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close this bookBetter Water Services in Developing Countries - Safeguarding the Interests of the Poor (DFID, 2000, 22 p.)
View the document(introduction...)
View the documentWater is Essential for Life
View the documentThe Need
View the documentRequirements for Successful PPP
View the documentProblems and Opportunities
View the documentInvestment Needs
View the documentFinance and Risk Mitigation
View the documentThe Opportunity for PPP
View the documentBack Cover

(introduction...)

Department for International Development

PUBLIC-PRIVATE PARTNERSHIP
the way ahead

Water is Essential for Life

The Department for International Development's (DFID's) purpose is eliminating poverty in poorer countries. Lack of access to water is a clear determinant of poverty. The provision and good management of water and a hygienic sanitary environment are central to the elimination of poverty, to reducing the burden on women, and to an improved quality of life. Water links with DFID's three development objectives, contributing to:

· Sustainable livelihoods, in particular through water for food production;

· Better health, through improved water supply, sanitation and hygiene practices;

· The Environment, through sustainable management of water resources, use of water for ecosystems and control of pollution.

In many of the poorer developing countries certain utilities are already attracting private sector involvement, but the water sector is seen as presenting particular political and practical difficulties. A careful and considered approach to the design of water sector PPP arrangements is required in order to safeguard the interests of consumers and government, and to attract the interest of potential investors and operators.

This information note is intended to improve the understanding of the potential benefits of private sector involvement in the water sector in such countries, and describes the environment and mechanisms for risk mitigation which can promote this involvement.


Figure

The Need

More than one billion people in developing countries still lack access to clean water and over 2 billion lack adequate sanitation. Population growth, increasing urbanisation, and the need to meet the demands of long-term economic development all increase the demand for reliable and efficient water and sanitation service provision.

Developing countries invest in excess of US$200 billion a year in new infrastructure, around 4% of their national output. Water and sanitation accounts for about one quarter of investment. However, the impact of such expenditure on water and sanitation services is often limited by major inefficiencies in operation and maintenance management. Access to reliable safe drinking water and hygienic sanitation remains far from satisfactory.


Figure

Water and sanitation are fundamental human needs which are inadequately provided for in many developing countries.


Figure

With few exceptions, services are of a relatively poor standard, and will he further strained by future growth.


Levels of Access to Sanitation and Safe Drinking Water


Employee/Connection Ratios

Without adequate funding water service providers can be caught in a cycle of decreasing revenues and worsening service standards. The continuity and reliability of supply deteriorates, mains pressures fall and may become non-existent in some parts of the system. Water quality fails to meet prescribed standards and levels of non-revenue water steadily increase.

Public Private Participation in water and sanitation provision presents challenges which are increasingly well understood and provided for, with a growing record of success.

Commercial factors that contribute towards inefficient operation include:

· low collection/billing ratios, often 50% or less
· incomplete customer registers
· high numbers of illegal connections
· inadequate knowledge of the asset base
· absence of asset management plans and business plans
· unreliable accounts and financial information
· tariffs which are not related to recovery of the costs of the service
· high employee/connection ratios
· lack of knowledge of customers' desired levels of service and willingness to pay.

Private sector commercial management and customer relations skills are well suited for the firm, but fair, approach that is required in order to bring about improvements. A private company pays for inefficiency and non paying customers out of its profits, and in consequence will be far more determined and effective in minimising these conditions to create efficient water supply and sanitation services.

There is a widely held perception that the private sector cannot provide a monopoly supply without the risk of exploitation and unreasonably high prices. There is also concern that uneconomical services to poorer communities may be neglected, substandard or otherwise inadequate. Such risks have to be acknowledged, but knowing the risks steps can be taken to provide adequate protection to customers. This has been done successfully for example in Buenos Aires (Argentina), Cd'Ivoire and Guinea.

Requirements for Successful PPP

Many Governments fully appreciate the need for change, but must recognise and manage potentially contentious and unpopular necessities such as legal restructuring and the reduction of government influence, redundancies and tariff increases. Implementing these changes requires a cautious and transparent approach, and sustained political commitment.

POLITICAL WILL UNDERPINS SUCCESS

BUENOS AIRES

The process of building consensus for PPP was reinforced, by & Central Government Decree.

MALAYSIA

Government policy supports private sector initiatives and the participation of the local capital market.

