Performance improvement planning helps service providers in bringing about incremental improvementsin services by applying the principles of commercial orientation and financial viability. This overview paperdiscusses the context for performance improvement plans in India, and the key elements and objectivesthat such strategies should constitute.

Performance Improvement Planning

Upgrading and ImprovingUrban Water Services

April 2008

Overview

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

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Executive Summary

The water supply and sanitation sector in India continues to be

plagued with severe deficiencies in the availability, quality, and

equity of services. Though access to infrastructure may be

increasing in some cases, access to reliable, sustainable, and

affordable water supply and sanitation services remains poor in

general. Services remain deficient, with water available for only

few hours a day; many remain unconnected to the network, and

wastewater is disposed of without adequate treatment.

Consumers often spend large sums of money on expensive and

unsafe alternatives to cope with poor services.

While there are short-term procedural and technical solutions

that providers can undertake for demonstrating immediate

improvements in performance, these must be supported

by institutional reform and adequate incentives for better

management, operational autonomy, and improved

accountability. Service providers can, through performance

improvement plans, target the delivery of improved services by

(a) applying the principles of customer orientation and financial

viability; and (b) by stressing on operational efficiency and

sustainable revenue strategies for improved and accountable

services. Such plans focus on both the demand side in terms of

maximizing water revenues, and on the supply side in terms of

cost efficiency and cost recovery. This overview paper explores

how such improvements can be undertaken so that they remain

sustainable in the long run as well.

ContextUrban water supply and sanitation(WSS) utilities and service providersacross India continue to be plagued bysevere deficiencies in the delivery ofservices, with access to reliable,sustainable, and affordable WSSservices remaining poor in general.1

Indian cities are today providing, onaverage, less than five hours of watersupply in a day. Not even one city in thecountry has a continuous water supplysystem. Many cities have 40–50percent nonrevenue water (these beingvery unreliable estimates since meteringlevels are extremely low) and poorcollection practices, with cost recoveryrates as low as 20–30 percent ofoperation and maintenance (O&M)costs. This results in limited funds forroutine maintenance and eventually inpoor infrastructure coverage, access,and quality of services. Despiteincreased investments to improveperformance (as seen in Figure 1),results have been poor and have notnecessarily produced better outcomes.The impact of such poor services is feltby all consumers who are forced tocope with intermittent and unreliablesupplies through expensive and unsafecoping strategies, with the degree ofthe impact being most severe for thelow income consumers.

So what is hindering the deliveryof efficient water services? Poorcost recovery does impact the financialhealth and overall performance ofservice providers as those with

1 In the Indian context it is difficult to draw a parallel to thecommon definition for a ‘utility’ as used in the internationalcontext. For the purpose of discussion in this paper, ‘utility’ isdefined as an organization that is majority owned andcontrolled by the government and could consist of differentforms, some of which may be undistinguished from thegovernment unit that they may be part of. It could also mean aspecially carved out unit in the municipal body involved withthe delivery of municipal services, water being one of them.

Performance improvement plans must be based on cost recovery, operationalefficiency, and improved demand management. They should be supported bya robust financial model and a strong performance monitoring system.

Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

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The basic aim of the performance improvement series is to help water utilities and service providers understand andadopt mechanisms that promote compliance with adequate service standards, cost recovery, and sustainable revenuestrategies, as well as help achieve financially viable and sustainable improved services. The objective is to be able tofocus not only on specific performance improvement areas by advancing technical, commercial, and operationalefficiency—such as leak reduction, billing and collection, customer service, and tariff setting, among others—but alsoensure that such improvements remain sustainable and viable in the long term through arrangements such asperformance agreements, monitoring and evaluation, and so on.

Performance improvement planning helps service providers in bringing about incremental improvements in services byapplying the principles of commercial orientation and financial viability. They must be supported by institutional reformwith appropriate incentives and broader financial accounting reforms if they are to remain sustainable in the long run.

Issue No. 1 is an overview paper that discusses the context for performance improvement plans in India, and the keyelements and objectives that such strategies should constitute. Subsequent field notes will focus on the identified andimportant elements of such plans.

Box 1: Why is Performance Improvement Necessary?

Figure 1: Poor Services Despite Increased Investments

Mumbai

Delhi

Bangalore

Ahmedabad

Chennai

Continuity of Service

Hours of Supply

0 1 2 3 4 5 6

Delhi

Bangalore

Chennai

Mumbai

0 10 20 30 40 50 60

Nonrevenue Water

Collection Period

Chennai

Mumbai

Bangalore

Delhi

0 1 2 3 4 5 6 7 9Months

84.5

161

91%

8th Plan 9th Plan

8

Note: The figures for the last bar chart indicate central sector investment only and are reported in dollar millions. (US$1 = INR 40, as of September 2007.)Source: WSP-SA Benchmarking Study, Phase I, 2005; Planning Commission of India (Assessment 2002).

