Embed Size (px)
Citation preview
Toolkit: Approaches to Private Participation in Water Services
Module 1
Considering Private Participation
Introduction:
Navigating through this E-Learning Module This is one of 9 Toolkit e-learning Modules. Each Module is created in PowerPoint, and you advance through the Module by pressing the right arrow or ‘Enter’ button. Core Module: The Module takes you sequentially through four or five major issues, depending on the Module. The progress through the Module is shown by the colored area on a logo on the top right hand corner of each slide. Here is an example: Supplementary Content: The Core module covers all key issues. However, you can choose to access additional information. These supplementary slides can be accessed by passing the cursor over colored buttons. The button colors relate to issues of various levels of detail:
Navigation through the supplementary material is also by pressing the right arrow or ‘Enter’ button. At the end of each section you will return automatically to the core Module. However, there is an extra button (to pass over) on the top right hand of each supplementary page that gives you the option of a shortcut back to the core Module:
Basic Concept Detail
Expert insight
Supplementary Information / Case studies
Back to Module
E-learning design: [email protected]
Elements of the Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
5Standards, Tariffs, Subsidy, Financials
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
General Outline of Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
Module 1
5Setting Service
Standards, Tariffs, Subsidies &
Financial Arrangements
Module 1
Considering Private Participation
“What can private particpation expect to Achieve?”
Module 1 - What will we learn?
What are the
underlying POLICY
PROBLEMS for
provision of the
water services in
developing
countries?
What are the various MODELS OF PRIVATE PARTICIPATION that we can usefully consider? How do they address the problems
What are the possible EFFECTS OF PRIVATE PARTICIPATION ?
Management Contract for
Jordan Valley Authority,
Irrigation Water Supply, may be
the first of its kind.
How can we be sure of
GETTING
PRIVATIZATION TO
WORK?
Module 1 - Considering Private Sector Participation
Before introducing Private Participation, Governments need to:
Document particular problems their water utilities face
Diagnose the underlying cases of the problems
Determine whether private participation can address the problems
UNDERSTAND: Effects of
Privatization
ACHIEVE:
Getting PP to work
REVIEW:
Underlying Policy Problems
Module 1 - Considering Private Participation (PP)
HOW?:
Different PP Models
“In this Module we will look at four main areas…...”
UNDERSTAND:
Effects of Privatization
ACHIEVE:
Getting PP to work
HOW?
Different PP Models
REVIEW:
Underlying Policy Problems
Underlying Policy Problems
REVIEW:
Underlying Policy Problems
In this section we REVIEW underlying policy problems related to provision of water services, including
Customer Connections Supply (flow and quality) Sanitation service Money Assets and Investment Service providers
In this section we REVIEW underlying policy problems related to provision of water services, including
Customer Connections Supply (flow and quality) Sanitation service Money Assets and Investment Service providers
Underlying Policy Problems
“In many countries the provision of water services is unsatisfactory. A number of basic issues influence this……….”
Basic issues affecting water services include:
Connection rates – Many households don’t receive water or sanitation services from the utility, although they prepared to pay for service.
Quality of service – Those few connected get water for only a few hours per day, with water not safe to drink, and little sewage treatment.
Lack of money – Solutions would be easier if customers could pay more or governments could raise more tax.
External benefits – Improved water services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay
Assets – With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements
Local, provincial and central government may have overlapping responsibilities
Underlying Policy 3 Other Factors
“………. but three additional factors may create serious obstacles.”
Basic issues affecting water services include:
Connection rates – Many households don’t receive water or sanitation services from the utility, although they prepared to pay for service.
Quality of service – Those few connected get water for only a few hours per day, with water not safe to drink, and little sewage treatment.
Lack of money – Solutions would be easier if customers could pay more or governments could raise more tax.
