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PRIVATE SECTOR

PARTICIPATION IN WATER

AND SANITATION FOR

DEVELOPING COUNTRIES

KARL-ULRICH RUDOLPH AND

MICHAEL HARBACH*

In developing and transition countries, the publicinstitutions and administrations are weak. Public

utilities have not been successful in implementingand maintaining sufficient water supply and sanita-tion (W&S) services to the people (apart from somepositive exceptions). And without reliable W&S, thesocio-economic development in any country will bedisturbed. Thus, poor W&S are the reason as well asthe result of insufficient development.

This dreadful situation has not changed much duringthe last decades, in spite of huge investment fundsfinanced by international and bilateral donors fornew public water utilities (Shikwati 2002). Since theearly 1990s, banks and donors have been discussing

and trying to involve private partners and privateinvestment for water and sanitation services in theirtarget regions.

Figure 1 shows the poor status of maintenance andoperations (M&O) of a supply water purificationplant in Latin America (chemical reaction chamberfull of sludge, even weeds growing!). For this utili-ty, the donors decided to insist on private sectorparticipation (PSP) to secure M&O, which wasfinally realised (after a long and complex process)in 2005.

Water supply correlating with economicdevelopment in Macao

Macao (China) is one of the well-researched casesthat demonstrates the interrelationship betweenwater services and economic development. Prior tothe closure of a water supply concession contract in1985, water supply was of poor quality (high sali-nity and turbidity) and unreliable (frequent fail-ures, supply periods in some areas only a couple ofhours per day or not at all). Within three years ofthe implementation of a new concession contract,the water supply quality had nearly achieved EU-

standards. As Figure 2 illustrates,the level of water supply services(counted in number of connected

people) and the economic de-velopment (GDP) are well-cor-related. Although it is obviousthat GDP is dependent on ma-ny factors, not only on thelevel of W&S, noone can denythat a lack of infrastructure, es-pecially water supply and sani-tation, would have preventedthis positive development inMacao.

Figure 1

SUPPLY WATER PLANT, CHEMICAL REACTION CHAMBER

* Karl-Ulrich Rudolph is Professor andMichael Harbach is researcher at theIEEM-Institute of Environmental Engi-neering and Management at the PrivateUniversity of Witten/Herdecke gGmbH,Germany.Source: GTZ (1996).

Sanitation and public health, the Durban example

Another well-documented case is Durban, SouthAfrica (Orth et al. 2005). Figure 3 shows a selectedsupply area, the left part visualising the percentageof appropriate sanitation delivered to the popula-tion. The right part shows the number of incidents ofwaterborne diseases (especially Cholera). Red fieldsmark regions with no or poor sanitation, green fieldsindicate high incidents with cholera. The correlationis clear and needs no further explanation.

Beside severe economic costs of waterborne diseases(preventing people from working, and causing sur-

plus expenses in hospitals andthe whole medical sector), thehuge social impact and humantragedies linked to each individ-ual fate should not be over-looked.

The past 15 years of water PSPs

According to Prasad (2006),there were only two privateW&S-investment projects in de-veloping countries before 1987.At that time, water privatisationin France had a tradition of near-ly 100 years, the UK had priva-tised all public water associa-tions two years before, and inGermany a few dozen so-called

“Betreibermodelle” (BOOTs) had been realised(the first in 1983, see Rudolph 2001).

The number of PSP-projects in developing and tran-sition countries increased steadily year by year,reaching its peak in 1999 with 38 projects. ThesePSP-projects involve arrangements ranging fromsimple service contracts, broad management assign-ments (with no private capital requirements) andlease contracts (affermage) with private workingcapital to Greenfield Build-Operate-Transfers(BOT), BOOT-contracts with significant privateinvestment requirements and full concessions gener-

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0

50

100

150

200

250

300

350

400

450

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

Source: ADB (2001).

