There are several theories about governance styles driven by various interests; however, the ability to decide the preponderance of one style to another is relative to its output, in respect to the wealth of the said nations, affordability and the welfare of the whole community. Tariff impassions are a characteristic of a governance style that is less democratic and influences the relationship between the people, the utility and the capacity of law to regulate the relationship between them. It also allows such institution to take upon infrastructure projects with a complete disregard to the impact of the cost on the household’s income, affordability, and the quality of life of the people as expressed in demand. This presentation dissects factors of governance that influence costs and inefficiencies.
2. 1.0 The Purpose:
Shed Light on:
the impact of governance on pricing of infrastructure services.
The Externalities of governance can result in prohibiting access to the
infrastructure services, especially to the poor and lower middle classes.
Risks types that influence an infrastructure project as the outcome of
governance resulting in inflating of the price of services or infrastructure.
Create dialogue between decision makers and professionals based on
common grounds.
3. 2.0 Introduction:
Infrastructure is either Virtual, Economic or Social. It is the backbone of
any Nation’s Wealth.
Pricing decisions that impact cost of infrastructure is taken with a brief
superficial consultation process, and often disregards the community’s
“Ability To Pay” such as:
Tariff hike of water services in Cape Town at he tail of the cloud of fear around
the Day Zero.
E-tolls in Gauteng Province.
Nationwide energy (Eskom) hikes of power tariff.
South Africa between the years 2009 to 2017 has suffered systemic
demolition of its Institutional Infrastructure, particularly that of water,
marked by abrupt changes of polices, centralized and autocratic style of
governance.
4. 2.1 Infrastructure and its costs:
Tariff for service can be expressed by the following equation
Tariff = Asset Rent + Labour Quasi Rent + Adjuvant Costs + Inherent costs + Subsidy + Losses
+ Profit
Such that :
Asset Rent = Lifecycle Cost of Infrastructure / quantity produced (or flow over life cycle).
Labour Quasi Rent = Any cost incurred related to Human Resources or Consultants.
Adjuvant Cost are direct costs or cost of risks related to :
Direct governance cost
Corruption Rent
Projects Risks/Rent
5. 2.1 Infrastructure and its costs: (cont.)
Such that :
Inherent Costs are costs related to the nature of the infrastructure (Bulk Water Cost).
Access rights Costs,
Opportunity Cost.
Externalities Cost.
Subsidy: or subsidy deficit, is the short fall between actual full cost of service to that
provided to a specific economic sector (or institution, business, or individual).
Losses: cost of physical Losses in the non-revenue water.
Profit: a financial gain, and could be a measure for efficiency or sustainability.
6. 2.1 Infrastructure and its costs: (cont.)
It is necessary to mention that:
The Supply Quantity, Tariff and Tariff block’s pricing
influence largely the ability to pay and Non-Revenue
water.
High tariff triggers various risks : (as in the case of e-
tolls) and increase Non-Revenue water and/or
inflation in the community.
High tariff Increases Non-Revenue water and/or
inflation in the community.
When in a country where only 13% of its population
are tax payers. This stretches subsidy to a minimum
of 35% of its population.
Fig 1
Tariff
Hike
Increase
of
Losses
Increase
of
Subsidy
Fig 2
7. 3.0 Direct Governance Cost:
Governance is a discursive and highly complex set of
interactions between laws and institutions, personal
and group interests as well as the general interest.
Infrastructure Institutions are subject to the prevailing
politics and the administration rules thereof.
Direct Governance costs are function of:
Layers of Governance
Markets, and its structures
Layers of inefficiencies
Governance Style and costs thereof.
Fig 3
8. 3.1 Layers of Governance:
The main factors that affect the governance costs
can be summarized as:
Cost of government strata in national,
provincial and local
Cost of legislature national, provincial and
municipal
Cost of sovereignty
The increase of number of governance sub-layers,
increases costs and erodes the growth and if not
optimally designed it can trigger the losses cycle
(Fig 5).
The legislature direct and indirect cost influences
the cost of service (significantly at the municipal
level) and weakens growth. (Example: excessive
security, catering, travelling, etc.); thus denying the
poor access to the service.