External benefits – Improved water services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay
Assets – With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements
Local, provincial and central government may have overlapping responsibilities
Three other factors may create serious obstacles :
These factors, alone or combined, may create obstacles to plans for water and sanitation service improvement:
Water services are critical to all consumersServices are often provided under a natural monopoly; supply by one well run firm may be more effective than two or more firmsRequired investments are large, and cannot be reversed if returns prove to be less than estimated
The combination of these factors potentially leads to trouble
Three other factors may create serious obstacles :
These factors, alone or combined, may create obstacles to plans for water and sanitation service improvement:
Water services are critical to all consumersServices are often provided under a natural monopoly; supply by one well run firm may be more effective than two or more firmsRequired investments are large, and cannot be reversed if returns prove to be less than estimated
The combination of these factors potentially leads to trouble
The first two factors:
Customers may doubt that they are getting a good deal, and resist price increases, even if revenue is lower than costs.
As a result, Government faces strong pressure to keep prices below costs, causing problems for improving service.
The first two factors:
Customers may doubt that they are getting a good deal, and resist price increases, even if revenue is lower than costs.
As a result, Government faces strong pressure to keep prices below costs, causing problems for improving service.
The third factor - investment:
Provided prices are above operating costs, governments can accede to consumer pressure to limit price rises without causing suppliers to cease services.
Unless government makes up any difference between prices and costs, through subsidy, providers will not invest, if prices are too low to cover full costs including investment and repairs to infrastructure
The third factor - investment:
Provided prices are above operating costs, governments can accede to consumer pressure to limit price rises without causing suppliers to cease services.
Unless government makes up any difference between prices and costs, through subsidy, providers will not invest, if prices are too low to cover full costs including investment and repairs to infrastructure
Underlying Policy Problems – The Challenge“Given that the provision of water services is unsatisfactory, and a number of
issues influence this…..”
The biggest challenge for governments is to address these issues and thus to encourage investment, in order to:
Improve quality
Lower costs
Extend access to services
UNDERSTAND
Effects of Privatization
ACHIEVE:
Getting PP to work
HOW?
Different PP Models
REVIEW:
Underlying Policy Problems
Possible Effects of Private Participation
UNDERSTAND:Effects of
Privatization
In this section we show some of the possible effects of Private Participation in water services in developing countries.
We look at three main areas: Operation Investment Policy & enforcement
In this section we show some of the possible effects of Private Participation in water services in developing countries.
We look at three main areas: Operation Investment Policy & enforcement
Possible Effects of Private Participation
“Private participation changes the water sector, with an operator being independent of government, and with incentive to be profitable. ”
Private providers cannot be directed in the same way as a public provider, and the profit incentives can cause it to take actions not in the public interest.
However independence and profit can help the government to achieve its objectives.
Private participation may have effects in three areas:
The Operating Performance of the utility
The utility’s investment decisions
Policy and its enforcement
Possible Effects of Private Participation
“Private participation changes the water sector, with an operator being independent of government, and with incentive to be profitable. ”
Private providers cannot be directed in the same way as a public provider, and the profit incentives can cause it to take actions not in the public interest.
However independence and profit can help the government to achieve its objectives.
Private participation may have effects in three areas:
The Operating Performance of the utility
The utility’s investment decisions
Policy and its enforcement
Possible Effects of PP:Operating Performance
Possible Effects of PP:Investment Decisions
Possible Effects of PP::Policy & Enforcement
UNDERSTAND:
Effects of Privatization
ACHEIVE
Getting PP to work
HOW?
Different PP Models
REVIEW:
Underlying Policy Problems
Getting Private Participation to Work
ACHIEVE:
Getting PP to work
In this section we show some of the potential issues in getting Private Participation in water services to work.
We look at three main challenges:
Ability and incentives to invest Protecting operator from risk of change Achieving ‘Fairness’ in PP Arrangements
In this section we show some of the potential issues in getting Private Participation in water services to work.