MACAO, CHINA

AN EXAMPLE OF THE LINK BETWEEN WATER SUPPLY QUALITY AND

ECONOMIC ACTIVITY

Population in 1 000 GDP in 1 000

Population

Concession commences EU standard water supply

GDP

Figure 2

Figure 3LEVEL OF SANITATION (LEFT) AND NUMBER OF CHOLERA INCIDENTS (RIGHT)

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ating legal relations between water customers andprivate water concession companies.

Due to various reasons (which will be described inthe next chapters), the number of PSP-projects hasdecreased since its peak year 1999 (Figure 4). Thisdecrease occurred despite the fact that demands forbetter solutions with regards to financing capacityand management efficiency have not been fulfilled.

Recent developments

In 2003, only 11 PSP-projects were realised in thedeveloping and transition world. And until today fig-ures have remained lower than in the peak years withan estimated number of between five and tenrealised PSP projects (Izaguirre and Hunt 2005, plussources analysed by the authors). In 2005, investmentflows amounted to USD 1.5 billion, within the USD

1 to 2 billion range for the pastfive years (excluding the USD2.5 billion Syabas concession inMalaysia in 2004, according toMarine and Izaguirre 2006).

According to Prasad (2006), 266projects in developing countriesare currently in the “pipeline”,of which 42 percent (111 pro-jects) target a concession typeand less than one percent (20)target full privatisation (dives-titure).

Though under different workingconditions, the development of

PSP projects in Europe and especially in Germanywas somewhat similar, Figure 5 shows the number offigures of PSP projects in the reference list of aspecialised consulting company (www.professor-rudolph.de). The peak was caused by German reunifi-cation and the large number of investments in newwater and sanitation facilities was needed to improvethe situation in the former German DemocraticRepublic and Central East Europe (DEG 1999).Especially the very rapid development of sanitation inthe former GDR was a unique experience, withlessons learned for worldwide application in transitionand developing countries (UBA 2001).

Global players in the water PSP-sector

Since the development and procurement of PSPprojects in W&S is a complex issue, and sometimes

includes a long and democraticprocedure, it is not favourablefor small and medium-sizedcompanies without their ownlobbying network and large ad-ministration (especially for le-gal issues and other documenta-tion). Hence, the number ofplayers in the PSP water andsanitation sector has decreasedconsiderably.

The French professional waterservice providers dominate theworld market. The global waterbranches of VEOLIA (formerGénérale des Eaux) and SUEZ

0

10

20

30

40

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

07

Source: Prasad (2006); own calculations.

PRIVATE INVESTMENT PROJECTS IN WATER & SEWERAGE

estimated

Figure 4

0

2

4

6

8

10

12

14

16

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Source: Designed by the author.

WATER AND SANITATION PSP PROJECTS IN EUROPE

total number of projects

year of contract closure

Figure 5

(former Lyonnaise des Eaux) supply approximately54 percent of the water customers in the PSP worldmarket. Together with SAUR, French companiescover 61 percent of the PSP global market. Germancompanies (including smaller PSP players not listedin Figure 6) have a share of about four percent (afterthe German power company RWE sold ThamesWater to a consortium led by the AustralianMacquarie). British private water service providersaccount for 11 percent or approxiately 40 millioncustomers.

Depending on the type of PSP project, the regionand (very important) the clients’ procurement strat-egy, there might still be viable competition. In anycase the global situation appears to be an oligopolyled by the two giant French companies.