Percent

poor finances continue to haverecurring problems with operationsand hence compromise on the qualityof services delivered. However,this is not the only reason. It isincreasingly being recognized thatthe sector’s worrying performancegoes beyond only financial andcapacity constraints and stemsmore from institutional deficienciesand the lack of systemic incentivesto deliver ongoing quality services.Control from governments (centralor state) has resulted in little eagernessfor service providers to undertakeWSS functions and responsibilitiescompletely. Service providers stilllack the true functional autonomyand authority to undertake manykey decisions, be it operatingarrangements for WSS assets,expenditure decisions for assignedfunctions, or even determiningtheir staff needs for basic servicedelivery functions.

There is also a lack of clarity in rolesand limited separation of policymaking,regulatory, and service deliveryfunctions. The enabling incentivesfor encouraging the delivery ofgood services are severely lacking,as the survival of providers does notdepend on objectives of cost recoveryand efficiency. Instead, providerssurvive on the back of virtuallyunconditional financial support fromgovernment and, in the absenceof ring-fenced arrangements, onnumerous opaque cross-subsidieswithin municipal accounts. Increasedcapital spending is also beingundertaken for improving services, withasset creation in isolation of demand orfinancial viability, or without anassessment of current operationalperformance and needs and hence littlefocus on O&M.

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The sector’s worrying performance goes beyond financial and capacityconstraints and stems more from institutional deficiencies and lack ofsystemic incentives to deliver improved services.

Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

How Do WeBring aboutBetter Services?Urban water service providers will needto significantly enhance performance inorder to improve services and to matchinternational best standards. This willinvolve operations and maintenance,quality of service, financial health,governance issues, managementsystems, and community relationships.While service providers will need tofocus at their individual level on specificmeasures to ensure improvements inthese areas of performance, suchefforts will remain short-lived andunsustainable unless they are coupledwith institutional reform formanagement and operationalautonomy and accountability. Table 1demonstrates how such improvementshave been brought about in the

international context using theprinciples of performance improvement.

Role Separation and Clarity

The institutional framework will needto clearly define the way in whichthe sector is governed, regulated,managed, incentivized, and financed,so that it creates the foundation forsustainable and more accountableservice delivery. Institutionalarrangements will need to clearly definethe functions and responsibilities of allstakeholders, de-link service provisionfrom policy and regulation functions,and create appropriate regulatory andenforcement mechanisms that makeproviders more accountable. By clearlyallocating responsibilities it will also bepossible to control and monitor servicedelivery performance more effectively,structure adequate sources of fundingand, at the same time, hold theappropriate stakeholder responsible forits respective and designated function.

Incentives forEnhancing Accountability

Institutional arrangements will need tobring in more control over operationsand address issues of weak financialincentives. It is absolutely essential tocreate separate WSS financial accounts,so that WSS managers can control,measure, and compare financial healthon a regular basis as well as understandthe financial impact that performanceimprovement initiatives have onservices.2 Providers will need toeventually move to activity-basedcosting that helps capture the nuancesrequired for decisionmaking on specificperformance improvements. They mustalso be made to operate underconditions of a hard budget constraint,

Utility Name Country Initiatives for Performance Improvement

Haiphong Provincial Vietnam Used the Phoung model, which focused on performanceWater Supply Company improvements at the ward level, one at a time.

Johannesburg Water South Africa Used public-private partnerships for performance improvementswhere roles and responsibilities within the utility and the externalenvironment have been clarified and clearly separated.

National Water and Uganda Using incentive-based performance contracts extensively andSewerage Corporation adopting a wide range of change management tools to

improve performance.

Public Utilities Board Singapore Superior performing utility conducting continuous performanceimprovement in all aspects of service delivery by involving the privatesector through service contracts when deemed more efficient.

Societe Nationale des Senegal Broad package of reform measures, including role clarity andEaux du Senegal separation, a legal structure, and a public-private partnership in the

form of a hybrid lease (affermage) contract.

Table 1: International Experiences in Delivering Performance Improvements

2 In some cases service providers perform water supplyfunctions as one of their many tasks, especially if suchfunctions are endowed with municipalities or town divisions. Insuch cases they have one overall budget covering all servicedelivery functions and maintain no separate accounts for WSSservices. Hence tracking the impact of performanceimprovements in such cases becomes futile.

