Flowing Forward: Navigating Financial Resilience in Water Utility Corporations

The expansion of urban populations strains water resources that are already under pressure from climate change, pollution, and aging infrastructure. Photo credit: ADB.

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Among the remedial measures are boosting revenue generation, striving for expenditure efficiency, and unburdening liabilities.


Access to safe and affordable water and sanitation is essential for a city to thrive, be livable, and be inclusive. This requirement aligns with Goal 6 of the Sustainable Development Goals. In many large Asian cities and capitals, public-sector water utility corporations, or state-owned enterprises (SOEs), manage water supply and sanitation services.

Water utilities face a multitude of challenges, even during prosperous times. The expansion of urban populations strains water resources that are already under pressure from climate change, pollution, and aging infrastructure. Weak institutional capacity and operational inefficiencies, such as high non-revenue water, further complicate matters.  Additionally, the funding landscape presents another layer of difficulty. Water utilities primarily rely on water tariffs and government grants, both of which have limitations. Tariffs, sometimes set as flat rates and frequently subject to political influence, may not always cover the entirety of operational and maintenance expenses, including the costs associated with wastewater treatment. Meanwhile, grants, dependent on government discretion, lack predictability, making long-term planning challenging. Furthermore, capital shortfalls are sometimes addressed with loans without a thorough assessment of the utility's ability to repay, creating future burdens.

The already vulnerable position is now compounded by a one-two punch of high inflation and soaring interest rates. This heightens the risk of losses, accumulating liabilities that cannot be serviced, and eroding capital. As financial challenges persist, service delivery deteriorates, making tariff increases even more politically unappealing. As a result, a once-stable utility may swiftly become unstable.

To break this detrimental cycle and build up the financial resilience of water utilities, prompt and decisive remedial measures are imperative. This article aims to provide insights into implementing such measures, focusing primarily on public-sector water utility corporations (or state-owned enterprises), while also being relevant to other entities providing similar services. To simplify the topic, the remedial measures are organized according to the five elements of financial statements: revenue, expenditure, assets, liabilities, and capital.

Financial Optimization Strategies

Boost revenue generation.

Enhancing revenue relies on optimizing service volume and tariff pricing. Reducing non-revenue water can increase service volume and revenue without raising tariffs, though it usually requires investments. Tariffs must accurately reflect costs, covering operating expenses and preferably contributing to capital investments. Indexing tariffs to inflation ensures they keep pace with expenses, while targeted cross-subsidies can ensure service affordability for the most vulnerable amidst tariff increases. Any revenue needs not covered by the tariff should be provided by the government as a transfer under a dedicated budget line to ensure transparency. Transparent communication on anticipated tariff increases, outlining their benefits, and the cost of inaction is crucial to secure public buy-in.

In addition to service volume and pricing, the water utility's capacity to meter and bill accurately for the services provided is essential to safeguard revenue. Implementing volumetric supply and billing, coupled with rigorous meter reading practices and regular verification of the customer database, constitutes straightforward measures to bolster revenue while also discouraging the overconsumption of water.

Strive for expenditure efficiency.

Boosting expenditure efficiency is more politically palatable than implementing outright cuts. By scrutinizing operating expenses and adopting energy-efficient digital technologies, process automation, and outsourcing, water utilities can maximize the value of their expenditures while ensuring they remain manageable. Effective management of receivables is crucial for minimizing bad debt expenses resulting from uncollected invoices and maintaining customer discipline. Regularly generating account receivable aging reports and visiting delinquent customers by water utility staff can significantly enhance collection efficiency. 

Care for the assets.

Preserving the asset network's economic benefits requires continuous and adequate maintenance. Neglecting this responsibility risks premature deterioration, breakdowns, and a decline in customer confidence. An effective asset management system, linked with periodic surveys, detailed maintenance plans, and budgets, is critical for minimizing downtime and non-revenue water while ensuring the assets reach their estimated design life.

Unburden liabilities.

Excessive reliance on loans for network expansion can erode financial resilience, especially when returns are insufficient. Even profitable water utilities can struggle if they lack the cash flow to repay debt obligations promptly. While managing short-term cash flow by monitoring payables aging reports or refinancing may be effective for modest debt levels, excessive borrowing often leads to painful restructuring. Converting government loans to equity could provide a solution, and policy makers should consider regulations to restrict borrowing to financially viable projects. Funding for non-viable activities should be sought through government grants rather than loans.

Secure adequate capital.

Adequate capital serves as a buffer against risks, but prolonged losses diminish it, leaving the water utility vulnerable to shocks such as rising costs of financing, chemicals, and energy. Prompt bill collection bolsters cash flow, preventing receivables from ballooning. This, in turn, eases working capital pressure and reduces reliance on borrowing to cover payables. In the long run, a recapitalization strategy may need to be implemented. This could include government-backed equity injections, debt-to-equity conversions, or retaining more earnings.

Ensuring a Stable Foundation

The described remedial measures and best practices are more likely to yield tangible results if the water utility has sound governance and financial management systems in place. A functional board, proactive audit committee, adherence to international accounting standards, robust internal controls, and IT systems, along with timely independent audits, are essential. Adopting and publicly disclosing a mission statement with key performance indicators can enhance accountability and stakeholder confidence.

In conclusion, water utilities need robust financial defenses. A wide range of measures exist to strengthen their financial resilience, ensuring long-term sustainability and affordability of water and sanitation services. This is critical not only for safeguarding public funds but also for fostering thriving, livable, and inclusive cities.

Mikael R. Andersson
Financial Management Specialist, Procurement, Portfolio, and Financial Management Department, Asian Development Bank

Mikael Andersson is a financial management specialist and development policy professional with more than 12 years of experience in the development sector and international financial institutions. His expertise includes project and public financial management, development economics, governance, financial analysis, and risk-based approaches. He has contributed to projects and programs across Western and Central Africa, Eastern Europe, the Near East, Western and Central Asia, and South Asia. He holds a master’s degree in Economics from the Hanken School of Economics.

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