WATER P-NOTES ISSUE 3 JUNE 2008 44721 Engaging Local Private Operators in Water Supply and Sanitation Services P rograms to reform urban utilities--and to Legal and policy frameworks vary significantly engage the private sector--have tended to among the countries. Some have laws that clarify focus on large cities and on transactions with responsibilities, decentralize responsibility for opera- large foreign private operators. This is changing, tions, establish accountability rules, and encourage as smaller towns and cities are growing rapidly in private sector participation (PSP). Some have nation- many developing countries. Concurrently, decen- al regulators; others lack effective regulatory frame- tralization is shifting responsibility for services from works. All five countries have policies that encourage national to smaller entities that often cannot finance greater access to services by the poor, to the extent and manage them effectively. consistent with the paramount goal of financial vi- Paralleling this trend, new service models in ability. Investment subsidies, particularly those target- which local private firms contract with local govern- ing the poor, have played an important role in all ments or community associations to provide water cases. However, except for Colombia, subsidies tar- supply and sanitation (WSS) services have been get only communities with a high percentage of poor proposed in smaller urban contexts. We examined households--not individual households. how these challenges are being addressed in eight World Bank projects in Cambodia, Colombia, Para- guay, the Philippines, and Uganda. The projects we Characteristics of the public and studied were not complete, but we believe that their private partners preliminary results are worth reporting. In all five countries, the government has sought Except in the Philippines, the lead role in promoting public­private partnerships to promote sustainabil- the projects and managing the procurement process ity, increase access to services (particularly for the has been played by a national water and sanita- poor), and, except in Cambodia, strengthen the role tion authority. Beneficiary communities have been of local government. Although private financing has selected on the basis of need and willingness to en- been a goal in several cases, nowhere is it central. gage private operators. In most cases, a high level Most local private operators are not expected to of poverty was also a criterion for eligibility. provide substantial long-term investment. The du- In all five countries, most of the potential rations and terms of the contracts we studied vary private partners lacked experience in delivering widely (table 1). urban services and the capacity to comply with This note reports key messages and findings from "Engaging Local Private Operators in Water Sup- ply and Sanitation Services, Initial Lessons from Emerging Experience in Cambodia, Colombia, Paraguay, the Philippines, and Uganda," by Thelma Triche (tatriche@aol.com), Sixto Requeno (sre- quena@att.net), and Mukami Kariuki (rkariuki@worldbank.org), published by the World Bank in December 2006 (Water Supply and Sanitation Working Note 12). Readers may download the com- plete paper from www.worldbank.org/water. WATER P-NOTES Table 1. Key features of the contract models Country Type of contract Private investment Duration (% of total) (years) Cambodia Design, build, and operate (DBO) 40­50 15 Design, build, and lease (DBL) 10 15 Colombia Build, operate, and invest (BOI) 20 (estimated) 16­30 Build and operate (BO) None 10­15 Paraguay Build and operate (BO) 20 (estimated) 10 Philippines Design, build, and operate (DBO) None 15 Operate and maintain, long-term (OML) None 15 Uganda Operate and maintain, short-term (OMS) None 3 World Bank procedures. Initially, informal water All projects have allowed for training, consulta- supply operators in several countries chose not to tion, and promotional activities during the prepa- compete for the contracts offered. To attract more ration phase, to raise awareness about proposed bids, qualifications in Colombia, Paraguay, and the contracts and to consult with and inform stakehold- Philippines were changed to accept experience in ers, particularly local communities and WUAs. Less network industries other than water. In Paraguay, emphasis has been placed on providing sustained selected firms were required to hire experienced support to the new partnerships. In several cases, informal water supply operators as managers. In difficulties emerged after contracts were signed--as Uganda, bidders were simply required to score ad- a result of local officials' lack of commitment or equately on a general questionnaire. capacity or private firms' lack of professionalism. Ad The entities that signed contracts with local hoc intervention helped to resolve these situations. private firms included local governments, water More sustained support during the postcontract user associations (WUAs), multi-town aggregations, stage might have prevented such problems. national sector ministries or services, and national financing institutions. In countries where several public sector stakeholders were responsible for vari- Contracts and financial ous arrangements (investment finance, construction arrangements and operating contracts, regulation), multiple con- tracts were signed. In Uganda and the Philippines, Contract forms were driven primarily by local fac- separate contracts were awarded for construction tors. and for operations and maintenance (O&M). In · Uganda chose the short-term operation and each community in Paraguay, a single private firm maintenance (OMS) model after failed experi- signed two contracts: one for construction and an- ments with local water authorities. other for O&M. In addition, a third agreement was signed between SENASA (the national water and · Build, operate, and invest (BOI) contracts sanitation service) and the WUA regarding subsidies in Colombia, and build and operate (BO) and supervision. The only cases that did not require contracts in Colombia and Paraguay, were multiple contracts were in Cambodia, where the designed to reduce subsidy and construction central government is responsible for all service de- costs, reduce delays, and promote sustainabil- velopment and provision. ity. Technical sustainability was enhanced by requiring the contractor responsible for building Such multi-party arrangements are usually in- the water supply system to operate and main- evitable when responsibility for service provision is tain it over a 10­15 year period. All operating decentralized, and a national entity retains responsi- costs, regulatory fees, and taxes were to be bility for most of the financing. paid from tariff revenues. ISSUE 3 · JUNE 2008 · In Colombia, the private operator was required were allowed to bid for more than one contract but to contribute some tariff revenues