We look at three main challenges:
Ability and incentives to invest Protecting operator from risk of change Achieving ‘Fairness’ in PP Arrangements
TWO MAIN ISSUES:
Getting Private Participation to Work
“The experience of the last decade shows how important it is to get two main issues right – but also how difficult”
Giving the provider the ability and the incentives to make good operating and investing decisions
Protecting the Operator from risk of losing through Government changing ground rules
Giving ability and incentives :This means giving the provider enough freedom to make decisions, and so to be expected to take relevant business risksThe provider should be allowed to benefit when it improves business, but should bear any risk it has agreed to bear (and should not be automatically be allowed to renegotiate when things go wrong and if profits decline)
Giving ability and incentives :This means giving the provider enough freedom to make decisions, and so to be expected to take relevant business risksThe provider should be allowed to benefit when it improves business, but should bear any risk it has agreed to bear (and should not be automatically be allowed to renegotiate when things go wrong and if profits decline)
Protecting the Operator from Government changes :This means protecting the operator from Government changes to the ‘rules of the game’, rather than from bad operating or investment decisions.This includes protecting the operator from the risk that the government will cut prices after the operator has invested, or other measures that wiill affect the investor’s profitability
Protecting the Operator from Government changes :This means protecting the operator from Government changes to the ‘rules of the game’, rather than from bad operating or investment decisions.This includes protecting the operator from the risk that the government will cut prices after the operator has invested, or other measures that wiill affect the investor’s profitability
Getting PP to Work - ‘Fairness’
“In the last decade many PP arrangements have run into trouble or been cancelled. Lessons learnt show that the arrangement must be perceived to be fair and legitimate ”
If the customers or operator feel that the arrangements haven’t been fairly implemented, then they can run into trouble
Examples: Cochabamba and Manila
To work well, the Government must create an arrangement that people perceive as being fair. If not:
Customers & voters may pressure Government to override contractual protections
The Operator may find his property rights or returns are less secure than expected
Private providers may require a higher rate of return if the arrangement is not perceived as being fair
Getting PP to Work - ‘Fairness’
“In the last decade many PP arrangements have run into trouble or been cancelled. Lessons learnt show that the arrangement must be perceived to be fair and legitimate ”
If the customers or operator feel that the arrangements haven’t been fairly implemented, then they can run into trouble
Examples: Cochabamba and Manila
To work well, the Government must create an arrangement that people perceive as being fair. If not:
Customers & voters may pressure Government to override contractual protections
The Operator may find his property rights or returns are less secure than expected
Private providers may require a higher rate of return if the arrangement is not perceived as being fair
FairnessExamples in Toolkit
Getting PP to Work: Fairness & Cost
Ra
te o
f R
etu
rn t
ha
t m
us
t b
e p
rom
ise
d
Strength of legal protections
Rules perceived as unfair
Rules perceived as fair
“Additionally, perceived fairness allows a lower rate of return to be promised for a given legal protection – and possibly lower potential cost”
UNDERSTAND
Effects of Privatization
ACHEIVE
Getting PP to work
HOW?
Different PP Models
REVIEW
Underlying Policy Problems
Models of Private Participation
HOW?
Different PP Models
In this section we show the key Private Participation models:
Management Contracts Affermage – Lease Concessions and Divestitures Joint Ownership
In this section we show the key Private Participation models:
Management Contracts Affermage – Lease Concessions and Divestitures Joint Ownership
Reviewing Module 1Toolkit Approach to PP Models
1. Many issues arise in more than one PP model. Organizing the Toolkit by issue avoids repetition
Example: The question of disputes arises in every model
2. Focusing on matters of substance avoids unproductive discussion of exact meaning of contract types:
Example: Focussing on appropriate allocations of risks and responsibilities, and allowing this to determine
contract type.
3. Many real world arrangements are in fact hybrids of the ‘standard’ PP models
‘The Toolkit focuses on choices faced when designing PP arrangements rather than describing specific PP models ….’
The reasons for this approach include:
The use of ‘standard’ PP models:
However, whilst the Toolkit is structured around these design choices, we do refer to three main types of Private Participation Models, comparing and contrasting the importance of the issues under each model.
The three delegated management models considered throughout the Toolkit are:Management ContractsAffermage-Leases Concessions
The Toolkit does not discuss BOT arrangements, nor arrangements that do not involve private participation.
