role in its planning andoperations. These include thepolicymaking, regulation, and servicedelivery functions that are met bydifferent parties involved in the deliveryof WSS services. The exercise of allthese functions means that there are

14 A benchmarking exercise measures, compares, andanalyzes key performance data on a regular basis and usessuch data to share good operating practices across serviceproviders to build capacity where there are performancegaps. Balanced scorecards involve a performancemanagement approach that focuses on various overallperformance indicators such as financial performance,customer perspectives, internal business processes,operational performance, learning and growth potential,and helps monitor progress towards some strategic goalsset by the provider.15 See Field Note # 4 in this series, ‘Implementing RobustConsumer Voice Mechanisms’ for an explanation ofconsumer complaint resolution mechanisms that enableutilities to not only meet specific standards of service but toconstantly raise these standards.16 Citizen Report Cards are used to obtain consumerfeedback on satisfaction levels regarding various aspects ofservices. They record consumer voices throughparticipatory methodologies such as focus groupdiscussions and sample household surveys forunderstanding service-related problems.

multiple accountabilities that the utilityhas to various stakeholders.

Service provider accountability to allthese stakeholders could bestrengthened through the performancestandards that the provider has tomeet. One way could be to have theBoard or an independent regulatorregularly monitor the standards.Another way could be to have theservice operator report regularly andconsistently on specific standards.

The areas of performance monitoringinclude service quality and operationalefficiency indicators such as waterlosses, energy cost, revenue collection,water production, drinking waterquality, customer service, financialperformance, new connections, and soon. The setting of these standardswould need to be done by the Board inclose consultation with the operator, so

that there is ownership of such amonitoring mechanism. Monitoring ofperformance is important as it helps theutility compare its own performanceover time, and also with betterperformers (usually a benchmarkingexercise or through balancedscorecards).14 Such a monitoringmechanism helps to see if performanceis on track with the set standards.Consumers could also providefeedback on services throughconsumer grievance redressalmechanisms15 or could rate theirproviders through mechanismssuch as citizen report cards, and hencehold their service provider moreaccountable for matching services toconsumer expectations.16

Encouraging and ImprovingInternal Accountability

Internal accountability addresses howthe management and staff of the utilityare held accountable for efficientlydelivering services and, at the sametime, how the work culture transformsitself for bringing about improvedsustainable change. This involves aprogressive empowerment of workersand their proactive involvement at alllevels of operations. It also involvesdevolution of power to the operator

Not only performance bonuses and cash prizes, awards and recognitionat the overall level could also provide the means for ensuring improvedinternal accountability.

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including increased autonomy forimproving team accountability. Staffmembers must feel proud of theircompany, be given more autonomy,and be made to feel more responsible ifthey are to become more accountablefor the services that they are made todeliver. Hence any reform process thattargets improved governance andaccountability can succeed if it is wellplanned, adapted, and owned by allimplementing stakeholders.

One of the key ways to encourageinternal accountability is by inculcatinga good corporate culture that inspiresstaff to be more accountable. Typicallygood corporate culture is shapedby the chief executive and topmanagement and involves moral,social, and behavioral norms that canhelp inspire staff and managers to dowell and excel in their job functions.Corporate culture is created throughvision statements of the company andwell-defined and clear performanceobjectives for service quality andcoverage. This helps shape the beliefs,core values, attitudes, and ability ofstaff members to set priorities toachieve their mission. These in turnmust be supported by having in placecriteria for promotion and salary hikesthat encourage good performance. Atthe same time, training should beprovided to staff and management forimproving their skill sets and deliveringimproved services.

Incentivizing staff to meet well-definedperformance targets as set in theperformance agreement is key tostrengthening internal accountability.Annual staff performance evaluationsare also considered important for givingmanagers and staff feedback on theirperformance. It is important that thereare incentives, sanctions, or both, for

encouraging or discouraging theprovider in meeting these performancetargets. A utility must use incentive-based systems to reward goodperformance if it is looking to encouragethe delivery of improved services.

Not only performance bonuses andcash prizes, awards and recognition atthe overall level could also provide themeans for ensuring improved internalaccountability. At the same time,sanctions could be imposed ifperformance is not up to the mark. Staffmembers could also be encouraged to

perform better through capacity-building and interesting staff trainingprograms that they could take part in.As demonstrated in Box 9, the waterutility in Uganda encouraged servicedelivery performance through specialincentives for staff members.