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and in case they do receive anygovernment grants and transfers,these could be made more transparent,part of a rational budgeting processand contingent on operationalefficiencies. As the case may be,improvements in services may alsorequire access to additional financesfrom capital markets, in which caseproviders would need to demonstratefinancial viability and conditions ofcreditworthiness through presentationof financial statements and projectionsbased on evidence of effective andefficient operations and expansionplans. Not only financial incentives,utilities and service providers can alsobe motivated otherwise to improvetheir performance. For instance,enhanced independence from externalgovernment interference,independence in undertaking importantdecisions that significantly impact theirperformance such as autonomy insetting tariff decisions, in allocatingresources, in procurement decisions, indeciding their own workforce, and soon, can encourage utility staff toimprove their performance.

Provider-Level Interventionsfor Immediate Improvements

Notwithstanding the need forinstitutional reform, broader financialaccounting reforms and incentivestructures that remain out of the controlof the service provider and could takea few years to implement, there areincremental interventions at the providerlevel that can be undertaken in theshort run for demonstrating immediateimprovements in performance byapplying the principles of customerorientation and financial viability.

PerformanceImprovementPlansPerformance improvement plans targetthe delivery of improved services byapplying the principles of efficiency andfinancial viability to service delivery.Such plans use the same parametersthat businesses use for measuringperformance and for targeting financialefficiency. These plans stress on

operational efficiency and sustainablerevenue strategies that provideimproved and accountable services byfocusing on both the demand side interms of optimizing water revenues,and the supply side in terms of costrecovery and cost efficiency. Acommercial 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 capital to invest. Suchplans would hence undertake a tightercontrol over existing revenues andcosts through financial planning andmanagement and by linkingperformance measures to operations.This is, however, not in conflictwith an orientation to provideaffordable services to everybody,with special consideration topoor people.

Strategic BusinessPlanning Exercise

Performance improvement plans arederived by undertaking a strategicbusiness planning exercise.3

A strategic planning exercise helpsthe service provider understand theshortcomings in service delivery andthe specific areas requiring performanceimprovements, and thus plan forsystematic improvements in services.Such planning exercises would need tomove away from the standard andtypical annual reviews to longer term

Performance improvement plans target the delivery of improvedservices by applying the principles of efficiency and financial viability toservice delivery.

3 A strategic business plan is different from a city developmentplan, in the sense that (a) the latter is a broader planningexercise that helps cities gain a perspective and a vision forfuture development; (b) it helps indicate where the city is now,where it wants to go (vision, goals), what are its priorities, howcan it reach there, and what interventions are required for it tobecome economically productive, efficient, equitable, andresponsive to the needs of a growing population; and (c) ithelps provide the basis for cities to undertake reform and helpdirect investment into city infrastructure. A strategic planfocuses on a specific service and helps the service providerunderstand shortcomings in service delivery and undertakestrategies that address the specific areas requiringimprovement and future needs.

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Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

and focused planning horizons that haveshort- (two to five years), medium- (fiveto 10 years), and long-term (20 to 30years) goals and targets, along withspecific timelines required to meet them.Under such a planning exercise theprovider is required to undertake anintegrated and analytical approach toachieving improvements in services, byunderstanding all components of cost,demand, investment, and revenuestreams. A strategic planning exercisedefines the scope and nature ofperformance improvements by assistingthe provider in twospecific ways:

• It helps decide who does what, whatto do in-house, what to outsource,what training is needed, and so on.

• It helps understand targets andobjectives of contracts orperformance agreements of bothindividuals and managementinvolved, as well as of the operationalunit as a whole, in case the means toachieving service deliveryimprovements are being outsourced.

The strategic plan must, however,have the scope to be reviewed andupdated every five years to keepup with achievements andperformance improvements.

Performance Agreementsto Implement PerformanceImprovement Plans

Performance agreements are a meansfor implementing performanceimprovements within a conduciveinstitutional framework that helps foster,incentivize, and sustain service deliveryimprovements on a long-term basis.These agreements form the basis for amarket-orientation approach to thedelivery of public services, by exploringmeans for lowering costs byoutsourcing certain functions, bygradually introducing incentives withinthe organization for incentivizingperformance improvements, and so on.In undertaking such agreements,water utilities can use performanceagreements in clearly defining roles andresponsibilities of all stakeholders sothat there are no ambiguities or overlap

in functions. Under performanceagreements, the public sector or highertiers of government or the state-levelwater board (henceforth referred to asthe Board) contracts the lower tiers ofgovernment, the operating arm of thepublic service provider or even theprivate sector (henceforth referred toas the service operator). While theresponsibility of the Board remainsto define what is wanted, what theperformance standards are, award thecontract, and monitor performance,the service operator to whom servicesare being contracted to remainsresponsible for the actual delivery ofservices against some set performancestandards. The role of the Board thenshifts from the existing role of anoperator or service provider to that of afacilitator and regulator for approvingand monitoring business plans, andregulating the operations andobligations of the contracted operatoragainst set standards. While the Boardsets the guidelines and defines overallobjectives for a plan for performanceimprovements, the service operator

How am I doing?