Global network and the factors workingagainst PSP

The decrease in numbers of annual PSP projectimplementation is caused by the following factors:

1. In various countries, public bodies responsible forW&S have realised that PSP may be a good solu-tion to significantly raise efficiency (a pre-condi-tion for financing), but that one important prob-lem in the water sector will not be resolved byPSP alone: cost-recovery has to be realised in atransparent way, either through public subsidiesor water tariffs. On the other hand, private waterservice companies have realised that they bearmore than just commercial risks (manageablewith skills and expertise). They had to learn that

politicians and public media(with its populistic appeal) mightblame the private companies forthe water tariffs, even though thecosts would have been muchhigher (and often for less value)without privatisation. Therefore,the clear definition and manage-ment of political risks is essentialfor PSP in W&S.2. Public functionaries in waterutilities (and in this respect,there is little difference betweendeveloping countries and in-dustrialised countries like Ger-many) have recognised that wor-king under a protected mono-

poly is much more comfortable than working in acompetitive environment. It is understandablethat they use their PR and lobbying power inclose relationships with their political sharehold-ers (quite often they are the same people as thefunctionaries and profit from the public monop-oly). They tend to emphasise difficulties withprofit-oriented private companies, claiming thatpublic administration was always dedicated tothe welfare of the customer, with no self-interestat all.

3. Global networks, like ATTAC and internationallylinked NGOs, like the BUND in Germany oreven members of religious institutions (like theGerman Brot für die Welt) have strong doubtsabout the power of competitive markets, and fightagainst any form of PSP, favouring public monop-olies instead. Some activists favour a non-PSPoption even in developing countries where it isobvious that water shortage and insufficient sani-tation will remain under public control.

However, one argument against PSP cannot bedenied: the complexity and the over-bureaucraticapproach of the donor-driven PSP tenders has fer-tilised the global oligopoly illustrated in . Local com-panies seem to have little or no chance to win PSPcontracts.

Failures

It is true that there have been failures in the historyof PSP in water and sanitation. But it is also true thatthe reasons for these failures often lie outside thePSP principle as such and are related to basic prob-

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108.0

80.0

56.0

27.0

26.0

20.0

9.5

9.0

6.5

4.5

Veolia

Suez. Env.

Macquarie et al.(ex RWE-TW)

United Utilities /US Water

Saur

Severn Trent

Biwater

Anglian Water

Gelsenwasser

Remondis Aqua

Source: BMWA (2006), updated.

GLOBAL PLAYERS

mio. water customers resp. population equivalents

Figure 6

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lems which became noticeable in the course of a PSPprocess:

• CochabambaFrom the beginning, a very ambitious and expen-sive investment scheme was targeted for the prof-it of construction companies linked to influentialpoliticians. The private company did not insist onchanging this scheme to a more efficient one (orcould not change the scheme against the will ofthe client).The international donors concentratedon legal issues, probably neglecting the essentialtechnical-economic environment. Local lobbyists(among them private water vendors who wouldhave lost their profit once the public water supplystarted working) in close collaboration with theabove-mentioned institutions and internationalnetworks succeeded in organisinz public riots.Fierce police reaction caused the tragic death ofsix people. A realistic cost-calculation comparingthe status quo and the status ante with the statuspost was not communicated in a transparent mat-ter. If the public sector decides not to recovercosts through water tariffs (which may be under-standable in developing countries), the share ofsubsidies or revenues must be defined.

• ManilaResearch carried out by the authors on behalf ofthe World Bank revealed what experts had prob-ably presumed. One of the two Manila PSPs wassuccessful from the beginning. The second failedto overcome difficulties with definition, billingand collection of water tariffs, due to various rea-sons (including the Asia crisis).After re-tenderingand re-design, the project has recovered.

• La PazThe private concessionaire improved the connec-tion rates and water services to the poor as wasdefined in the procurement contract, in compli-ance with the contracted target. Nevertheless,under changed political environment (elections),the public client did not want to proceed, and theprivate company finally gave up. In the beginningthe pressure groups seemed happy. At themoment the situation (although money has beenprovided by donors) is definitely worse than dur-ing the PSP period.

• DaressalamIt is very difficult to obtain details and factsdescribing what happened in this PSP. In the

beginning it was the international donor whoapplied pressure to set up a PSP (fearing that thepublic utility would not be able to operate waterfacilities successfully, even if the investment wasgranted). As experienced later, this suppressiveattitude led to difficulties. As soon as the grantwas ready for payment, the PSP was cancelledusing a variety of reasons and excuses. The man-agers of the private company were arrested andforced to leave the country. The public perceivedthis activity as local patriotism against the “busi-ness invader from outside”.

