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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

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.


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.


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.


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