WATER P-NOTES 55271 ISSUE 41 AprIl 2010 public-private partnerships for Urban Water Utilities A Review of Experiences in Developing Countries S Growth of ppps Since 1990 ince 1990, many national and local govern- ments in developing countries have contracted with private companies to operate or manage Between 1991 and 2000, the population served by their water utilities under Public-Private Partner- private operators in developing and transition coun- ship (PPP) contracts. The assumption was that the tries grew steadily from 6 million to 94 million. At private sector would improve utilities by bringing in the same time, the number of countries with active new capital, raising the level of staff expertise, and water PPP projects increased from 4 to 38. How- making operations more cost-effective and efficient. ever, problems started to appear in the late 1990s, More than 260 PPP contracts have been signed to and the number of new PPP contract awards began provide water services in more than forty developing to decrease. countries. Yet, although the general perception is that The recourse to private operators has been water PPPs in developing countries are on the accompanied, however, by a good deal of contro- decline, the situation is more nuanced. The popula- versy. Several high profile contracts, such as in Bue- tion served by private water operators in developing nos Aires, were cancelled in recent years following and emerging countries has continued to increase conflicts between the public and private partners. steadily, from 94 million in 2000 to more than 160 This has raised doubts about the suitability of PPPs million in 2007. Large countries such as Algeria, to help improve water services in developing coun- China, Malaysia, and the Russian Federation now tries. Yet, there has been only little objective data rely on private water operators on a large scale. Out available in the literature about the performance of the more than 260 contracts awarded since 1990, of PPPs, and the resulting debate has been based 84 percent were still active at the end of 2007, and more on ideology than fact. This study attempts to only 9 percent had been terminated early. Most can- redress the shortage of information by examining, cellations were in Sub-Saharan Africa, a challenging through objective indicators, the actual performance region for reform, and in Latin America, because of of PPPs in developing countries over the last fifteen overoptimistic concession schemes. years. It collected data from as many as 65 PPP projects, representing a served population of about one hundred million people--half of the urban performance of Water ppp projects population served at one point in time since 1990 by private water operators, and 80% of the popula- The study looked at 65 large water PPPs that had tion served by a private operator for more than 3 been operating for at least five years (or at least years and under a contract signed before 2003. three years for management-only contracts), focusing The following note highlights key information from the World Bank publication Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries, by Philippe Marin. It is #8 of the Trends and policy Options series from the World Bank and Public Private Infrastructure Advisory Facility (PPIAF), 2009. WATER P-NOTES Figure 1. Water Utility PPPs Awarded and Urban Populations Served in Developing Countries, by country of origin of operators, 1991­2000 175 150 Population, millions 125 100 75 50 25 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Devoloping Other Devoloped Spain United Kingdom France Countries Countries Source: Author's Calculations on the actual impact on the populations served by Improving Quality the PPPs, rather than on whether contracted targets The study focused on the contribution of water PPPs for service provision had been met. Four dimensions for reducing water rationing, which is a major prob- of service were used to assess how the PPPs per- lem affecting many water utilities in the developing formed: the extent to which coverage was expanded; world. Without service continuity, a utility cannot the quality of the services provided; the operational guarantee the potability of the water it distributes efficiency of the utilities; and the tariff levels imposed. because of the risk of contamination through infil- tration of soiled water into the network. In addi- Increasing Service tion, pressure fluctuations under intermittent service In terms of the contribution of PPPs for expanding causes leakages and burst pipes, accelerating the access to water services, the study found a wide deterioration of the network and/or increasing range of variation between projects. The perfor- maintenance costs. Finally, the poor who often live mance of concessions arrangements (where the at the periphery of the network are disproportion- private contractor was held responsible for making ately affected by these disruptions. additional investments to expand service) proved The study found that many PPPs had been very highly dependent upon the financial design (espe- efficient in reducing water rationing, even in some cially tariff level and subsidies) of each contract. cases succeeding in reestablishing after a few year Many fell short of expectations, as private operators a full 24/7 service. The largest body of data comes often failed to invest the amounts initially committed from Colombia, where water rationing is wide- to the operation. The best performing concession spread and the national regulator provides reliable arrangements were usually those which had some data on water rationing. Many management con- amount of public funding to complement what the tracts implemented with utilities suffering from water private contractors invested. Under lease arrange- rationing also proved efficient in increasing the ments, investments in the utilities originate from average number of hours of services. public sources and private contractors are respon- sible for operating or managing the utilities, and these arrangements often fared much better than Improving efficiency concessions as far as expanding their coverage of the population. It seems clear that, in the context of Operational efficiency was the dimension for which developing countries where many poor households the positive contribution of PPPs was the most may not afford the cost of connection, the provision consistent, with most projects showing significant of funding by the public partner, whether under a improvements in performance. The study analyzed "hybrid" concession or a lease, is of major important the evolution of three key indicators: level of water to promote the expansion of access. losses (Non-Revenue Water or NRW), bill collection 2 ISSUE 41 · APRIL 2010 Figure 2. Gains in Service Continuity under 12 Management Contracts 24 Daily hours of Operation 20 16 12 8 4 0 Kosovo (4) Kampala, Uganda (3) Lara, Venezuela, R.B. de (3) Zambia (4) Trinidad (4) Mozambique (5) Monagas, Venezuela, R.B. de (4) La Rioja, Argentina (3) Albania (4) Yerevan, Armenia (5) Gaza City, West Bank and Gaza (6) Amman, Jordan (6) Before Start of Management Contract Gain Gain With Private Operator Source: Author's Calculations ratio, and labor productivity (measured as the num- statistical difference in average tariff levels between ber of staff per thousand connections). utilities under PPPs and those under public manage- ment, provided that the latest were run under a tariff Many PPPs were able to reduce water losses regime that promoted full cost recovery. considerably, with a few reducing the level of NRW down to 15% or less, comparable to the best water utilities in developed countries. Almost all PPPs Toward More Sustainable ppps: showed an increase in the bill collection rate, as well as a significant improvement in productivity. It Optimizing Benefits must be noted that while several PPPs were associ- As many lessons were learned during the last ated with significant layoffs (as in Latin America), this decade, a new approach is emerging for maxi- was often due to over-staffing. There were also sev- mizing the contribution of private water operators eral PPPs where no significant layoffs tok place, as in the developing world. The focus should not for instance in many projects in Sub-Saharan Africa. be on attracting private financing--something which has usually proved disappointing except in Tariffs: a complex topic the most advanced countries--but on using pri- vate operators to improve operational efficiency The final measure for assessing the impact of PPPs-- and quality of service. This in turns improve the ariff levels--is a more complex and difficult topic. financial viability and creditworthiness of a util- Tariffs often rose while PPPs were implemented, but ity, allowing it to access various funding sources this was due in part because tariff levels were well (public, private or a mix of both) depending on below costs when they were under public manage- its specific situation. While private financing has ment. Tariff increases were necessary for the financial proved viable in a few of the more advanced sustainability of the water services, regardless of the developing countries, the bulk of investment in the option chosen for managing the utility. Because of near future will have to come from public sources. the multiple factors impacting tariffs, this study could The most successful PPP schemes have been not assess what was the specific impact of private designed around a mix of funding sources, using management on tariff levels. The most solid evidence a variety of schemes: on the topic comes from a recent econometric study by the World Bank (Gassner et al, 2008). Using a · Concessions with cross-subsidies from electricity sample of almost one thousand public and private sales, tariff surcharges, or both (as in Morocco, water utilities in the developing world, it found no Cote d'Ivoire and Gabon); 3 WATER P-NOTES · Leases contracts including enhanced incentives verted by vested interests. Many obstacles can lead for operational efficiency, subsidized connec- to conflicts and costly early termination. tions programs for the poor, and a gradual Still, the overall performance of water PPPs in move to full cost recovery through tariffs; developing countries is more positive than com- · Mixed-ownership companies; and monly believed. PPPs for urban water utilities have brought significant benefits to tens of millions of · Concessions with public grants for some invest- people around the world, with successful projects ments to spearhead access expansion or reha- in places as diverse as Chile, Colombia, Brazil, bilitation while minimizing the impact on tariffs. Senegal, Cote d'Ivoire, Morocco, the Philippines With a shift in PPP models, many new players and Armenia. Beyond the contribution of indi- are entering the market. Since 2001, private opera- vidual projects, the introduction of private water tors from developing countries have signed most of operators in a given country can be beneficial for the new contracts, and some international operators the reform agenda, by generating much-needed have also transferred their existing contracts to local pressure to move the whole sector toward higher investors. By 2007, local private water operators levels of performance. The public water utilities served more than 67 million people, or more than that have succeeded in improving performance 40 percent of the market. This is a major change are those that have applied sound commercial from the situation back in the 1990s, when the management principles, emphasizing financial via- water PPP market was largely in the hand of a few bility, accountability, and customer service. In that multinationals. These new operators provide much- sense, the benefits of PPPs may have more to do needed competition in the sector and may also be with stimulating a much-needed sense of competi- better able to manage the various risks inherent in tion and accountability in an otherwise monopo- the urban water utility business. Their understand- listic sector than in the specific achievements of ing of local culture can facilitate viable partnerships individual projects. with local authorities and better mitigate political A new hybrid model has emerged that takes risks. They are often more interested than their inter- a broad approach to private sector involvement national competitors to serve small cities and towns, in public water utilities. Successful PPPs often owe where the needs are considerable. their good performance as much to the contribu- tion of public partner as to the private operator. The boundaries between public and private water utili- rebalancing the Debate ties are also increasingly blurred, with an increasing number of public utilities opening their capital to One clear finding of the study is that PPPs are not private investors (as SABESP in São Paulo, Brazil) or a magic formula to address all the causes of failing signing PPP contracts outside of their jurisdiction, public water utilities in the developing world. PPP where they act as private entities (as ONEP from projects are complex undertakings with strong politi- Morocco in Cameroun). This is good news, as it cal risks and large uncertainties as to the magnitude fosters a more buoyant and competitive market with and timing of the expected benefits. Contractual tar- more choices for those policy-makers in government gets are difficult to set and baseline data are seldom who must tackle the immense challenges facing the reliable, generating many opportunities for conflict. urban water sector in developing countries. The pri- Private operators do not always deliver what they vate sector has much to offer, and in many forms. It promise and have a tendency to seek renegotiations might just be time for a broader concept of partner- to their advantage. Reforms can become easily sub- ship, one that includes all and excludes none. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the Water World Bank Group. P-Notes are available online at www.worldbank. Sector org/water. P-Notes are a synopsis of larger World Bank documents in Board the water sector. 4 THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org