Private Sector Participation Lessons in Water Supply and Sanitation Tokyo June 28, 2007 Mohammed Benouahi, World Bank

Overview of Presentation Sector objectives and strategies Options of private sector participation Experience from different PSP options Best practice lessons

Sector Objectives and Strategies Sector objectives should be to: Provide universal coverage of water and sanitation services (because of water’s positive external environmental and health benefits) Provide efficient service (service at least cost) Achieve sustainable service (operating revenue plus public subsidies sufficient to pay for operations, maintenance and investments)

Sector Objectives and Strategies Universal coverage is measured by: Share of population connected to piped water Share of population connected to sewerage Share of population with 24-hour service Share of water samples bacteriologically safe

Sector Objectives and Strategies Universal coverage best practice is: 100 % of urban and agglomerated rural population connected to water and sewerage in Chile 100% of urban population population with 24-hour service in Chile 100% of water samples bacteriologically safe in Chile Both public and private service providers can achieve best practice

Sector Objectives and Strategies Efficient service is measured by: Percentage of non-revenue water (NRW), i.e. share of water produced that does not produce financial revenue Staff productivity as measured by number of employees per thousand water accounts (connections)

Sector Objectives and Strategies Efficient service best practice is: NRW=4% in the case of the Singapore public water supply department and Japan water bureaus Staff productivity below 2.0 employees per thousand water connections for Santiago de Chile and Lima, Perú Both public and private service providers have achieved best practice

Sector Objectives and Strategies Sustainable service is measured by: Financial working ratio (cash operating costs/cash operating revenue) Share of collected wastewater treated and disposed of in an environmentally satisfactory fashion

Sector Objectives and Strategies Sustainable service best practice is: Financial working ratio 30% (Antalya lease operator) and below 50% (Santiago de Chile private concessionaire) Share of collected wastewaters treated 73% for Chile urban sector Both public and private service providers must have appropriate financial incentives to respond to environmental directives

Options of PSP OptionOwnershipFinancingOperations Service ContractPublic Public and some Private Management Contract Public Private Lease ContractPublic Private Concession Public Private Operate-Transfer Build-Own- Private then Public Private Reverse BOOT Public then Private PublicPrivate Joint Ownership Private and Public Private and Public Private and Public Divestiture Private Period, Yrs Indefinite

Options of Private Sector Presentation Based on the risk analysis the following PSP options are the riskiest for private operators: Concessions because of demand, tariff, political, financing and construction risks Lease contracts because of demand, tariff, and political risks

Options of Private Sector Presentation The demand risk is particularly significant for concessions and lease contracts because: the concessionaire and lease contractor in essence buys the right to the revenue stream in return for paying for investments (concession) and guaranteeing the service quality (both) demand can easily decrease with better control of consumption and higher effective tariffs

Options of Private Sector Presentation Affermage and lease contracts differ because: the remuneration under an affermage is a fixed fee (that not depends directly on the revenue) the remuneration under a lease contract is the difference between the collected revenue and the agreed lease fee paid to the owner of the system in both cases the owner finances investments but the operator pays for operations and maintenance

Options of Private Sector Presentation Based on the analysis the following PSP options are the least risky for private operators: Management contracts because payment is not linked to performance Service contracts because of short duration of contracts of a technical nature and few sanctions for lagging performance

Experience from different PSP options Failed concessions and reasons for failure: Buenos Aires (Government devalued currency and did not compensate with tariff adjustment) La Paz (Political opposition following change to populist government) Jakarta (Political changes and opposition due to lagging service improvements) West Manila (Political opposition to tariff increases due to lagging service improvements)

Experience from different PSP options Successful concessions and reasons for success: Casablanca (Economies of scale and cross subsidies due to combined power & water concession and limited financing risk) East Manila (Local concessionaire was able to manage political risk and benefit from links between improved service and real estate values)

Experience from different PSP options Successful concessions and reasons for success: Many systems in France and in Spain such as Barcelona and in new EU members such as Bucharest, and Sofia However, the financing needs are less in such mature systems with high coverage as compared to developing countries’ financing needs

Experience from different PSP options Concessions: Generally not possible because of risk averse private operators who have lost money Private operators not willing to accept demand risk (as under Build-Own-Operate-Transfer contracts) Private operators not willing to accept financing risks (and therefore try to delay investments)

Experience from different PSP options Failed lease contracts and reasons for failure: Antalya (Private operator bid low and Government refused adjustment of contractually fixed tariff which caused operator liquidation) Conakry (Political opposition to contract renewal in spite of service improvements)

Experience from different PSP options Successful leases and reasons for success: Gdansk (Improved performance and service quality to European standards helped by initially high service coverage) Senegal (Rapid service improvements helped by generous financing from World Bank group)

Experience from different PSP options Failed management contracts and reasons for failure: Trinidad & Tobago (Political opposition following lack of service improvements) Zambia (Opposition to contract extension following government change, in spite of rapid improvements of service quality & performance )

Experience from different PSP options Partly successful management contracts: Amman (Service improvements but even so government elected to replace management contract by government owned corporation, mostly for political reasons) Armenia (Widening participation of private sector based on improved performance and service quality)

Experience from different PSP options Successful joint ownership contracts and reasons for success: Barranquilla (Rapid service improvements due to skilled operator and successful mitigation of political risks because of joint public/private ownership) Cartagena (Rapid improvements due to successful mitigation of political risk and decent national regulation of tariff and service quality)

Experience from different PSP options Evaluation of selected management and leases: Households with piped water (percent) ContractBeforeAfter Amman90%100% Antalya93% 95% Barranquilla60% 89% Cartagena74% 95% Gaza58% 56% Senegal59% 73% Zambia100%100%

Experience from different PSP options Evaluation of selected management and leases: Constancy of supply (hours of service) ContractBeforeAfter Amman49 Antalya1923 Barranquilla1923 Cartagena1724 GazaNA 8 Senegal1622 Zambia1318 Tlipoli, Lebanon324

Experience from different PSP options Successful divestiture or privatization of assets: Chile (Steady service improvements over ten years before government-owned shares were sold to private operators at a huge financial windfall). The reasons for success includes a law that obliges operators to recover full costs of service, and a law that subsidizes up to 85% of the consumption of certified poor consumers.

Experience from different PSP options Successful divestiture or privatization of assets: England and Wales (But the divestiture was not a net money-maker for the Government that had to write-off substantial loans to the public regional companies plus pay a “Green dowry” and agree to real tariff increases in return for selling the shares to private companies Regulation under OFWAT has proven to be best practice but not transferable everywhere

Best practice lessons Lesson One: Best practice requires sustained political will and progress over many years (for Chile about ten years): Highest level political support of policies Creation of the instrumentation to reach political targets (laws, regulation, institutions) Consistent implementation of long-term plans to reach targets (15-year plans in Chile)

Best practice lessons Lesson Two: Both public and private operators can achieve best practice if appropriate policies are applied consistently: Chile achieved best practice under government ownership with policies identical for public and private operators. Assets were privatized for fiscal reasons Singapore’s government ownership and management represents efficiency best practice

Best practice lessons Lesson Three: Best practice pricing is to: Recover explicitly the full costs of service through user charges because otherwise all may be subsidized Avoid cross-subsidies since they create financial disincentives against service to poor Subsidize on the basis of income to enable the poor to pay for the full costs of service

Best practice lessons Lesson Four: Successful private sector participation requires that: The Government employer is as knowledgeable as the private operator Successfully tested regulation reduces the political risks of inconsistent policies The private sector is perceived as a partner and not an adversary as in Colombia