1 Private Sector Roles in Delivering Public Services: Policy Options for Developing Cities Penelope Brook The World Bank

2 Outline u Why involve the private sector? u Options for private participation in municipal services u Choosing an option

Why Involve the Private Sector?

4 The Problem u Chronic poor performance is the rule rather than the exception in many publicly run municipal services – many households lack good access to services (especially the poor) – service is often of poor quality – service delivery is inefficient

Population with Access to Public Infrastructure by Income Quintile (%)

6 Cost Recovery is Often Inadequate

7 Traditional Solutions Often Fail u Conventional projects centered on public investments in new capacity, training, and public sector managerial reforms often seem to make little difference u More and more governments are turning to private sector participation as an alternative solution

Options for Private Participation

9 Basic Options u service contract u management contract u lease u build-operate-transfer (BOT) u concession u divestiture

10 The Basic Options Compared

11 Service Contracts u Definition: specific tasks are contracted to the private sector, but overall utility management remains with the public sector u Typical duration: 6 months - 2 years u Pros: can inject good technical expertise u Cons: unlikely to improve performance greatly where overall management is weak

12 Example: Mexico City Water u Mexico City is divided into 4 zones, each allocated to a private service contractor for 10 years, beginning in 1993 u Contracts are in 3 stages, and cover: – mapping the network, consumer census, metering – regularization of billing – loss detection and reduction

13 Management Contract u Definition: a private company is paid a fee to operate a set of municipal services u Typical duration: 3 to 5 years u Pros: gains in managerial efficiency u Cons: gains can be difficult to enforce; city remains responsible for investment

14 Example: Solid Waste Collection u Management contracts for waste collection are common » Caracas, Seoul, Bangkok, Jakarta, Lagos u Contractors are often medium-size enterprises » 100 contractors in Lagos, 85 in Seoul u Cost savings can be significant » US data - private sector is 10-30% cheaper » UK & Canada data - private sector is 20-40% cheaper

15 Lease u Definition: a private company leases the assets of a utility, and maintains and operates them, in return for the right to revenues u Typical duration: 10 to 15 years u Pros: commercial risk borne by the private sector, giving strong performance incentives u Cons: administratively demanding; government remains responsible for investments

16 Example: Water in Guinea u Guinea instituted a lease contract for water supply in Conakry and 16 other towns in 1989 – benefits have included: » a substantial increase in access to potable water » increased connections » progression to full cost recovery

17 Guinea: Ongoing Issues u Continuing difficulties: – connection rate below expectations – high unaccounted-for water – high prices u Underlying institutional issues – problems in clearly allocating responsibilities and risks – problems in coordinating investment and operations

18 Build-Operate-Transfer u Definition: private sector develops, finances and operates bulk facilities u Typical duration: 15 to 30 years u Pros: good way of getting efficient delivery of bulk services, with private investment u Cons: not a good solution if supporting distribution systems are in bad shape, or traffic levels are uncertain

19 Example: Solid Waste in Hong Kong u DBO (Design-build-operate) for refuse transfer stations and a chemical waste plant - for waste plant, capital cost paid over 5 years in monthly installments; u DBO for landfills (including restoration and aftercare) - capital costs paid in lumpsums at milestones

20 Concession u Definition: city owns the assets, but contracts with the private sector for operations, maintenance and investment u Typical duration: 25 to 30 years u Pros: potential for high efficiency in operations and investment u Cons: requires considerable commitment and regulatory capacity

21 Example: Water & Sanitation in Manila u A 25-year water and sewerage concession began in Manila in 1997 – requires increase in water connections from 65% to 100% of households within 10 years – requires increase in sewerage connections from 8% to 83% of households within 25 years – requires decrease of technical and commercial loss from over 60% to 25% within 25 years – projected to involve total investments in excess of $7 billion

22 Divestiture u Definition: the assets of a municipal utility are sold to the private sector u Typical duration: indefinite, but may be limited by a license u Pros: potential for high efficiency gains u Cons: requires credible regulatory framework

23 Choosing an Option u Governments have multiple objectives from private sector participation: – technical and managerial expertise – improved efficiency – large-scale private investment in the sector – reduced public subsidies to the sector – making the sector more responsive to consumers’ needs and preferences

24 Mapping Options to Objectives Objective Technical Expertise Managing Expertise Operating Efficiency Investment in Bulk Investment in Distribution Option Service Contract Management Contract Lease BOT Concession Yes No Yes Some Yes No Yes No Yes Some Yes Some Yes

25 Mistakes are Easy u A number of African cities have begun by thinking of BOTs as a solution to perceived water supply problems, BUT: » real danger that new supplies of water will be lost in leaky distribution systems » danger of bankruptcy if poor collections undermine ability to meet take-or-pay obligations u In such cases, better to begin by focusing on distribution efficiency

26 What Can the Municipality Get? u The preferred option of the municipality may not be the preferred option of the private sector u Options that yield higher benefits for consumers also tend to demand a higher level of government commitment, and a better prepared institutional framework

27 Key Private Sector Objectives u A fair rate of return, over a period that allows the private sector to recover its investments u This requires: – a well-specified contract – consumer willingness to pay (and the ability to enforce payment) – credible, stable regulatory arrangements – mechanisms for handling risks beyond the utility’s control

28 Mapping Options to Prerequisites Requirement Political Commitment Cost-covering Tariffs Regulatory Framework Good Information Option Service Contract Management Contract Lease BOT Concession Low Moderate High Low Moderate High Low High Moderate High

29 Getting What You Want u If the starting conditions are not especially conducive to private investment the municipality may: – delay the transaction, and pursue institutional and regulatory reforms first; – go ahead with the transaction, but be prepared to pay a relatively high price; or – opt for a stepwise approach to private participation