Understanding thecurrent situation

What are myshortcomings?

Specific areasrequiring performance

improvements

Figure 2: Stages of a Performance Improvement Plan

Why am I notperforming?

Identifying the shortagesand constraints that

hinder my performance

• Skills• Assets

• Procedures• Communityinvolvement

What do I need todo to improveperformance?

• Control physical losses

• Control apparent losses

• Improve collectionefficiency

• Induce cost efficiencies

• Encourage sustainablerevenue strategies

How can I improveperformance?

• Performance agreement

• Financial model

• Community education

• Workforce development

• Workforce training

Performanceimprovement plans

formulation andimplementation

Performance Monitoring

7

defines what is needed so that theperformance plan can comply withoverall objectives, and the two togetherreview and revise it to reach a finalaction plan.

Performance agreements areoperationalized by breaking downoverall strategic goals into specific anddetailed operational processes andoutput-oriented targets in exchange forincreased operational autonomy and

performance-related remunerationor incentives to achieve them. Theoperator is granted reasonableautonomy in day-to-day managementand operational decisions and isensured adequate resources to bringabout performance improvements.The operator is monitored againstperformance targets as defined in aperformance standards chart and isencouraged to supersede these targetsthrough financial incentives set out in

an incentive compensation chart.These defined performance targets alsohelp in bringing about increasedexternal and internal accountability tothe various stakeholders: externally tocentral, state, and local governments,customers, donors, and financialinstitutions as well as internally, withintheir own organization, since they areheld accountable for effectively andefficiently reaching these performancegoals. These targets also help pushthe utility forward towards improvedperformance in a transparent manner.In the longer term, many of theincentives captured in performance andincentive compensation charts can besuperseded by allowing the operator ashare of operating cash flows or (lesseffectively) of profits. However, such anarrangement is likely to be acceptableonly after the relationship between theBoard and the service operator hasdeveloped a sufficient degree of trustand the information base has matured.

A Financial Model toMonitor Financial Progress

Given that performance improvementsrequire access to funds, utilities, andservice providers will need to usefinancial models that can help inplanning and tracking the transition toperformance improvements and alsoin determining and monitoring the keycomponents that are required for afinancially viable and sound system ofservice delivery on a continuing andsystematic basis. In a nutshell, sucha model will help assess the utility’sfinancial situation, formulate financialstrategies for achieving its objectives,capture and project future trends,simulate future milestones, and trackprogress towards them. It is a processwherein long-term financial goals are setthrough cash flow planning, investments,

Water supply and sanitation managers should be able to control, measure,and compare financial health as well as understand the financial impact thatperformance improvement initiatives have on services.

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Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

asset allocation, and risk management.Further, when such a financial model iscombined with an appropriate monitoringapproach, it can be extended to coverbroader issues such as consumer impact(or service quality) and internal innovationand learning (or reform milestones). Atthe same time that a strategic businessplan is put in place and a performanceagreement is developed to determine theways and means for bringing aboutperformance improvements, a financialmodel can help diagnose the financial,commercial, and operational aspects ofservice delivery and thus facilitate theimplementation and tracking ofrespective performance improvementmeasures. Such models also help insetting fiscal incentives and allow forcontinuously and systematicallymonitoring the provider’s financial healthby testing the impact of performanceimprovement plans, to see if such plansare truly delivering financially viable andsustainable services.

Principles ofPerformanceImprovementPlansPerformance improvement plans targetperformance improvements through theprinciples of revenue enhancement andcost recovery. Transformation toimproved services requires that serviceproviders execute governance andmanagement reforms through specifictechnical, operational, and commercialstrategies, and are held internallyaccountable for the effectiveness andefficiency of these strategies. However,the impact of these is likely to be short-lived in the absence of the rightinstitutional incentives at the state andlocal level that can encourage moreaccountable services and help providersmove from poor financial, technical, andmanagerial performance to conditions of

continuous operational efficienciesresulting in improved services.For the purpose of discussion, thispaper categorizes performanceimprovement plans as strategies that(a) enhance operational efficiencyby targeting improved productivityof all areas of service delivery; and(b) enable the adoption of sustainablerevenue strategies.

Improving OperationalEfficiency

Performance improvement plans targetoperational efficiency by bringing aboutimprovements across various servicedelivery aspects through better demandmanagement and by running the systemas a commercial practice.

To ensure that operational efficiency isreached, such practices would need tomaximize revenue water and hencecontrol nonrevenue water (indicatedin Table 2) and the costs ofservice delivery.

