297 33319 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2005 Private Water Projects JULY Ada Karina Izaguirre Investment Flows Up by 36 Percent in 2004 and Catherine Hunt Drawing on the World Bank's Private Participation in Infrastructure Ada Karina Izaguirre Project Database, this Note reviews developments in the water and (aizaguirre@worldbank.org) is an infrastructure sewerage sector of developing countries in 2004 and changes in specialist, and private participation in the sector since 2001. Data for 2004 show Catherine Hunt (chunt@worldbank.org) a that total investment in water and sewerage projects with private junior professional associate, PRESIDENCY participation amounted to nearly US$2 billion. Recent private activity with the World Bank's in water was concentrated in a few countries and focused on VICE Infrastructure Economics and Finance Department. treatment plants and smaller projects. The Private Participation In 2004, 28 new water and sewerage projects Regional trends in Infrastructure (PPI) with private participation reached financial New private activity in water during 2004 DEVELOPMENT Project Database tracks closure in nine developing countries.1 Those occurred in three developing regions: East Asia infrastructure projects projects involve arrangements ranging from and Pacific, Europe and Central Asia, and Latin owned or managed by SECTOR management contracts with no private capital America. South Asia and Sub-Saharan Africa private companies in energy (electricity and requirements, to lease contracts with private had no new activity, while the Middle East and natural gas transmission working capital, to concession or greenfield North Africa had just one project, involving PRIVATE and distribution), build-operate-transfer (BOT) contracts with sig- both a power plant and a water treatment plant. telecommunications, nificant private investment requirements. In East Asia 11 water projects reached finan- transport, and water and That activity represents a strong recovery cial closure, attracting investment commitments sewerage. For more from 2003. In 2004 annual investment flows of US$470 million.2 Most involve water treat- GROUP information on the grew by 36 percent, and the number of projects ment plants in China, part of efforts by provin- database, see the Web site reaching financial closure by more than 50 per- cial governments to improve water quality. The at http://ppi.worldbank.org. BANK cent. Although the recovery only signified a two exceptions: a water utility concession in return to the activity level of 2002, it finally Tangu, China, and a management contract for reversed the steady decline in private activity the water distribution system in Sybus, Malaysia. since 1999 (figure 1). But most of the 2004 activ- Europe and Central Asia had 4 new water WORLD ity took place in just three countries: Chile, projects with private participation in 2004-- China, and Mexico accounted for 90 percent of management contracts for water utilities in THE investment flows and 70 percent of projects. Armenia, the Czech Republic, and Hungary. P R I V A T E W A T E R P R O J E C T S I N V E S T M E N T F L O W S U P B Y 3 6 P E R C E N T I N 2 0 0 4 participation, there was often much political Investment commitments in water and sewerage projects with private Figure participation in developing countries, 1995­2004 resistance to raising tariffs to cost recovery levels. 1 Those characteristics have also made private US$ billions water projects prone to contract disputes. Many 10 water contracts were renegotiated.4 In addition, 20 water projects were canceled or became 8 distressed--accounting for 7 percent of projects Manila water system concessions and 37 percent of investment commitments in 6 First phase of Chilean privatization 1990­2004.5 Concessions of water utilities accounted for more than 80 percent of those com- 4 mitments, including the Manila West Zone and Cochabamba concessions, the subject of high- 2 profilecancellations,andsixArgentineconcessions that came under distress after the 2002 peso crisis. 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Renegotiations do not necessarily indicate systematic problems or project failures and Note: Includes projects that reached financial closure in 1990­2004. Source: World Bank, PPI Project Database. indeed are expected for long-term contracts, during which many unforeseen developments Latin America had 13 new projects, attract- may occur.6 Nevertheless, renegotiations and ing investment commitments of US$1.4 billion, cancellations of water contracts have raised the region's highest activity since 2001. Most of questions about the viability of private partici- this activity took place in just two countries: pation in water, particularly in concessions with Chile, where six small and medium-size utility significant investment commitments. concessions reached financial closure, and Mexico, where four water treatment plants did. Private activity after the 1995­2000 boom Three other countries also had new private Among infrastructure sectors, water and sewer- activity in water: Brazil (the sale of a stake in age was the most affected by the broad decline Companhia de Saneamento Básico do Estado in private activity. Annual investment flows to de São Paulo), Colombia (the concession of a the sector averaged US$1.9 billion in 2001­04, small water utility), and Ecuador (a small green- less than half the US$4.2 billion in 1995­2000. field water treatment plant). The decline in investment flows came with changes in the size and type of water projects Difficult times with private participation. The average project Water has lagged far behind other infrastruc- size fell from US$156 million in 1999 to US$59 ture sectors in private activity. In 1990­2004 million in 2004 (figure 2). Indeed, while annual water projects attracted just 5 percent--around investment flows dropped sharply after the US$41 billion--of the investment commitments boom, the annual number of projects reaching in infrastructure projects with private participa- financial closure barely changed, from 28 in tion in developing countries. The annual aver- 1995­2000 to 27 in 2001­04. age, US$2.7 billion, was