Another innovative case of providingincentives for improving accountabilityis Tanzania (Box 10) where increaseddegrees of autonomy in operationsprovided the incentive for the utility toimprove services through better costrecovery and efficiency.

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Box 10: Using Incentives and Increased Autonomy to Spur PerformanceImprovements in Tanzania

Unsatisfactory performance of the urban water sector prompted the Government of Tanzania to call for urgent reform ofthe sector in 1993, through the creation of semi-autonomous Urban Water and Sewerage Authorities to operate andmaintain water supplies in the urban towns. Advisory boards for these Authorities were created for overseeing theiractivities, including looking after key management issues such as budgeting and tariff-setting. The Urban Water andSewerage Authorities were responsible for operations and would be allowed to retain revenue collected through the saleof water and related services to meet operation and maintenance costs. A memorandum of understanding was signedthat detailed all the guidelines including personnel, financial, commercial, technical, procurement, reporting, andmonitoring mechanisms within which authorities would operate.

The unique feature of the memorandum of understanding was that it designed a distinctive incentive scheme forencouraging better performance in service delivery and operations through improved cost recovery and efficiency. Asindicated in the table, three categorizations were developed for the Urban Water and Sewerage Authorities, based on thelevels of costs that they could recover. Depending on this categorization, different degrees of autonomy were granted tothem for undertaking operating and management decisions.

Categorization Costs Covered Autonomy Granted

Category A Met all operations and maintenance (O&M) costs Fully autonomous, with no government control

Category B Met all O&M costs save personnel emoluments Partial government support in operations

Category C Met all O&M costs except plant electricity and Complete government support in operationspersonnel emoluments for permanentlyemployed staff

Accordingly, Urban Water and Sewerage Authorities were incentivized for improving their respective financial performanceso that they would achieve a higher category status, improved cost recovery and hence a higher level of autonomy inoperations. Simultaneous to this reform process, a World Bank-funded government-executed Urban SectorRehabilitation Program was also implemented in 1997 for capacity building in nine of the Urban Water and SewerageAuthorities.17 Today four out of those nine authorities (Arusha, Moshi, Tanga, and Mwanza) are able to meet all operationand maintenance and staffing costs and have been granted the Category ‘A’ status, or complete autonomy in operations.

17 These nine Urban Water and Sewerage Authorities were Arusha, Moshi, Mwanza, Tanga, Shinyanga, Dodoma, Mbeya, Iringa, and Morogoro.

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Concise content and effective processes make performance agreementsmore effective. The contract preparation and design process should also bewell-organized and transparent, involving frequent stakeholder consultations.

Lessons forDesigningPerformanceAgreementsAs the pressure increases for waterutilities and service providers to providequality services to their customers in afinancially sustainable manner, the needto ensure sound management and costefficiencies in service delivery willrequire that utilities opt for performanceimprovement strategies that satisfythe key principles of enhancedautonomy, improved accountability,and a commercial orientation toservice delivery.

Performance agreements are animportant tool that can pave the wayfor a utility or municipality’s overallservice improvement program, helpingthem reform and restructure their urbanwater sector for sustainable andimproved performance and cost-effectiveness. The incentives to performbetter and be more accountable couldbe strengthened within the institutionalstructure of performance agreements,so that all stakeholders are indeedencouraged to work towards betterservice delivery outcomes.

This section draws on some lessonsthat such agreements have to offer forthe successful design and implementa-tion of performance agreements.

Enabling Conditions

The case studies demonstrate thatsuccessful implementation ofperformance agreements depends onthe presence of strong leadership aswell as a conducive institutional andlegal framework supporting suchagreements. The specific design andthe appropriate model for performanceagreements and their constantmonitoring is important for bringingabout sustained performanceimprovements, but focusing only onthese elements will not necessarily leadto their effective and sustainableimplementation. In Tanzania, a series ofamendments was made to existinglegislation in 1997 and 1999, and arevised National Water Policy in July2002 set forth the environment forreform. This was also the case inUganda and of the reform process forthe power sector in India.