Billed authorized consumption Billed metered consumption Revenue Water

Billed unmetered consumption

Unbilled metered consumption

Unbilled unmetered consumption

Unauthorized consumption

Customer metering inaccuracies

Transmission and/or distribution Nonrevenue Watermains leakage

Leakage and overflows at utility’sstorage tanks

Leakage on service connections upto point of consumer metering

Table 2: Water Balance—Components of Revenue and Nonrevenue Water

AuthorizedConsumption

Water Losses

Apparent losses

Unbilled authorized consumption

Real losses

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Operational efficiency could be achieved by controlling technical losses,tapping commercial losses, improving collection efficiency, and implementingcost controlling techniques.

Such efficiency could be achieved by:

• Controlling technical losses byimplementing proactive leakagemanagement.

• Tapping commercial losses fromfree and unbilled water.

• Improving collection efficiency.

• Implementing cost controllingtechniques.

Controlling Technical Losses

In a number of cities across India, morethan 40 percent of water produced islost before reaching the consumer.Reducing lost water and hence lostrevenues is an important task for anywater service provider. Designingan effective leakage reduction andmaintenance strategy helps in tappingphysical losses and in improvingmanageability of the network, enhancingorganizational accountability down theline of service provision, and increasingrevenues. The approach to reducingwater losses includes a set of programsand activities aimed at the optimizationof water supply by controlling leakagesin pipelines, distribution mains, andnetworks and controlling overflows inthe storage tanks as well as improvedoperation and maintenance of waternetworks and sound managementpractices that enable maintaining waterloss at low levels. Such losses aretackled through continuous leakdetection and consequent repair worksthrough technical improvements andrefurbishments of the network, amongother techniques.

Managing Commercial Losses

Commercial losses are a result ofunbilled authorized consumption,unauthorized consumption, andmetering inaccuracies. They can be

managed by focusing on controllinglosses from overestimation of waterproduction, underestimation ofconsumption, theft of water throughillegal connections, free water,wasteful water use, and water lost frommetering inaccuracies. The key tomanaging commercial losses is theimplementation of a proactive androbust metering practice. Besideskeeping track of system water flows,such a metering policy helps inimproving operational accountabilitywithin the utility down to all levels, ifevery WSS staff involved in networkmanagement is held accountable fortheir share of water produced and sold.Effective metering is also required if theservice provider is aspiring to providecontinuous water supply. This meansthat service providers need to not onlycheck their own bulk meters to keeptrack of how much water is beingsupplied to the water network but alsoneed to check all consumption metersthrough regular tests and repairs.Although it is hard to implement, waterproviders also need to penalizecustomers who have fraudulentpractices regarding their consumptionmeters. A subsequent field note onbilling and collection practices willdemonstrate how operators haveimplemented such measures.

Commercial losses could also becontrolled by reducing the levels of freewater. This means tapping illegalconnections by implementing crediblepenalties and disconnection policies.Free water also results from authorizedconsumption—for instance, foroperational use, fire fighting, amongothers—which needs to be controlled.Some amount of free water is alsoavailable through public standposts.While there is huge political pressure to

provide free services for the poor, suchattempts have not really resulted inreliable services for them, since anysubsidies targeting them are mostlydelivered through subsidized watertariffs and are lost as the poor remainunconnected to the network. They arealso sometimes forced to cope with,and rely on, unsafe and expensivealternative options. Water utilities areincreasingly realizing that poor peopleare ready customers for piped waterand connecting them will serve as anadded revenue base.

Improving Collection Efficiency

The other element to commercial lossescomes from poor billing practices andhence low collection efficiencies. Waterservice providers need to explore allfactors that affect payment patterns ofcustomers. They can speed upcollection of their receivables and avoidlate payments by developing an effectivebilling plan and ensuring that bills arecollected within a reasonable time span.For this to happen, water utilities mustensure that they have robustaccounting, recordkeeping, and billingprocedures in place that include acomplete listing of all customers they areserving. Service providers could alsointroduce efficiencies in billing practicesby outsourcing billing activities toorganizations that are more competentin handling such practicesor by using improved technology forgenerating bills on the spot and on time.An important element to an effectivebilling and collection strategy is also tohave efficient and incentivized staff.Such incentives could be created bylinking remunerations of WSS staff toactual collection efficiencies as achievedby them. Consumers also need to beencouraged to pay bills on time, throughbill payment conveniences such as

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Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

customer care centers that are open onweekends and for longer hours, onlinepayment facilities, raffles, and so on. Asubsequent field note will explorehow such initiatives have had an impacton improving collection efficiencies bothin India and internationally.

