The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Water & Sewerage Corporation sucked up $55m in Bahamian taxpayer subsidies in 2022 to help cover a -$31m negative operating margin that had more than doubled over a 12-year period.

An Inter-American Development Bank (IDB) document, detailing a total $100m project loan to finance the latest overhaul of The Bahamas’ water and sanitation systems, reveals that over the same 12-year period the Corporation’s staffing costs increased by 52.6 percent or $10m - surging from $19m to $29m.

Detailing the state-owned water provider’s “low operating efficiency”, with consumer tariffs set below what it costs to supply them with water, the report reveals that the $100m IDB financing will account for 42 percent of the Water & Sewerage Corporation’s total $239.4m capital investments planned for the period between 2023 and 2028.

That spans the utility’s new corporate business plan, which has yet to be publicly disclosed, but the IDB document seen by Tribune Business asserts the upgrades to be financed by the multilateral lender will benefit some 65,000 households - around 180,000 persons - in New Providence and the Family Islands through improved access to, and the provision of, drinking water.

Critical to improving the Water & Sewerage Corporation’s performance, and achieving the project’s objectives, will be reducing increasing non-revenue water (NRW) which represents water supply lost from the utility’s network through leaks, theft and other problems before it reaches the end user and cannot be billed to customers.

Noting that these losses rose to 3.85m gallons on New Providence in 2022, thereby reversing the declines/gains made over the previous decade, the IDB report revealed that 55 percent - more than half - of the water pumped through the Water & Sewerage Corporation’s Family Island distribution systems in 2022 was lost before it reached the end consumer.

These losses, the document added, are well above the 30 percent NRW benchmark seen as the standard that “a well-performing” water utility should achieve. And they force the state-owned utility to purchase more water from already “expensive” privately-owned reverse osmosis plants, which is critical given that this and staffing costs alone account for a combined 87 percent of the Corporation’s operating costs.

Providing further insight into these challenges, the IDB report said: “A major factor exacerbating the Water & Sewerage Corporation’s operational and financial performance is its low operating efficiency. In 2022 NRW stood at 35 percent in New Providence and 55 percent in the Family Islands.

“This is particularly concerning since 81 percent of water supplied is from desalination, leading to the cost of purchasing water accounting for 49 percent of Water & Sewerage Corporation’s operating expenses..... The larger the physical losses, the more water needs to be produced from expensive reverse osmosis plants.

“Lowering NRW improves operating efficiency, contributes to improved financial performance as well as improved resilience and quality of service since recovered water can be distributed to new customers or production can be decreased. In New Providence, NRW decreased from 2011 to 2019 before increasing to 3.85m imperial gallons in 2022,” the IDB report continued.

“In the Family Islands, NRW increased from 1.66m imperial gallons (equivalent to 41 percent) in 2019 to 2.67m imperial gallons (equivalent to 55 percent) in 2022. It is commonly accepted that a well performing utility should have an NRW below 30 percent.

“Reducing the Water & Sewerage Corporation’s NRW and raising the productivity of its staff could lower operating expenses since water purchases and staffing accounted for 87 percent of operating expenses in 2022.”

The IDB report also revealed that the Corporation’s workforce had expanded by some 73 persons between 2017 and 2022, a period mostly covered by the former Minnis administration’s time in office, even though productivity and efficiency metrics were declining and operating losses increasing.

“According to the corporate business plan, the Water & Sewerage Corporation needs to increase the efficiency of its staff as highlighted by an increase in the number of employees from 411 in 2017 to 484 in 2022; a deterioration in the standard staffing efficiency indicator (eight employees per 1,000 water connections in 2022); an increase in staff costs from $19m in 2010 to $29m in 2022; and the high proportion of operational expenditure represented by staff costs - 36 percent in 2022, up from 28 percent in 2012,” the IDB report said.

“Revenues have remained relatively flat, increasing from $41m in 2010 to $51m in 2022. As a result of the larger increase in operating expenses than revenues, Water & Sewerage Corporation’s EBITDA margin worsened from a negative $13m, equivalent to a negative 32 percent in 2010, to a negative $31m, equivalent to a negative 61 percent, in 2022.” In dollar terms, that represents a 138 percent increase.

A negative operating income, or earnings before interest, taxation, depreciation and amortisation (EBITDA), margin means that the Water & Sewerage Corporation - and any corporate entity in a similar financial position - is unable to cover its operating expenses from its regular revenues and earnings. This signals cash flow issues and is viewed as a “red alert”, indicating fundamental operational issues.

“Because of its poor operating efficiency and tariffs that are not sufficient to cover costs, the Water & Sewerage Corporation relies heavily on increasingly greater subsidies from the Government to cover some of its operating expenses and nearly all its capital investments,” the IDB report spelled out on the consequences.

“Increasing the efficiency of collections could improve its cash flow and lessen its reliance on subsidies from the Government. Operating subsidies were $55m in 2022.” The Water & Sewerage Corporation’s reverse osmosis supplier have also consistently complained about unpaid bills and multi-million dollar arrears due to them that they are having to carry on their balance sheets.

BISX-listed Consolidated Water, which supplies the Corporation and all its New Providence customers with water from its two reverse osmosis plants, Blue Hills and Windsor, in its most recent financial filings has pegged these arrears at around $25m-$26m.

The IDB financing is to be broken down in tranches, with the first $50m to be disbursed over a five-year period. Some $33m, or the bulk of that figure will be devoted to reducing the Water & Sewerage Corporation’s non-revenue water losses, both “physical and commercial”, across its Family Island markets.

“The contract’s main target will be to reduce NRW in the Family Islands from a baseline of about 1.5 million imperial gallons per day, which is subject to review and confirmation, at an average annual system pressure of 25 psi within a maximum of five years, focusing on Abaco, Eleuthera and Exuma,” the report added.

“About 65,000 households - some 180,000 people - in New Providence and the Family Islands are expected to directly benefit with access to, or improved provision of, drinking water services. Underserved communities in New Providence and the Family Islands are expected to benefit from the expansion of access to potable water supply under the project.

“The Water & Sewerage Corporation will also benefit from institutional strengthening and improving the operational efficiency of the utility - reduction of NRW, energy efficiency and the installation of smart meters.... The Water & Sewerage Corporation is targeting investments funded by the IDB of $100m out of $239.4m from its initial prioritised capital investment plan for 2023 to 2028.”