The cases demonstrate that good andstrong leadership is important. Theydemonstrate how strong leadershiphelped bring about a work culturechange that is pro-reform of the watersector and, at the same time, helpedsupport a culture of learning andtransparent systems that enforceaccountability and autonomy. Themanagement needs to work hard onchanging the corporate culture of theutility and convince everyone of theneed for change. Strong commitmentfrom top level management, includingthe politicians, was reflected in the caseof Uganda and Vietnam where politicalwill and government support duringproject preparation and implementationhelped the successful roll-out ofthe agreements.

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process should also be well organizedand transparent, involving frequentstakeholder consultations. Thisprocess has to be supported withstrong leadership that is pro change ofthe existing work culture.

The contract needs to spell out clearly

the roles of all stakeholders, theirresponsibilities and risks, reflecting the

accountability of all parties and

avoiding conflicts between different

roles. Extensive and systematic

stakeholder consultations on central

issues such as distribution of the rolesand responsibilities of each actor in thesector, risks in the reform process, andthe exact design of the contract canhelp create mutual learning and buildtrust among stakeholders. This was

In Uganda, the required push for reformcame from the presence of achampion—a strong leader—who wascommitted to bringing about a newcorporate culture, to moving towardsmore professional, customer-oriented,and commercially-run services byputting in place systems that enforcedaccountability and autonomy with theheads of the operational units. Changemanagement was mostly internaland driven by the managing directorhimself, and this helped gainacceptability with the staff.

In India’s context this will mean thatperformance agreements aresupported by legal, institutional, andregulatory frameworks, as well as acommitment of all stakeholders withinwhich such performance agreements

are signed. A political will and buy-inand ownership from all stakeholders willbe required if such agreements are tobe successfully implemented. This isespecially true because the issues ofwater supply are hugely politicized inIndia, and the willingness to adhere tothe objectives of financial sustainabilityoften remains blurred. All stakeholderswill need to be fully consulted and keptin the loop during the process,development, and implementation ofperformance agreements.

Well-Structured Design ofPerformance Agreements

Concise content and effectiveprocesses make performanceagreements more successful. Thecontract preparation and design

20

An effective monitoring process (like a benchmarking exercise) systematicallyreviews and monitors service levels and key performance data atregular intervals.

demonstrated especially in the case ofHaiphong, where regular consultationsand a pilot helped prove, especially tothe communities, the benefits of reformand the phuong model and made itsimplementation easier. Performanceagreements also need to secure theright incentives to deliver and demandbetter services. The agreements willneed to create more autonomy for theprovider in operational matters if theyare being expected to take on fullownership of service delivery. Again,the cases of Tanzania and Ugandademonstrate how performanceagreements encouraged autonomy inoperations of the providers andencouraged them to become moreaccountable for improved services.

In India, this will require a trueimplementation of the 74th AmendmentAct that empowers urban local bodiesto take full and actual responsibility ofWSS service delivery. This may bedifficult to implement immediatelybecause of the complex nature ofexisting relationships between differentWSS stakeholders, and because somelocal bodies may not have adequatecapacity or finances to undertake fullresponsibility for WSS services withimmediate effect.

A start could at least be made by a

separation of policy, regulation, and

service delivery functions and clarity in

their respective roles and functions. The

state’s role (state parastatal or state

government) could focus on settingstandards, establishing regulatorysystems for environmental and health-related quality issues, monitoringperformance, ensuring informationgeneration on adherence to standards,and building capacity of local bodies.Local bodies could be increasinglyempowered and made to takeownership and responsibility of serviceprovision, with the choice of how toprovide services being left to the localbody itself. For this to happen, newrelationships on capital expenditure,staff issues, revenue-raising ability, andinter-governmental transfers forempowering local bodies in taking overfull responsibility and accountability forservice delivery would need to develop.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

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Specific Targetsand Incentives forPerformance Improvements

Performance agreements enforce themonitoring side to performanceimprovements through performancetargets. The agreements need to set upperformance targets that are specific,measurable, ambitious, realistic, andtime bound. Utilities and serviceproviders must also be incentivized tomeet these performance standardsthrough rewards and bonuses thathonor and encourage goodperformance. Most of the casestudies—Tanzania, Uganda, andHaiphong—demonstrated howincentives were used to encourage theservice provider in meeting servicestandards and targets that weredefined in the agreements.