Inducing Cost Efficienciesin Service Delivery

The issue of cost-effective designpoints to the need for creating the rightincentives and accountability. Currentpractices usually tend to favor largerinvestments that are made in isolationof demand assessments and financialviability. However, options need to bedevised that include modular designsand sequential upgrades to provide fortoday’s population, but with plans for

expansion based on improved revenueflows and future borrowing once theutility is on sounder financial footing.

There are other areas that needimmediate focus for controlling costs ofservice delivery. Cost inefficienciescould be on account of many factorsincluding inadequate processes,outdated technology, high energycosts, or too many staff, all of whichimpose a strain on finances. Indianwater providers spend as much as 80percent of their operating costs onmeeting energy costs and staff costs.This leaves very little to be spent onappropriate maintenance of waterinfrastructure, thus taking the focusaway from preventive maintenance toreactive maintenance. Poormaintenance has resulted in decaying

infrastructure that has eventually failedto deliver quality services, with adverseeconomic and health impacts on allconsumers, especially on poor people.Water service providers will need toensure that services are delivered in acost-efficient manner so that they meetspecific service standards andobligations without wasting resources.For instance, providers could bring inenergy cost efficiencies by usingcapacitors to improve the energyfactor, conducting regular energyaudits, negotiating better energy tariffrates, and reducing nonrevenue waterlevels. Staff cost rationalization alsoneeds to be looked at by movingtowards newer technologies, smarterprocurement practices, and trainingof staff that encourages or makes

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Continuous and regular montoring of performance is critical for sustainability.Such monitoring could be done either at the provider level or at theconsumer level where consumers rate providers on services delivered.

efficiencies for the delivery of servicesfor both the service provider and thecustomer. An optimal tariff needs tosatisfy, and strike a balance between,some general principles and someoperational objectives (as detailed inTable 3).

It must be borne in mind thatadopting performance improvementsfor better services does not necessarilyimply that tariffs will becomeunaffordable for poor people and lowincome communities. Appropriatesubsidy mechanisms could bedesigned to ensure that affordabilityconsiderations for poor people aremaintained. The goal should befinancial viability while not excluding thepoorer section of society.

Principle Description

Cost efficiency and cost recovery Revenue stream generated from tariffs should be relatively stable and notcause cash flow or financing difficulties for the utility.

Economic efficiency Signal to consumers the financial and other costs that their decision to usewater impose on the rest of the system.

Resource conservation Discourage excessive or wasteful uses of water, thus promoting theconservation of depleting sources or the sustainable use of renewablewater sources.

Affordability Affordable for poor people and low income communities.

Equity and fairness Treats similar customers equally and customers in different situationsdifferently, and may mean some policy measures to subsidize poor people andlow income communities.

Acceptability Free from public criticism and not objectionable to political leaders.

Simplicity Easy to understand.

Feasibility Administratively, the tariff should be such that its implementation can beundertaken at minimum cost.

Transparency Implementation, including the structure of the tariff, should be transparent.

Table 3: Principles of an Optimal Tariff

Source: Literature Review on Water Pricing, WSP–SA Study, 2003.

them more efficient, or by implementingsome of the more hard-hittingoptions of staff retrenchments andhiring freezes.

SustainableRevenue Strategies

The second element to performanceimprovements is to ensure thatwater service providers adoptcoherent and sustainable revenuestrategies through the use ofappropriate tariff structures that aresimple, equitable, affordable, financiallysustainable, and transparent forall, taking into account poor andmarginalized consumers.

Tariffs are a powerful management tooland, if properly designed, create

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Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

Institutionalizingfor Long-TermResults throughPerformance-Level MonitoringIt is evident that while adoptingperformance improvement plans,continuous and regular monitoring ofperformance is critical, especially if suchimprovements are to be sustainable inthe long run. Monitoring is importantbecause it helps understandperformance, which is critical forbringing about improvements inservices. Key questions that needto be addressed are:

• How does my performance compareto my past, and how doI fare over time?

• How does my performance compareto my peers and toothers nationally?

• How can I improve my performanceto match that achieved by superiorperformers?

Monitoring of performance could bedone in two ways:

• Provider-level where providersmonitor themselves and comparetheir performance with betterperformers.

• Consumer-level monitoring whereconsumers rate providers onservices delivered.

Benchmarking

Provider-level monitoring is typicallydone through performancebenchmarking. Service providers canuse performance indicators to help

define the efficiency and effectiveness ofthe delivery of services. Theseperformance indicators measure aparticular aspect of the utility’sperformance such as water coverage,sewerage coverage, unaccounted forwater and nonrevenue water, staff per1,000 connections, water availability,working ratio, and so on. Utilities andservice providers can then use suchdata to benchmark performanceand subsequently bring aboutimprovements in services.