MANILA

Government provided legal authority and support by passing a "Water Crisis Act" in 1995. The labour force was downsized prior to PPP.

KARACHI

Tariffs are being increased and manpower reduced in preparation for PPP. A major publicity and information programme is in progress.

MOZAMBIQUE

Government has implemented significant pre-PPP tariff increases and is committed to further increases post-PPP.

Successful introduction of PPP in water and sewerage services needs the full support and political will of the sovereign government

Major promotional and educational campaigns are being undertaken by bilateral and multilateral development agencies. "Toolkits"1 have been developed to help governments to identify and implement the best possible private sector arrangement for their particular circumstances. These "toolkits" are intended to build on the experience of other countries and cities, and provide guidance on how solutions can be tailored to meet specific local needs and conditions.

1 Toolkits for Private Participation in Water and Sanitation - The World Bank with support from DFID

The barriers to PPP in the water sector are being progressively recognised. Political will is being reinforced. The design and marketing of PPP projects is increasingly recognising the concerns of all of the stakeholders.

Financial facilities and instruments are constantly being developed and refined to enable the sharing of financial commitments and to mitigate risks. Most importantly, governments are gaining confidence as mechanisms are being developed and attitudes changed through successful PPP in their own countries in less sensitive sectors, such as telecommunications and power. They are also able to see an increasing number of successes in differing circumstances in the water sector worldwide. Success is never absolute, but, with political will from government and demonstrable achievement by the private sector, dynamic and productive partnerships can be developed.


Figure

In order to capitalise on experience, the form of PPP to be adopted is best modelled upon previous successful projects, but with adaptations to take full account of the particular circumstances of the new situation.

The initial model for PPP must recognise operator/investor perceptions of what is appropriate.

The generic options for PPP entail widely different degrees of responsibility, financial commitment and contractual periods. Government ambitions for immediate large scale PPP may need to be tempered to recognise operator and investor caution. Investor appetite will be strongly influenced by the political and economic risks associated with the country. Investors will also look at the government's track record of implementing PPP in other sectors. It is now the norm for the views of operators to be considered in the design of PPP arrangements.


Figure

CORPORATISATION

Santiago, Chile - Public corporations were formed as autonomous commercial enterprises preparatory to more substantial PPP in the form of private purchase of shares in the corporations. Corporatisation is often a short-term option as an intermediate stage in the introduction of PPP, although the 'delegated public management' form common in the Netherlands for example, has been in place for many years.

COOPERATIVES

Santa Cruz, Bolivia - A large and effective cooperative was started in 1979. Other examples of community water systems can be found in Ethiopia, India, Tanzania and Argentina. A very significant urban sanitation cooperative has been set up in the Orangi township of Karachi.

SERVICES CONTRACTS

Mexico City - Contracts have been let to private operators for discrete operational functions such as meter reading. With services contracts revenues are derived from the sale of services to the utility. Contracts are normally for 2-3 years duration.

MANAGEMENT CONTRACT

Trinidad and Tobago - Government has entered into a three year management contract with performance targets with a private operator. There is potential for future renegotiation to a concession basis. Generally management contracts are likely to be for 3-5 years duration.

BOT AND VARIANTS

Build Operate and Transfer - There are numerous examples in many countries. BOTs are often used for constructing new capacity in water and wastewater treatment plants. Revenues are derived from bulk treatment sale to the services provider. BOT contracts generally need to be 15 to 25 years duration in order to provide acceptable returns on the initial investment.

LEASE CONTRACTS

Guinea - The Government entered into a contract with a private operator for the operation and maintenance of water services in the Capital and sixteen towns. With leases, the private operator collects revenues and normally pays a fee to the government for the rental of the assets. The operator is not responsible for funding capital investment. Generally leases are likely to be for 10 to 15 years' duration.

CONCESSIONS

Buenos Aires - Government entered into a long-term operating and investment contract with a private operator. With concessions, ownership of the existing assets is retained by the state. Generally they are likely to be for 20 to 30 years duration to enable acceptable returns on the investments.

PUBLIC-PRIVATE JOINT VENTURES

Subic Bay Metropolitan Authority (Philippines) - The Authority is a minority shareholder in the operating company which runs the Concession for water supply and sanitation in Subic Bay. The authority's shareholding was contributed in the form of the existing assets.