In the Indian context this will beimportant, especially because there arevery few instances where performancetargets are set for utilities. Even ifthey are set, very little monitoring ofperformance is undertaken on asystematic basis. The recent roll-out ofthe Handbook on Service LevelBenchmarks by the Ministry of UrbanDevelopment is an important step inthis direction. The objective of thishandbook is to identify a minimum setof standard performance parametersfor the water sector that is commonlyunderstood and used by allstakeholders for monitoring serviceperformance. The framework wouldmake it possible to eventually link thedisbursement of centrally sponsoredschemes to the improvement andachievement of these standards ofperformance, and would henceencourage more accountability fromservice providers.

Monitoring PerformanceAgreements, Outcomes,and Deliverables

An effective monitoring process isimportant for the successfulimplementation of performanceagreements. Such a system mustsystematically and consistently reviewand monitor service levels andperformance targets at regular intervals.A formalized organization of suchperformance monitoring could beundertaken through processes such asbenchmarking—which involves a

constant process of measuring,

monitoring, and analyzing key

performance data of the service

provider on a regular basis; such data

can then be used to share good

operating practices and build capacity.The case study of Delhi demonstratedthat the creation of a performanceassessment and management systemwould provide the city government withan effective tool for monitoring progressin implementing reform milestones. Asimilar exercise is now being plannedby the Ministry of Urban Development

22

Consumers could also hold the service provider more accountable throughcarefully designed consumer feedback mechanisms that could beincorporated as part of performance improvement planning.

in India for institutionalizingbenchmarking that it is rolling-outthrough its Handbook on Service LevelBenchmarks and ensuring that this iscarried out on a systematic andcontinuous basis.

Consumers could also hold the serviceprovider more accountable throughcarefully designed consumer feedbackmechanisms that could beincorporated as part of performanceimprovement planning. Such

mechanisms ensure that serviceproviders satisfy the obligations ofmeeting specific standards of serviceand respond to consumer complaintsin a speedy, appropriate, and efficientmanner. Consumer feedbackmechanisms also help serviceproviders receive constant feedbackabout services provided. Constantlymonitoring this feedback helpsimprove performance and deliverservices that are closer to consumerexpectations. Some performance

agreements require setting up ofeffective customer complaint systemsthat are robust and receptive inaddressing consumer complaints andgrievances in a speedy manner.18

In some cases performanceagreements also require that afinancial model is instituted so that theresults and outcomes as expectedout of the agreement are indeed met,since they help in analyzing andmonitoring the financial implications

18 See Field Note # 4 in this series, ‘Implementing Robust Consumer Voice Mechanisms’ for an explanation of consumer complaint resolution mechanisms that enables utilities to not only meet specificstandards of service but to constantly raise these standards.

Performance Improvement Planning:Enhancing Water Servicesthrough Performance Agreements

23

that performance agreements have tooffer. Financial models are diagnostictools that track the financial health ofservice providers and help assesswhether service providers are movingtowards the target of deliveringfinancially sustainable services. Thecase of Delhi had plans for a financialmodel that would have helped theBoard in planning its performanceimprovements along with viability.

ConcludingRemarksPerformance agreements help set up aconducive institutional environment forfostering, incentivizing, and sustainingservice delivery improvements on along-term basis. Their careful design isimportant, and they must includemeasures for increased operationalautonomy and performance-relatedremuneration or incentives to achievethem. The agreements must alsoinclude an appropriate definition ofstakeholder roles and responsibilities ofthose who are involved in the contract,so that service delivery functions areclearly delineated from those ofpolicymaking and regulation. Thesefeatures—along with an enablingenvironment for adopting theseagreements including strongleadership, willingness of allstakeholders to adopt such practices,an appropriate policy and legislativeframework, and a good monitoringsystem for reviewing serviceimprovements—will ensure that, first,such agreements are implementedsuccessfully, and second, that theservice improvements targeted bysuch agreements remain sustainablein the long run.

ReferencesMarch 18, 1999. Trinidad and TobagoManagement Contract: 1996 to 1999.Based on a paper presented byG. Weatherdon of STWI, UK, at aWEDC seminar.

November 2003. A Case Study ofthe National Water and SewerageCorporation—Uganda. Modes of PublicEngagement (BNWP 033), Kampala.