to a replace- were required to submit a separate proposal for ment and expansion fund. The requirement is each. Operators that have won several contracts in similar to a fee that lease operators pay to as- this manner have reported substantial economies of set owners, but the private operator plays an scale, without which the contracts would have been important role in planning and executing invest- less attractive. Operators have no guarantee that ments and expansions both before and after all towns in their administrative cluster will renew initial construction. their contracts, but this uncertainty may provide an · Cambodia and the Philippines chose design, added incentive to develop good relationships with build, and operate (DBO) and design, build, the communities and provide high-quality services. and lease (DBL) contracts. These enhance tech- nical and financial sustainability, in part by shift- ing from a supply-driven to a demand-driven The selection process approach in systems design and planning. Creating effective screening criteria that qualify Full or partial cost recovery featured in all con- enough bidders to ensure a competitive process tracts. Full O&M costs are being recovered through can be a challenge. A prequalification process was user tariffs in all cases. Recovery of capital costs used everywhere except Colombia, where bidders varies depending on the availability of subsidies. submitted eligibility credentials with their proposals. To balance cost recovery with the important goal of In Cambodia, prequalification criteria were an- ensuring access for the poor, subsidies have been nounced in advance, giving bidders time to create provided as grants or as loans on highly conces- strong consortia and thus increasing competition. sional terms. As a result, the effect of debt ser- In Uganda, bidders were required only to qualify vice on tariffs is minimal in five of the eight cases against a broad range of criteria. This favored small studied. The exceptions are the DBO contracts local firms, and the lenient requirements have prov- in Cambodia, where 50 percent of investment is en adequate. Bid bonds were required in all cases, privately financed, and most contracts in the Philip- except for OML contracts in the Philippines, which pines, where 90 percent of the financing is on-lent were awarded to WUAs without competition. by local banks at market rates. These costs perhaps created a barrier to private sector interest, and the Deterrents to bidding have included the lack of Philippines program has not progressed as hoped. concessional finance in the Philippines, and, in Co- lombia, the high cost of entry and the requirement to qualify as a specialized public service provider. Market size and structure The most common quantitative bid criterion-- applied in Cambodia, Colombia, Paraguay, and the Most of the communities served by the projects Philippines--was the investment subsidy proposed have populations of less than 30,000. In several by the bidder. Other selection criteria were the pro- cases, towns and communities have been grouped posed average tariff, given a fixed subsidy amount to improve economies of scale and attract operator (Cambodia); the lowest user connection charge, interest. In the multi-community service areas of Co- given a fixed subsidy and a pre-set tariff (Paraguay); lombia and Paraguay, each community is represented a fixed management fee plus variable service fees in a multi-town authority that contracts with a single (Uganda); and the percentage of revenues to be private operator. Such contracts attract large, compe- retained by the private operator (Uganda). tent bidders, increasing the likelihood of success. In Cambodia, Uganda, and the first phase of the Paraguay contracts, where common facilities Monitoring and regulatory were not practical, an alternative approach has al- arrangements lowed for economies of scale. The selection of op- erators was organized in lots encompassing several All contracts specify service quality and perfor- towns or communities. Separate contracts were to mance targets tailored to local conditions. All be awarded for each town or community. Bidders operators must submit performance reports to an WATER P-NOTES oversight entity. In most cases a national entity · Small service providers can strengthen PSP if provides regulation, but usually only with regard to tender processes and contracts allow them to tariff revision. Although ministry-level entities may participate. have nominal responsibility for service quality, they have exercised their authority inconsistently. Even · The need for qualified bidders must be bal- where specialized WSS regulators exist, they rarely anced against the need for enough bidders to provide routine supervision. As a result, except in ensure real competition. Allowing adequate Cambodia, monitoring and enforcement are gen- time for bidders to form partnerships and le- erally performed by local contracting parties. In nient prequalification criteria have been effec- many cases, local monitoring practices need to be tive in achieving the necessary balance. strengthened. And, in most cases, the relationship · Training, consultation, and promotional ac- between local and national agencies needs to be tivities are essential during preparation and clarified. implementation of contracts with local private operators, as are follow-up consultation and programs to educate users and encourage be- Lessons learned havior change. Capacity building during imple- mentation is essential. Continuing education We have been able to draw valuable lessons from programs and professional associations have our examination of these ongoing PSP projects. provided valuable support for private operators. Prominent among those lessons are the following: · Specific service standards and performance tar- · A well-developed legal framework is not neces- gets are of little use without effective reporting sary to attract local private operators to WSS and monitoring mechanisms. Small towns, in projects, especially if little or no investment particular, lack regulatory frameworks, and the finance is required and tariffs are adequate to interface between local oversight bodies and cover O&M. national regulatory agencies must be clarified. · Small markets are a challenge. Effective strate- · Initial investment subsidies are necessary to gies for creating economies of scale are estab- ensure that greater numbers of the poor gain lishing multi-town service areas and allowing access to services and to attract private sector bidders to win multiple contracts. interest. Strategies for mobilizing future invest- ment finance must be developed. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. P-Notes are available online at www.worldbank.org/water. P-Notes are a synopsis of larger World Bank documents in the water sector. THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org