Given increasing inefficiencies in servicedelivery, there is a growing need todayto monitor and evaluate performanceprogress to see if increased investmentsfor improving services are trulydelivering results.

Performance monitoring is undertakenby measuring, comparing, and analyzingkey performance data on a regular basisand using such data to share goodoperating practices across serviceproviders so as to build capacity wherethere are performance gaps. Such anexercise on a continuous basis can helpservice providers scrutinize outcomes,measure performance, and identify suchperformance gaps.

However, for ensuring that suchperformance benchmarking actuallytranslates to performance improvementon the ground, it must be pursued ina sustainable and effective manner.It must be made a part of an overallperformance improvement framework,be undertaken on a regular basisthrough a sustainable institutionalframework, and be underpinnedby appropriate incentives thatencourage service providers toundertake such activities.

Given that such exercises are data-intensive and aim at bringing different

units together, they will be effective andsuccessful only if they encourage thecollection of reliable and meaningfuldata. This means that the benchmarkingexercise should be supported with goodsystems and practices such as financialmanagement systems, customer careand grievance redressal mechanisms,effective metering practices (bulk,zonal, and customer), water qualitymonitoring systems, human resourcedevelopment, and managementsystems, among others.

Balanced Scorecards

Provider-level performance monitoringcan also be undertaken throughthe use of balanced scorecards.

This technique is a performancemanagement approach that focuseson various overall performanceindicators such as financialperformance, customer perspectives,internal business processes, operationalperformance, learning and growthpotential that helps monitor progresstowards some strategic goals as set bythe provider.

Service providers can obtain acomprehensive overview of theirperformance by focusing not onlyon financial outcomes butalso on human issues that drivethese outcomes. Besides the financialperspective these include theimportance of learning and growth,customer satisfaction, and businessprocesses, all of which have an impacton the long-term performance of theservice provider.4

4 The learning and growth perspective focuses on employeetraining and provider attitudes through continuous learning forkeeping up with rapid technological change. The customerperspective focuses on the importance of customersatisfaction with the service to ensure their compliance withservice rules and payments. The business process perspectivefocuses on internal processes that enable managers to knowhow well their business is running, and whether servicesdelivered conform to customer requirements.

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Box 2 indicates how a private utilityin India is monitoring its performanceusing balanced scorecards.

charters defining service standards,e-governance mechanisms or consumercomplaints, and consumer courts aresome means through which customerscomplain about poor and deficientservices. Most complaint systems thatare robust and receptive in addressingconsumer grievances also facilitate thecollection of systematic user feedbackon services so that service providerscan continuously upgrade and betterserve customers, by providing servicesthat are closer to customerexpectations. By being moreresponsive to consumer needs, theyalso achieve higher customersatisfaction—thus encouragingconsumers to pay more willingly forservices being delivered.

Of course, how effective suchmonitoring mechanisms are dependsfinally on how incentivized the serviceprovider is to improve upon its ownperformance and to constantly driveitself to provide quality services forits customers.

Typically such monitoring tools wouldrequire support from higher tiers ofgovernment to ensure that suchmonitoring is undertakenon a systematic basis. For instance,a benchmarking exercise could alsobe used by the central and stategovernments to put in place mandatorydisclosure norms for water serviceproviders to report on performance,which could then be used as indicatorsfor delivering intergovernmentaltransfers and centrally sponsoredschemes. Ideally, financial andperformance indicators as reportedon by utilities can be cross-checkedthrough consumer consultationprocesses, such as citizen reportcards, where citizens rate servicesreceived from the service provider.

Consumer-level monitoring enables the collection of systematic userfeedback on services so that the service provider can provide services thatare closer to customer expectations.

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Monitoring by the Consumer

Consumer-level monitoring is usuallyundertaken through consumer grievancemechanisms. These mechanisms forceservice providers to be moreaccountable, responsive, and proactiveby meeting specific standards of serviceas well as constantly improving thequality of services. Such monitoringactivities help determineto what extent utilities and servicesproviders are customer-oriented,whether they ‘listen’ to their clients, andwhether they proactively work to meetcustomer needs regarding standards,levels of services, and complaints.

Mechanisms such as 24-hour customercare grievance phonelines, citizen

Jamshedpur Utilities and Services Company Limited was established inAugust 2003 for providing—under one roof—comprehensive utility servicesincluding water, power, sewerage, drainage, and solid waste managementto approximately 500,000 people in the city of Jamshedpur.

As part of many performance improvement initiatives, the company has beenundertaking a monthly benchmarking exercise of its own operationalperformance for the water services that it provides. The company monitors itsown performance through the balanced scorecard approach on four aspects:financial aspects, service delivery aspects for the customer, internal businessprocesses, and community concerns.