Fig 4
Fig 5
9. 3.2 Markets, and its structures:
Companies endeavor to create a monopoly
on their market for their service or good, if
they can. This allow them to dictate or
increase price without adding any value to
the current good.
Water markets are no different, and due to
the cost of investments required create the
supply chain, they are positioned to benefit or
abuse such monopoly.
Such position allows them to balloon their
expenditure, or reduce quantity or quality of
output.
The only response that markets have to such
position is usually trigger of unrest, that in
return triggers various other risks and
increases asset Rent
Fig 7
Fig 8
10. 3.3 Layers of Inefficiency:
Truncating Inefficiencies in one of the prominent
features of stratified water supply markets
At every stage of production there are losses,
Upstream resilient physical losses vary between
12% and 20%, while the Non Revenue losses in
the Downstream can reach up to 75%.
Also the inefficiency in determining the quantity
and quality of demand at upstream level, can lead
to major in efficiency downstream due to the
increase in excess water and Non-revenue water
(even due to non-paying other region) in the
system as shown in Figure 1 above.
the Upstream operator veers off such losses
automatically to downstream operator who is in a
subjective position
Fig 9
Fig 10
11. 3.3 Layers of Inefficiency (cont.):
Downstream has a bouquet of inefficiency some are
inherent and some are imposed, that is also automatically
veered off to consumer.
Inherent may be due to policy aspect such as:
Low ability to pay of markets served (cash flow)
Imposed tariff structure that is not addressing diversity
within the market
Functional cross subsidy
Low efficiency collection
Lack of dexterity
Lack of proper dispute resolution mechanism either
with layers above or within its market itself (which is a
legal risk)
Physical transport losses
All above inefficiencies increase operation, legal, political,
revenue risks, well increases Non-Revenue Water.
With such combo of risks, operation becomes expensive,
funding of Labour and Assets become too expensive.
Fig 11
Tariff Hike
Increase of
upstream
inefficiency
Increase of
downstream
inefficiencies
Increase of
Risk
Increase of
Asset Rent
Increase of
cost of money
and inflation.
12. 3.4 Governance Style and costs:
Accountability is the scoreboard of governance.
The cost of National Governance is dependable on the drivers of
the Governance style adopted in the said country and its
stratification.
Accountability in a system can shift places in practice. In a
tyranny, accountability to people diminishes and reverse
completely to become accrued to the Executive.
When the Executive, or its institutions divert from the style
outlined in the constitution, legal risks are triggered
accompanied with surmountable cost due to delay of service
deliver, deterioration of Asset or delay of asset development and
or legal costs.
When a regime approached a tyranny like the center of
accountability to institutions shifts from the people to the
executive which triggers a bundle of risks and costs that results
in diversion of asset rent, and loss of dexterity.
Ultimately in pure tyranny private sector diminishes and market
shrinks, triggering inflation, deterioration of quality, before falling
into chaos.
Fig 13
Fig 12
13. 3.4 Governance Style and costs (cont.):
Due to attempt to shift the accountability center in SA, the infrastructure institutions operating in South
Africa between 2009 and 2017, have suffered the following:
Lack of transparency.
Introduction of institutional prima facie structures to obscure centralization and corruption.
Creating internal barriers to entry of skilled service delivery and force them to accept roles of sub-
contractors.
Rapid and intense change of policies and rules either to restrict participation and close markets.
The increased cost of access to justice and long waiting periods for its delivery.
Executive boards of institutions are dismantled and or replaced with a single executive.
Rapid change of law and policies influencing the markets and the relations.
Executives are selected based on the degree of loyalty and obedience rather than education and
expertise.
Mediocre or window dressing procurement system.
Differed accountability or its lack thereof.
Replacement of skilled labour.
Deterioration of the wealth of nation through diminished dexterity because of the highly politicized
work environment.
14. 3.5 Corruption
There is no corruption free system. The system success is to curb corruption to reduce its
influence on society and quality of life.
Corruption is the abuse of entrusted power for private gain. It has various forms,
from political to social corruption.
There are three types of Corruption: Private-Public Corruption, Private-Private
Corruption, as well as Public-Public Corruption.