The use of ‘standard’ PP models:
However, whilst the Toolkit is structured around these design choices, we do refer to three main types of Private Participation Models, comparing and contrasting the importance of the issues under each model.
The three delegated management models considered throughout the Toolkit are:Management ContractsAffermage-Leases Concessions
The Toolkit does not discuss BOT arrangements, nor arrangements that do not involve private participation.
Models of Private Participation
“It is useful to understand the nature of some key PP models, and implications for the Challenges of Private Participation.”
Management Contracts
Management Contracts transfer responsibility for managing a utility to an operator – often for 3 to 5 years
Affermage - Leases
In Affermage-Leases the operator is responsible for operating and maintaining the business,but not financing investment - with a term often from 5 to 14 years
Concessions and divestitures
Concessions give the operator responsibility for financing investment, as well as operation and maintenance, with assets returned to government after 25 or 30 years.Divestiture gives the same responsibilities, but ownership of the assets stays with private investor
Joint Ownership
Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain advantages
Models of Private Participation
“It is useful to understand the nature of some key PP models, and implications for the Challenges of Private Participation.”
Management Contracts
Management Contracts transfer responsibility for managing a utility to an operator – – often for 3 to 5 years
Affermage - Leases
In Affermage-Leases the operator is responsible for operating and maintaining the business,but not financing investment - with a term often from 5 to 14 years
Concessions and Divestitures
Concessions give the operator responsibility for financing investment, as well as operation and maintenance, with assets returned to government after 25 or 30 years.Divestiture gives the same responsibilities, but ownership of the assets stays with private investor
Joint Ownership
Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain advantages
Management Contracts
Affermage - Leases
Concessions and Divestitures
Joint Ownership
PP Models Further Details
Reviewing Module 1
‘The Module has looked at a whole range of issues for analysis and allocation of responsibilities & risks in PP design………….
UNDERSTAND: Effects of
Privatization
ACHIEVE:
Getting PP to work
REVIEW:
Underlying Policy Problems
HOW?:
Different PP models
Checklist: Module 1
Skim the rest of the Toolkit to get an idea of what is involved
Review additional references(such as in ‘More Information’ in the next slide)
Prepare an analysis that answers the following questions:
What is the Government’s objective? How would it like to improve the provision of water services?
What deeper policy problems seem to underlie the service problems?
What are the options for addressing the problems – including reform of public providers, reform of “upstream policy (see Module 4), and private participation?
What could each of the options be expected to achieve? What are their likely costs and benefits?
What has happened with reforms on similar places (also see “More Information” slide)
‘……..and what to do before beginning this process is discussed in this Checklist”
Module 1 More information:
Considering Private Participation:
Other References:
Fundamental political-economy problems in the provision of water services and broad strategies for addressing them: Gómez-Ibáňez 2003, Nickson and Franceys 2003, Savedoff and Spiller 1999, and Smith 1997a
Recent trends in private participation in water: World Bank 2003
Evidence and arguments about the effects of private participation, including case studies: Abdala 1996, Barlow and Clarke 2002,Bitran and Valenzuela 2003, Brocklehurst and Janssens 2004, Clarke and others 2004, Crampes and Estache 1996, Estache and Rossi 2002, Gray 2001, Harris 2003, Lobina and Hall 2003, Megginson and Netter 2001, Nickson and Vargas 2002, Palaniappan and others 1999, Plummer 2002, Public Citizen 2003, Rivera 1996, Saghir and others 1999, 200, Sirtaine and others 2005, Shirley 2002, Shirley and Walsh 2000, Sirtaine and others 2005
Concessions and management contracts in particular: World Bank 1997b
Supporting Material
• The Toolkit Financial Model• Toolkit Case Study material• Toolkit Website:
http://rru.worldbank.org/Toolkits/WaterSanitation/• For comments or further details contact Cledan Mandri Perrott at
Toolkit: Module 1
End of Module
Toolkit: Module 1
Return to StartReturn to Start