Each aspect has a set of objectives that are to be achieved on a yearly basis.A set of indicators are measured for each objective. For instance, formonitoring financial aspects, the company has set itself a target of maximizingrevenue generation from water supply within the Jamshedpur service area.

To ensure that this objective is met, the company is continuously monitoringrevenue generation from five sources: revenue from potable water incommand area; revenue from other businesses; revenue from potable waterin bagan areas; revenue from clarified water; and revenue from raw water.

Each indicator or benchmark is monitored against the previous year’s dataand also against target levels that are set by the company on a yearly basis.The data are published and are common knowledge to the consumer as well.

Box 2: Balanced Scorecards to Monitor Performance

Source: Adapted from Jamshedpur Utilities and Services Company Limited: Improving WSS Servicesthrough Private Sector Partnerships. WSP-SA. June 2006.

Performance Improvement Planning:Upgrading and ImprovingUrban Water Services

WorkforceDevelopmentand TrainingTraining and development of theworkforce and operating staff is akey element that helps staff implementnew work practices and proceduresas identified in the strategic planningexercise and is critical while undertakingthe actual implementation ofperformance improvement plans.

Given that such plans would betargeting improvements withinservice delivery, and there may benew ways to undertake theseimprovements, it is important to developa comprehensive, ongoing,and consistent training program thatkeeps staff motivated during the periodwhen performance improvement plansare being undertaken as well as helpstaff learn new concepts so that they areable to implement new work practicesand procedures for improvingperformance. In addition, workforcetraining and development will not go toofar unless it is supported by properincentives that can persuade staff toundertake such activities. Operating staffwill need to be constantly encouragedand given suitable incentives toundertake such training anddevelopment activities so that theyrealize and feel the importance of suchactivities on the way they work. Besidestraining in new procedures andpractices, such programs could alsoinvolve exposure visits for senior officers,visiting other organizations with betterpractices. It also helps keep staffmembers informed about currentpolicies, procedures, and technology aswell as how such systems could beimproved to impact performance.

Consultation andCommunicationwith theCommunitiesAn issue to be addressed early onwhile designing improvement plans isinteractive communication programs forthe communities, especially the poorerconsumers, to apprise them of thebenefits of, and need for, substantialchanges in water service levels. Anextensive outreach program forcommunities, right from the conceptionto implementation of such plans, will berequired so that they are made aware

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of the potential benefits of such plans.These programs should commencevery early on in the change processso that there are no surprises for thecommunity during the implementationof the provider’s vision. Communitiesshould be on board and accept thechanges willingly and have a sense ofownership. This must also be areceptive process, seeking involvementand feedback from the community tohelp guide the change process. In theend communities must be empoweredsuch that they start demandingconsistent and sustainableimprovements on a regular basis. Thiswill also ensure that service providersare forced to become more accountable.

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

April 2008

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 United Kingdom, theUnited States of America;the United Nations Development Programme,The World Bank, and the Bill and MelindaGates Foundation.

AusAID provides WSP-SAprogrammatic support.

ACKNOWLEDGMENTS:This paper was peer reviewed byAnup Wadhawan, Anupam Sharma,Mario Alejandro Suardi, Premila Nazareth, CyrilWear, Deepak Sanan, GlennPearce-Oroz, Nicholas J Pilgrim,Chris Heymans, and Vandana Mehra.

TASK MANAGER AND AUTHOR:Pronita Chakrabarti Agrawal

Editor: Anjali Sen GuptaPictures by: Sajid DarokhanCreated by: Write MediaPrinted at: Thomson Press (India) Ltd

ABOUT THE SERIES

WSP Field Notes describe andanalyze projects and activities inwater and sanitation that providelessons for sector leaders,administrators, and individualstackling the water and sanitationchallenges in urban and rural areas.The criteria for selection of storiesincluded in this series are large-scaleimpact, demonstrable sustainability,good cost recovery, replicableconditions, 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.

ConclusionsSuccessful service providers arerealizing that commercialization ofservice provision is fundamental forensuring financially sustainable servicesin the medium and long term. Whileinstitutional reform, broader financialaccounting reforms, and incentivestructures are required for sustainableservice improvements, there are

internal performance improvementsunder the control of service providersthat can be undertaken for effectingimmediate improvements in services.Performance improvement plans helpimplement these service deliveryimprovements and need to be designedas part of a strategic business planningexercise that help the provider identifyservice delivery gaps and set short,medium, and long-term goals forachieving service improvements. Theseplans must be based on the basicprinciples of cost recovery, operationalefficiency, and improved demandmanagement. They need to besupported by a robust financial modeland a strong performance monitoringsystem that helps review progresstowards milestones and track financialimplications of performanceimprovement.