Azuba, Christopher Henry. May 2002. LocalGovernment Contracts with PrivateOperators in Uganda. Water ResourcesManagement Group and the Water andSanitation Sector Board, Water Forum, May6–8, 2002, Washington, D.C. (Pr. Engineer,Water Authorities—Directorate of WaterDevelopment, Uganda)

Baietti, Aldo, William Kingdom, and MeikeVan Ginneken. February 2006.Characteristics of Well-PerformingPublic Water Utilities. Water Supplyand Sanitation Working Notes,Note No. 9.

Brown, Ato. November 18, 2004. TheReform Agenda for Urban Water Supplyand Sanitation. World Bank–Civil SocietyDialog on Urban Water Supply andSanitation. London.

Coffee, Joyce Elena. April 1999. Innovationsin Municipal Service Delivery: The Case ofVietnam’s Haiphong Water SupplyCompany. Department of Urban Studiesand Planning, Massachusetts Instituteof Technology.

Water and Sanitation Program-South AsiaWorld Bank55 Lodi EstateNew Delhi 110 003India

Phone: (91-11) 24690488, 24690489Fax: (91-11) 24628250E-mail: wspsa@worldbank.orgWeb site: www.wsp.org

May 2009

WSP MISSION:To help the poor gain sustained accessto water and sanitation services.

WSP FUNDING PARTNERS:The Governments of Australia, Austria,Belgium, Canada, Denmark, France,Ireland, Luxembourg, the Netherlands,Norway, Sweden, Switzerland, the UnitedKingdom, the United States of America; theUnited Nations Development Programme,The World Bank, and the Bill andMelinda Gates Foundation.

AusAID provides WSP-SAprogrammatic support.

ACKNOWLEDGMENTS:This field note was peer reviewed by CatherineJ. Revels, Chris Heymans, Jean-Pierre Mas,Mario Alejandaro Suardi, Nicholas J. Pilgrim,Vandana Bhatnagar, and Vandana Mehra.

TASK MANAGER:Pronita Chakrabarti Agrawal

AUTHOR:Pronita Chakrabarti Agrawal

BACKGROUND RESEARCH:Pronita Chakrabarti Agrawal (research carriedout in 2005 and 2006)

Editor: Anjali Sen GuptaPictures by: WSP-SA/Sajid DarokhanCreated by: Write MediaPrinted at: PS Press Services Pvt Ltd

ABOUT THE SERIES

WSP Field Notes describe andanalyze projects and activities in

water and sanitation that provide

lessons for sector leaders,

administrators, and individuals

tackling the water and sanitation

challenges in urban and rural areas.

The criteria for selection of stories

included in this series are large-scaleimpact, demonstrable sustainability,

good cost recovery, replicable

conditions, and leadership.

The findings, interpretations, and conclusions expressed are entirely those of the author andshould not be attributed in any manner to The World Bank, to its affiliated organizations, or tomembers of its Board of Executive Directors or the companies they represent.

Djerrari, Fouad M., and Jan G. Janssen.Overview Paper on Institutional Optionsfor Urban Water and Sanitation Servicesin Africa.

Kayaga, Dr. S., and K. Sansom. 2003. PPPin Small Towns’ Water Supply in Uganda.29th WEDC International Conference,‘Towards the Millennium DevelopmentGoals’. WEDC, Abuja, Nigeria.

Mugisha, Silver, Sanford V. Berg, andDr. William T. Muhairwe. April 26, 2005.Using Internal Incentive Contracts to ImproveWater Utility Performance: The Case ofUganda’s NWSC.

Muhairwe, Dr. William T. February 2005.Performance Improvement Programs: TheCase of National Water and SewerageCorporation—Sewerage CorporationUganda. A paper presented at the WSP-SAorganized workshop on ‘Managing WaterSupply and Sanitation Services in LargeCities and Urban Areas’, February 23-24,2005. Karachi, Pakistan.

Mwoga, Jude. Performance-basedContracting as a Tool for the Water SectorReform: The Case of Performance Contractsand Management Contracts in the UrbanWater Utilities in Uganda. InternationalInstitute for Infrastructural, Hydraulic andEnvironmental Engineering, Delft,The Netherlands.

Rosenthal, Shane. February 1, 2001. TheManila Water Concessions and Their Impacton the Poor. Yale School of Forestry andEnvironmental Studies.

The Delhi Jal Board. 2005. PMoU.