DIVESTITURE

England and Wales - The publicly-owned regional water and sewerage authorities were floated in 1989 by means of a public share offering. The new companies (known as Undertakers) own the assets and operate them under a license. The licenses run for a nominal period of 25 years.

Success depends upon recognising specific needs within a broad range of generic options

Operators rushing to pre-empt their competitors and governments anxious to find rapid solutions to the difficulties facing the sector have often given insufficient attention to the fundamentals required for the success of long-term relationships. PPP contracts are effective for defining service standards and prices in the short-term. In the longer term, customer expectations, information levels, demands, costs and prices will all change with time. Regulatory structures can be set up to enable the Sector to accommodate these changes. Regulation should be designed into the relationship with the private operator from the start. The purpose of regulation is to ensure the long-term viability of the sector, and to balance the interests of all stakeholders.

In many countries there is a growing recognition of the need for appropriate structuring of the various agencies concerned with the provision of water and sanitation services. Preparation for PPP can provide an opportunity for rationalisation to the benefit of all parties with an interest in water use and the environment.

Insufficient consideration of regulation of the sector has been perhaps the major cause of breakdown of a number of PPP projects.

REGULATORS' RESPONSIBILITIES

· To ensure that water companies' functions are properly carried out

· To ensure that water companies are able to finance their activities (particularly by securing reasonable returns on their capital)

· To protect the interests of customers as regards:

- the fixing and recovery of water and sanitation charges
- the setting and monitoring of standards of service
- the terms and conditions included in the customer subscription contracts
- the definition of good practice through published codes of conduct
- the sharing of benefits from land and property disposals
- the avoidance of undue preference or discrimination

· To promote the effectiveness and efficiency of the operator

· To recognise and take account of the requirements of other regulatory bodies concerned with commercial, socioeconomic and environmental issues.

Problems and Opportunities

The introduction of PPP has in many utilities brought the commercial disciplines necessary to break the mould of habitual management reliance on subsidy from the public purse. Established PPP arrangements such as that in Buenos Aires have demonstrated that the spiral of poor motivation - poor service - low tariffs - poor payment - low cost recovery - low investment can be broken, leading to demonstrable improvements in service.


Figure

Governments are increasingly prepared to start the process of downsizing before the introduction of PPP as was the case in Manila, Philippines. Severance packages which are usually generous in comparison with earnings will be a small proportion of total costs over the early years of PPP. Natural wastage is likely to increase as higher performance is demanded from remaining staff. In the medium-term expansion of the services will increase job opportunities.

Over-staffing and low tariff level are perceived problems, but are surmountable and with the right approach can be turned into opportunities to benefit staff, the customer, and the local economy.

The Lusaka Water and Sewerage Company took over 650 staff from the Lusaka Urban District Council when it was incorporated in 1989. This number has been reduced to about 500 largely through natural wastage. In Buenos Aires, Argentina there have been significant job creation opportunities as a result of PPP. Substantial skills and experience are available in the public sector, and experience has shown that, through consultation and working with staff and Unions, full advantage can be taken of the opportunities for advancement provided by PPP.

Federal Law in Malaysia requires that no compulsory redundancies may take place within 5 years of the start of PPP, and that staff benefits under PPP must be increased by at least 17.5%.

More than any other sector of the community, it is the poor and socially disadvantaged that pay the price when water and sanitation services become inadequate.

People in poorer areas who do not have the benefit of a piped supply usually have to buy their water from vendors. Experience from around the world shows that the cost of buying water in this way can be as much as 100 times more than buying water directly from the public utility.

PPP provides an opportunity to break out of the vicious circle of declining financial viability and deteriorating service. If well designed, PPP will deliver benefits to all water users including those low income householders who may not yet be able to afford their own connection.


Ratio of Water Prices Charged by Vendors to Prices Charged by Public Utilities in Selected

Experience from around the world indicates that the cost to poor people of survival quantities of water is far higher per unit than the cost of a piped supply.

In Karachi, water services for a small household one month are bought for the price of one basic lunch, and cost far less than electricity and gas services.

The responsibility for providing low income households with water and sanitation cannot be left to the private operator alone. It is important that the institutional and contractual framework for PPP should recognise that local and national government, the regulator, NGOs, and local communities will all have a role to play. Community involvement in particular can be promoted to encourage local people to find local solutions to local needs.