It is the experience of the authors that the full truthabout the PSPs in water and sanitation can only bediscovered by researching cases individually; inter-net publications very often feature only one-sided,subjective reports, as the following example shows:

• NelspruitOne positive example is the W&S-concession inNelspruit, South Africa, which is among the mostoften cited PSP “failures”. However, a case studyundertaken by the authors revealed that the situ-ation has improved considerably, especially forthe poor. Even political difficulties (there werenever any significant technical difficulties) havebeen resolved. Connection rates, performanceindicators and cost-recovery are much better thanfor comparable municipalities in the region. As inmany other PSP cases, the reality is totally differ-ent from the impression gained from informationin the Internet.

PSP results so far

The World Bank has recently tried to calculate thenumber of connections installed by privateinvestors. Depending on the available data, the fig-ures range between 250,000 and 600,000 new con-nections in 15 years (Clarke 2004 ). Compared withthe more than one billion people without access tosafe water supplies (according to data from UN),this figure seems rather low. But the outcome ofprivate sector investment in the water supply andsanitation sector cannot solely be assessed by thenumber of new connections installed. It is alsoimportant to consider the improvements achievedin the water (service) quality.

Overall, 84 percent of the more than 220 contractsawarded for water utilities in 1990–2005 were still

operated by 2005. About 16 percent of the projectshave failed (some of these would have also failed ina market economy, not only because of politicalpressure). Hence, the failure rate is not high (Marineand Izaguirre 2006).

PSP in W&S – a complex issue

The overall positive results and the need for PSP inW&S should not distract from the general difficultiesthat are linked to the often complex structure oflong-term PSP contracts. The W&S sector is a deli-cate system because of quality requirement andhygienic risks.The social necessity of providing accessand (at least and basic) supply (e.g. in RSA: min. 6 m3per household and month) to the poor is another spe-cific characteristic. These issues have to be solvedthrough a reasonable PSP design, taking into accountthe natural monopoly of networks for W&S. In otherwords, PSP in the water sector is more difficult (andriskier in its planning and design because of the veryhigh portion of CAPEX or sunk costs) than in othersectors like power and telecommunication, etc.

In Europe, most of the PSP procurement has beencharacterised by transparent negotiation (publication� pre-qualification � indicative offer � pre-selec-tion of short-listed bidders � stage-wise exclusion ofbidders with proposals worse than others � last offerfrom preferred bidders � final negotiations � con-tract closure). But the (sometimes) negative effects offocusing on legal, administrative and financialinstead of technical and efficiency-orientated issueshas led to the following statement:

PSP projects in W&S are

– seldom tendered as they were originally designed,– seldom negotiated as they were tendered,– seldom contracted as they were negotiated,– and seldom executed as they were contracted.

Another general problem is the fact that the giantglobal companies are “one-stop-shops”, providingcomponents, reconstruction services, various tech-nologies, etc. This might (and in various cases, cer-tainly did) lead to a conflict of interest between theconcession company, whose task is to carry out theconcession contract in loyalty to the municipality asconcessionaire, and the various departments withinthe big “one-stop-shop”. Offering a low price in atender for operational services, these companies are

hoping for extra profit once they are in the positionto influence tenders for plant extensions, reconstruc-tion, modernisation etc.

General conclusions

It is obvious that public utilities under the regime ofpoliticians are not able to improve the water andsanitation services in many regions of developingand transition countries. It is also obvious that so-called “privatisation” is disliked by the public and bythe media and that this scepticism is supported bypolitical functionaries (according to their institution-al and individual interests) and international net-works (according to their general opinion aboutmarket economies).