The literature shows that corruption mushrooms under tyrannies.
Corruption has two components that are associated with the governance style
prevailing in the country, one is vertical, and other is a horizontal component.
The vertical component of corruption refers to the magnitude of Corruption Rent
(CR) paid along the governance layers, while the horizontal component of CR
determines the spread out as a culture in a community.
The magnitude of Corruption Rent is a function of demand/supply prevailing at the
time of application, as well as opportunity cost.
15. 3.5 Corruption (cont.):
The vertical component of Corruption (V.Cor), is
usually Private-Public, can be Public- Public, while
the Horizontal Corruption component is usually
Private-Private.
There are two costs related to Corruption:
1. The corruption amounts or rent itself and it can be
a form of standard percent of the asset capital cost
of rent paid to licensor by the corruptor,
2. The cost of curbing the corruption and
accountability. Such costs are not proportional;
however, they are also subject to location of the
center of accountability.
Corruption increases Asset rent (refer to equation above)
and reduces productivity thus increases asset rent
indirectly.
Corruption
propagation
Increases
asset rent
Increases
labour rent
Increases of
Risk
Tariff hike
Fig 14
16. 3.6 Risk and its types (cont.):
The development of any infrastructure generally and water systems, specifically,
requires a high investment cost, and financial, environmental, and institutional aspects
need to be considered.
risk could be:
the change of a loss;
the uncertainty of loss;
the possibility of loss;
uncertainty;
the divergence of actual from expected results;
the probability of an outcome different from the one expected;
the possibility of the occurrence of an undesirable contingency;
a condition in which a possibility of a loss exists.
17. Risk structures Source of risk Means to offset risk
1. Operating - technical Asset Owners & Operator Technology guarantee.
Technology management.
Technology insurance.
Quality assurance.
Fleet assurance.
Alternative sourcing.
Business interruption insurance.
2. Operating – cost Asset Operator and prevailing market
conditions (i.e. inflation, duties and
impositions)
Sales contract.
Cost guarantee.
Cost waivers (such as taxes or levies)
Economic test.
3. Operating – management Asset Operators Management agreements.
Key-man insurance
Labour contracts.
Training agreements.
3.6 Risk and its types (cont.):
18. Risk structures Source of risk Means to offset risk
4. Participant Stakeholders Contingent financial support.
Financial ratios.
Off-balance sheet.
Cross-collaboration and cross-default
clauses.
5. Completion Asset Owners Completion guarantee.
Deficiency/shortfall agreement.
Completion undertaking.
Overrun undertaking.
Default agreement.
Turn-key contract.
6. Supply Third Party Risk & Operator Supply undertaking.
Supply additions
Depletion protection.
Collateral.
Reserve weighting, and Reserve
3.6 Risk and its types (cont.):
19. Risk structures Source of risk Means to offset risk
7. Market Governing Body/Executive Sales contracts.
Consumer financing
Buy-back clause.
Advanced sales.
Deficiency agreements.
Etc.
8. Supporting Infrastructure Governing Body/Executive Pooled Infrastructure Agreements:
Government Commitments:
9. Environmental Shared – Government and Asset
Operators
Insurances and/or,
agreement
3.6 Risk and its types (cont):
20. Risk structures Source of risk Means to offset risk
10. Political Governing Body/Executive Title Insurance:
Legal Opinions:
Good governance practices
12. Foreign exchange Governing Body/Executive Hedging:
Swaps:
13. Engineering Asset owner Insurance:
Independent Certification:
3.6 Risk and its types (cont):
21. Risk structures Source of risk Means to offset risk
14. Syndication Third Parties Underwriting Agreement:
Broad Syndication
15. Funding Asset Owner Interest Make-Up or Protection
Agreements
Alternate Funding;
Supplier Credits;
etc,.
16. Legal Governing Body/Executive Good governance
3.6 Risk and its types (cont):
22. Thank You
Special Thanks to :
Sobek – Infrastructure Development Advisory www.sobek.co.za for allowing me
the time
WISA for allowing me to present – WISA.org.za
For all our sponsors that allowed the realization of this conference
Nezar Eldidy
eldidy@sobek.co.za
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