SAFEGUARDING THE POOR

How community involvement can help

"Community contractors" can be formed to construct simple local distribution sub-systems. The sub-systems are connected to the main water company network, and potable water is purchased in "bulk" from the private operator. The local community is responsible for running the sub-system and finding an equitable basis for Charging individuals for what they use. Similar arrangements can be developed with small scale community sanitation systems.

Local communities can be made responsible for managing and taking care of standpipes. They can appoint trusted members of the community to manage standpipes responsibly.

Community forums can provide a line of communication to the operator and to the regulatory body.

PPP provides an opportunity to break out of the vicious circle of declining financial viability and deteriorating service.

The returns to a private water company could be adversely affected if there is a requirement to supply low income customers, and in a completely unfettered market a private operator might well be tempted to supply only the better off. To make sure that this does not happen, PPP contracts must be drafted to set down minimum levels of service provision to all customers. In addition a key task of the regulatory body will to protect the interests of the lower income groups.

The most important contribution that PPP can make to help the socially disadvantaged is to address the root cause of high secondary market prices, namely the imbalance between supply and demand. This can be achieved by expanding coverage to unserved areas and by making sure that standpipes are well situated, properly maintained and responsibly managed. The private operator may also be able to reduce secondary market prices (and increase water sales) by encouraging more customers to on-sell water.

It is now accepted by most governments that tariff levels must provide for full cost recovery for the services, and that subsidy, if continued, must be targeted as close to the needy customer as possible. Tapering subsidies have been funded by IDA during the transition period from public sector to private sector to lessen the impact of poor collection rates in the initial years of the concession in Guinea. In some successful instances of PPP, the scale of potential operational efficiencies has allowed a reduction of tariff levels, at least in the short-term as in Buenos Aires, Argentina. More usually it will be necessary to increase tariffs, and the way in which this sensitive issue is handled is crucial to the continuing success of PPP.

High secondary market prices are an indication that the ability to pay a reasonable price for an appropriate level of water and sanitation services is there; the willingness to pay has to be developed carefully prior to and during PPP.

Customers who receive low levels of service are often reluctant to pay for that service. Increases in tariffs can engender resentment if such increases appear to be solely to pay for operators' profits. Various measures can be adopted to gain public support. Skillful publicity campaigns are a vital tool in good customer relations. Newspaper advertisements, radio and television broadcasts, public meetings and publicity handouts can all be used to make the public aware of the plans to improve the service, how this will be achieved and why public support is necessary for improvements to be possible. There should be clear reference to the cost of providing a good service and the benefits to the public derived from the investment, hence the value of paying for the service.

In cases where current tariffs are insufficient to cover the costs of providing the service, it is prudent for government to raise tariffs prior to the introduction of PPP in Order to lessen the impact when the private sector commences operations. In some situations it may also be advisable to undertake a rebalancing of the tariff structure.

A critical success factor in the early years is the achievement of demonstrable improvement commensurate with increases in charges. Properly handled, very low levels of existing tariffs can be an opportunity rather than an obstacle for the successful introduction of PPP.

SAFEGUARDING THE POOR

How regulation can help

The regulatory body can agree tariff structures that do not discriminate against the poor. For instance well-intentioned progressive tariff structures where customers are charged higher rates if they consume higher volumes can discourage customers from on-selling water. This can lead to higher secondary market costs.

The regulatory body can promote and guide forums for consulting all water users - not just established customers.

The regulatory body can apply the principles of the contract to ensure that the type and quality of service provided in particular areas is appropriate to local needs and aspirations.

The regulatory body can stimulate legislative change. For example, in squatter areas, there may be legal obstacles preventing the water company from providing a piped water supply to properties where there is no established legal tenure.

Progressive tariff structures can disadvantage low income groups

Investment Needs

In the case of service, management and lease contracts, relatively little capital expenditure is expected from the private sector. For BOT and its variants capital expenditure is a major commitment early in the PPP process, normally with well defined objectives and scale. The concession type of PPP for operation, investment and revenue collection, presents the biggest range of challenges to the private sector.

Capital investment must be focused and profiled to maximise the improvements in service provision commensurate with financial sustainability.

