Adopting “Condo” law could help to ensure sustainable management of water utility infrastructure
A “Condo” or “Condominium”, as the term is most commonly used in North America, is an individually-owned unit in a multi-unit structure. Think of an apartment-like building with the units owned individually and the common areas owned jointly by the unit-owners.
In a condo, the common areas are managed by a condo association, a nonprofit corporation formed by the condo-unit owners and managed by a board of directors.
Regular assessments are collected from the unit-owners to cover the costs of operations, maintenance, repair and replacement of common property, e.g., roof, elevators, fire systems, water and sewerage pipes, sidewalks, parking spaces, recreation facilities.
Condo associations and water utilities have similar characteristics
While they are privately-owned, condo associations have many of the same problems that water utilities have, especially in low-income or low-middle income countries. For example:
- Like water utilities everywhere, unit-owners want the assessments to be set as low as possible.
- Common property, like utility infrastructure, is long-lived, and the cost and timing of repairs and replacements are difficult to forecast, as it depends on the condition of the property.
- Condo associations, like water utilities, are often surprised by high repair or replacement costs that they did not plan for.
- As unit-owners own the common property, if something breaks or needs to be replaced they must pay for it or go without. There is no one else to help. It is not unusual for a condo association to close a swimming pool or let the tennis courts deteriorate. Government-owners of water utilities, especially in low-income and low-middle-income countries typically face similar “fund or go-without” decisions. Budget limitations and other high budget priorities often mean that funding for non-critical water or sanitation repairs or replacements is delayed, often for years, even though service delivery deteriorates and some previous customers may be forced to go without.
- Banks are normally unwilling to lend to condo associations, partly because associations cannot pledge common property as collateral and, partly because associations do not usually generate sufficient cash flow to offset the banks’ risks. Water utilities, especially those in low-income or low-middle-income countries face similar difficulties accessing finance.
Condo association problems have led States to mandate replacement studies and reserves
Condo associations have been sued by new unit-owners who unwittingly assumed expensive repairs or replacements of common property that association management knew about, or should have known about, and should have warned the unit-owners about before they purchased their units.
In response, over the years, to protect new unit-owners and condo associations, State governments in the United States have add laws that require condo associations to conduct periodic reserve studies to determine the condition, remaining life and cost to replace their common property, and that require them to fund reserves to repair, replace and restore common property components.
An example from the Condo Act of the Commonwealth of Virginia is included below [with clarifications in brackets]:
§ 55-79.83:1. Reserves for capital components.
A. Except to the extent otherwise provided in the condominium instruments and unless the condominium instruments impose more stringent requirements, the executive organ [the board of directors] shall:
1. Conduct at least once every five years a study to determine the necessity and amount of reserves required to repair, replace and restore the capital components;
2. Review the results of that study at least annually to determine if reserves are sufficient; and
3. Make any adjustments the executive organ [the board of directors] deems necessary to maintain reserves, as appropriate.
B. To the extent that the reserve study conducted in accordance with this section indicates a need to budget for reserves, the unit owners’ association budget [report] shall include , without limitations:
1. The current estimated replacement cost, estimated remaining life and estimated useful life of the capital components;
2. As of the beginning of the fiscal year for which the budget is prepared, the current amount of accumulated cash reserves set aside, to repair, replace or restore the capital components and the amount of the expected contribution to the reserve fund for that fiscal year; and
3. A general statement describing the procedures used for the estimation and accumulation of cash reserves pursuant to this section and the extent to which the unit owners’ association is funding its reserve obligations consistent with the study currently in effect.
Adopting similar “Condo law” provisions could help to ensure sustainable management of water and sanitation infrastructure
Water utilities — especially those in low-income and low-middle-income countries which cannot handle the financial shock of unplanned major infrastructure repairs or replacements, their government-owners, and their customers would benefit from having similar a provision included in the utilities’ enabling laws.
Periodic reserve studies would help utilities to sustainably manage their services by helping, for example, to:
- update and validate asset registers,
- improve maintenance and replacement planning and budgeting,
- calculate the full cost of providing their water and sewerage services,
- monitor management’s stewardship of the assets needed to sustain service, and
- budget critical asset replacement contingencies, that often must be funded, at least in part, by the utilities’ government-owners.
Reserves, even if inadequately funded, could help to fund, for example:
- emergency repairs, and
- critical asset replacements,
by shifting funds between reserves — if necessary; helping to protect government budgets from unplanned emergency funding demands.
Including 5-year maintenance costs in the reserve study could help to achieve SDG 6
Reserve studies should also include estimates of capital asset annual maintenance costs for the next five years. Knowing the lifecycle costs of utility’s infrastructure is critical to ensuring sustainable management of water and sanitation. Infrastructure operating costs are usually fully budgeted, infrastructure maintenance costs are usually not — especially in low-income and low-middle-income countries. Instead, maintenance costs are budgeted based on the funds projected to be available.
Without knowing the full cost of providing service, Sustainable Development Goal 6: ensuring availability and sustainable management of water sanitation for all — which every member of the United Nations has agreed to — cannot be achieved.
Restricting reserve balances and requiring board of director approval to use or move reserve funds would help ensure that reserves are used as intended
The use or transfer of reserves should be approved by the utilities’ boards of directors — as condo associations boards do. Reserve funds should be restricted and used only as authorized. Adding this requirement to a utility enabling legislation when adopting reserve study and reserve funding requirements would help to ensure that reserve funds are used as intended.