General difficulties with PSP, especially the largeprojects driven by international donors, can be over-come by

– creating PSP procurements in a less bureaucraticway and opening them for regional small andmedium-sized enterprises,

– using PSP models that leave legal ownership andlong-term governance with the public partner,like management contracts or BOTs,

– ensuring that there is no conflict of interestbetween operative functions and decisions on theone hand, and trade and delivery of goods (likespare parts, technologies) on the other, embeddedin the PSP (as this might happen with concessionsand very large one-stop-shop-companies),

-– making use of innovative new PSP-models,encouraging SMEs in co-operation with interna-tional professionals, as in a franchise scheme(Asian Water 2006).

PSP will remain a difficult option in the water and san-itation sector, more difficult than just collecting grantsfrom donors and operating the facilities without prop-er cost-recovery. However, achieving the MDG (Mil-lennium Development Goal, to which the internation-al community is committed) and realising a sustain-able solution will probably require more efficiency,and in many cases a private partner with professionalmanagement skills and some financing power.

The potential of PSP is usually understood as

– a driver of efficiency (institutionalised internali-sation of performance incentives),

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– a source of financing (making projects bankableand including private capital).

Further more, PSP is the door to the business devel-opment of water services (not of water resources!),which may be the major reason for conflicts betweenthose who want this to be a market economy, andthose who do not.

References

ADB (2001), Developing Best Practices for Promoting PrivateSector Investment in Infrastructure – Water Supply, Manila.

BMWA (Federal Ministry for Economy and Labour; 2005),Guideline Strengthening of Competitive Water Utilities inGermany (Utilities Management, PPP, International Activities),http://www.bmwi.de/Redaktion/Inhalte/Pdf/Publikationen/Dokumentationen/wasserleitfaden-dokumentation-547,property=pdf,bere-ich=,rwb=true.pdf.

Clarke, G. R. G. et al. (2004), “Has Private Participation in Waterand Sewerage Improved Coverage? Empirical Evidence from LatinAmerica”, World Bank Policy Research Working Paper 3445.

DEG (German Investment and Development Company; 1999),Wasserwirtschaft in Entwicklungs- und Transformationsländern– Chancen für deutsche Unternehmen, Köln (Author: K.-U. Ru-dolph).

GTZ (German Technical Cooperation; 2000), Fallstudie: Was-sersektor in Peru, Arbeitspapier no. 2, Public Private Partnership imInfrastrukturbereich, Eschborn (Author: K.-U. Rudolph).

Izaguirre,A. K. and C. Hunt (2005),“Private Water Projects”, PublicPolicy for the Private Sector, note no. 297.

Marine, P. and A. K. Izaguirre (2006), “Private Participation inWater – Toward a New Generation of Projects?”, Grid Lines, noteno. 14.

Orth, H. et al. (2005), Anforderungen an die Abwassertechnik inanderen Ländern, Exportorientierte Forschung und Entwicklungauf dem Gebiet der Wasserver- und Entsorgung, part II,Abwasserbehandlung und Wasserwiederverwendung, vol. 1, BMBF.

Prasad, N. (2006), “Current Issues in Private Sector Participation(PSP) in Water Services”, Development Policy Review 24 (6),669–92.

Rudolph, K.-U. (2001), Ten Years After – Experiences from BOXand PPP’s in the German Water Sector and Lessons for the Future,MIA News, Group on Management and Institutional Affairs in theNewsletter of the IWA Specialist, page 12, April.

Rudolph, K.-U. and M. Harbach (2006),“Franchising Operation andMaintenance: Achieving Competition in the Water Market”, paperpresented at the 5th Applied Infrastructure Research Conference,Berlin, October. See also: Asian Water, June 2006, vol. 22 (5), 8.

Shikwati, J. (2002), The Developing World Needs Trade, Not Aid, toHelp the Poor, Nairobi: Inter Region Network.

UBA (Federal Agency for the Environment; 2001), The GermanWater Sector – Policies and Experiences, http://www.umweltbunde-samt.de/wasser/wsektor/index.html.