The finances of concession based PPP are particularly difficult in the early phases. Governments have previously tended to expect rapid capital solutions, but now increasingly understand the relationships between costs, tariffs and revenues. Improvements in customers satisfaction and revenue collection, reductions in leakage and unit operating costs can be facilitated by controlled levels of capital expenditure. These measures should:

· allow a reasonable cash flow to be established
· form a platform for a growing investment programme
· allow the capital base to be maintained
· improve water and effluent quality
· allow expansion of the service

The expectations of PPP in the sector are becoming more reasonable; improved modelling of the relationships between levels of service, operations, investment and revenues is leading to a clearer appreciation of the challenges of financing PPP. More facilities are being made available to share the responsibility for financing, to provide long-term debt capital and to mitigate project and political risks.

Involvement in water and sewerage services requires long-term commitment. Experienced international water operators, frequently in consortia with local financial groups, understand the potential financial rewards from such commitments and continue to demonstrate an appetite for involvement in new opportunities.


Typical Profiles of Planned Concession Expenditure, Finance and Returns

Finance and Risk Mitigation

In addition to direct finance and guarantee facilities, measures to promote and protect investment include the establishment of country infrastructure funds, the development of local capital markets, advisory services to investors, and project appraisal against increasingly well developed criteria. A discrete mix of finance is usually required.

DEBT CAPITAL

Debt capital from international agencies may be broadly available as loans direct to the water utility (with a guarantee from the host country), loans to the host country for on-lending to the utility company, and in the form of export credits. Agencies which provide debt capital under various terms include IBRD, IDA, ADB, IADB1 and country Export Credit Agencies. The terms of international agency loans vary from market lending rates to highly concessional terms for poorer countries.


Figure

Sources of Finance for the First 5 Years of the Buenos Aires Water and Sewerage Concession

EQUITY CAPITAL

Equity capital can be provided direct to a PPP utility by some of the major multilateral agencies - for example ADB, EBRD, IIC and IFC1. In other cases a loan can be made to a country, for example to enable a parastatal to hold an equity stake in a joint venture with the private sector.

1 For contact details see inside rear cover


Figure

IBRD Loan to Water Company

International funding agencies are playing a major role in the promotion of PPP by developing a range of finance facilities and guarantee instruments.

Partial risk guarantees - cover specific risks arising from non-performance of government contractual obligations which are critical to the viability of projects.

Partial credit guarantees - typically extend the maturities of loans and cover all events of non-payment for a designated part of the debt service; they are therefore particularly valuable to projects which need long-term funds in order to be financially viable.

Political risk - this covers the major non-contractual risks such as expropriation by government without sufficient compensation, currency inconvertibility and exchange transfer, and political violence. Most of these can be covered by investment treaties and insurance together with guarantees, if provided in the specific contract.

Apart from the facilities available from the major multilateral funding agencies, many forms of assistance are provided by bilateral agencies such as ECGD and CDC in UK and OPIC in USA. International funding agencies are continually revising the range of their services, and can be expected to be highly flexible in devising forms of assistance which will suit the circumstances of particular projects.

Multilateral and Bilateral Guarantees and Insurances are Widely Available

Facility

International Funding Agency


IBRD

MIGA

ECGD

ADB

IDB

Partial Risk

Partial Credit



Political Risk







· War



· Revolution



· Expropriation



· Nationalisation



· Transfer


· Inconvertibility

Quasi-Commercial risks - these risks arise from governmental management of the infrastructure and can be resolved by insurance and guarantees if included in the specific contract. Enforcement can be secured by resort to international arbitration.

The Opportunity for PPP

The water sector is complex and sensitive, but major benefits can be brought by involvement of the private sector, and rewards gained. There is scope for technical and commercial flexibility; the difficulties are increasingly understood, and measures are increasingly available to share and limit risk.

The need - is evident

The requirements for success -are understood

The problems - can be turned into opportunities

Investment needs - can be controlled and sustainable

Finance and risk mitigation - are increasingly available

The opportunity - should be taken

Public Private Partnership in the provision of water and sanitation services in developing countries is growing.


Figure

Multilateral Funding Agency Contact Points

AGENCY

ADDRESS

CONTACT NUMBERS

WORLD BANK GROUP
incorporating:

International Bank for Reconstruction and Development (IBRD)

Multilateral Investment Guarantee Agency (MIGA)

International Finance Corporation (IFC)

International Development Association (IDA)

HEADQUARTERS:
1818 H Street, NW
Washington DC 20433
USA

For details of Group worldwide offices, please contact Headquarters.

HEADQUARTERS:
Tel: (1) 202 477 1234
Fax: (1) 202 477 6391
Internet: http://www.worldbank.org

Asian Development Bank (ADB)

6 ADB Avenue
Mandaluyong
0401 Metro Manila
PO Box 789
0980 Manila
Philippines

Tel: (632) 632 4444
Fax: (632) 636 2346
Internet: http://www.asiandevbank.org

European Investment Bank (EIB)

HEADQUARTERS:
100 bd Konrad Adenaur
2950 Luxemborg
68 Pall Mall
London SW1Y 5ES
United Kingdom

Tel: (352) 43791
Fax: (352) 437704
Internet: http://www.eib.org
Tel: (44) 171 343 1200
Fax: (44) 171 930 9929
Internet: http://www.eib.org

European Bank for Reconstruction and Development (EBRD)

One Exchange Square
London EC2A 2EH

Tel: (44) 171 3386000
Fax: (44) 171 3386100

Project Enquiries:

Tel: (44) 171 338 6282/6252
Fax: (44) 1713386102

Inter-American Development Bank

1300 New York Avenue, NW
Washington, DC
20577
USA

Tel: (1)202 623 1000
Fax: (1)202 623 3096
Internet: http://www.iadb.org

Private Sector Dept:
Tel: (1) 202 623 1501
(1)202623 3639

Inter-American Investment Corporation (IIC)
Tel: (1) 202 623 3900
Fax: (1)202 623 2360

Multilateral Investment Fund (MIF):
Tel: (1) 202 942 8211
Fax: (1) 202 942 8291

African Development Bank

01 Boite Postal 1387
Abidjan 01, Cote d'Ivoire

Tel: (225) 21 4444
Fax: (225) 22 70 04

United Kingdom Bilateral Funding Agency

Contact Points

(Bilateral agencies for other countries, such as OPIC (USA) and OECF (Japan), should be contacted through their offices in those countries.)

AGENCY

ADDRESS

CONTACT NUMBERS

Export Credits Guarantee Department

PO Box 2200
2 Exchange Tower
Harbour Exchange Square
London
E14 9GS

Internet: http://www.ecgd.gov.uk

Tel: (44) 171 5127000
Fax: (44) 171 5127649

Commonwealth Development Corporation

1 Bessborough Gardens
London
SW1V 2JQ

Tel: (44) 171 8284488
Fax: (44) 1718286505

Back Cover

DEPARTMENT FOR INTERNATIONAL DEVELOPMENT

The department for International Development (DFID) is the British government department responsible for promoting development and the reduction of poverty. The government elected in May 1997 increased its commitment to development by strengthening the department and increasing its budget.

The policy of the government was set out in the White Paper on International Development, published in November 1997. The central focus of the policy is a commitment to the internationally agreed target to halve the proportion of people living in extreme poverty by 2015, together with the associated targets including basic health care provision and universal access to primary education by the same date.

DFID seeks to work in partnership with governments which are committed to the international targets, and also seeks to work with business, civil society and the research community to encourage progress which will help reduce poverty. We also work with multilateral institutions including the World Bank, UN agencies and the European Commission. The bulk of our assistance is concentrated on the poorest countries in Asia and Sub-Saharan Africa.

We are also contributing to poverty elimination in middle income countries, and helping the transition countries in Central and Eastern Europe to enable the widest number of people to benefit from the process of change.

As well as its headquarters in London and East Kilbride, DFID has offices in New Delhi, Bangkok, Nairobi, Harare, Pretoria, Dhaka, Suva and Bridgetown. In other parts of the world, DFID works through staff based in British Embassies and High Commissions.

DFID

DFID

94 Victoria Street

Abercrombie House

London

Eaglesham Road

SW1E 5JL

East Kilbride

UK

Glasgow

G75 8EA

UK

Switchboard: 0171-917 7000 Fax: 0171 917 0019
Website: www.dfid.gov.uk
email: enquiry@dfid.gov.uk
Public enquiry point: 0845 3004100

03/99 2/1 K
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