also small relative to New concessions declined in both number sector needs. Just meeting the Millennium and size after the boom, and their share in Development Goals in water and sanitation has investment flows fell from 64 percent to 45 per- been estimated to require US$6.7 billion a year.3 cent. Concessions for small and medium-size The characteristics of water services have cities in Latin America became predominant. In often limited the willingness of developing coun- 2001­04 only two water concessions involved try governments to engage the private sector in investment commitments of more than US$200 their provision. Many countries continue to treat million--those for Guayaquil (Ecuador) and water as if it were entirely a public good rather San Pedro Sula (Honduras). than also a commercial commodity. And where Similarly, fewer lease contracts were signed, governments have pursued projects with private with the number falling from 19 in 1995­2000 Average size of water and sewerage projects Developing countries with new private with private participation in developing Figure activity in water and sewerage, 1995­2004 Figure countries, 1995­2004 2 0 5 10 15 20 25 US$ millions 3 1995 0 50 100 150 200 250 300 1995 1996 1996 1997 1997 1998 3 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 Source: World Bank, PPI Project Database. Source: World Bank, PPI Project Database. tries that remained active throughout 2001­04 to only 9 in 2001­04. Conversely, management and thus accounted for most of the activity, contracts became more frequent, growing from whether measured by investment flows or num- 10 to 18. ber of projects. Private activity in water and wastewater treat- The number of developing economies newly ment plants showed greater resilience than that in introducing private activity in water peaked in water utilities. Average annual investment flows 2001, when 11 countries brought their first proj- to treatment plants grew from US$0.6 billion in ect to financial closure. Armenia, Azerbaijan, 1995­2000 to US$0.8 billion in 2001­04, while Belize, Honduras, and Niger involved the private flows to water utilities declined sharply, from sector in managing water utilities, while Croatia, US$3.6 billion to US$1.1 billion. India, Namibia, Peru, and Vietnam attracted pri- This resilience was thanks largely to China, vate capital and management to treatment plants. which accounted for 40 percent of the total Ecuador did both. In 2002 four economies-- investment in projects involving treatment Guyana, Kosovo, Lebanon, and Uganda-- plants and half the 46 treatment plants built in opened their water sector to private participation, 2001­04. The remaining projects were spread all of them by awarding management contracts across 16 countries, with the largest in Mexico for water utilities. In 2003 Tanzania was the only (San Luis Potosí wastewater treatment), Croatia developing country to newly introduce private (Zagrebacke Otpadne Vode), Thailand (West participation in the sector, by granting a lease con- Bangkok water project), and the Russian tract for the Dar es Salaam water utility. No devel- Federation (St. Petersburg's southwest waste- oping country did so in 2004. Nevertheless, 53 water treatment plant and southwest Moscow's developing economies had large-scale private par- drinking water plant). ticipation in water and sanitation facilities in 1990­2004. Expanding country coverage Private activity in water was concentrated in a Who is investing? few countries, with each year generally seeing a The landscape of companies pursuing water different set of countries implementing new contracts changed in recent years, with two water projects with private activity (figure 3). trends emerging. First, local companies with lit- China, Chile, and Colombia were the only coun- tle or no operational experience entered the P R I V A T E W A T E R P R O J E C T S I N V E S T M E N T F L O W S U P B Y 3 6 P E R C E N T I N 2 0 0 4 Top five sponsors of water and sewerage projects with private participation in Table developing countries, 2001­04 1 Projects by region Latin Middle East East Asia Europe America and Sub- viewpoint Investment and and and the North South Saharan Sponsor Projects (US$ millions)a Pacific Central Asia Caribbean Africa Asia Africa Suez Environnement 17 1,053 9 2 1 2 0 3 is an open forum to Veolia Environnement 16 1,088 8 6 0 0 0 2 encourage dissemination of New World Infrastructure 7 292 7 0 0 0 0 0 public policy innovations for RWE Thames 6 762 3 1 2 0 0 0 private sector­led and Berlinwasser International 6 135 3 2 0 0 0 1 market-based solutions for Totalb 52 3,330 30 11 3 2 0 6 development. The views published are those of the a. Investment from all sources in projects in which sponsor has a stake of 15 percent or more. authors and should not be b. Data may not sum to totals because of projects involving more than one sponsor. Source: World Bank, PPI Project Database. attributed to the World Bank or any other affiliated water business. One example is the Russian providers of water and sewerage services because projects organizations. Nor do any of investment conglomerate Interros, which won involving such providers usually are not reported by the the conclusions represent the lease contract for the water utility in sources it uses. For more information on the database, see official policy of the World Siberia's Perm City. In Chile local investors http://ppi.worldbank.org. Bank or of its Executive (Grupo Solari, Consorcio Financiero, Grupo 2. All U.S. dollar amounts are in nominal terms as Directors or the countries Luksic, and Icafal) won five of the six water con- posted on the PPI Web site (http://ppi.worldbank.org). they represent. tracts awarded in 2004. And in Colombia local This reporting method differs from that used in earlier construction and engineering companies won Notes based on the PPI Project Database, which reported To order additional copies contracts for small cities in 2001­04. Second, investment in real U.S. dollars for the year of the update. contact Suzanne Smith, developing country companies expanded 3.UNMillenniumProject,Health,Dignity,andDevelopment: managing editor, within their regions. Malaysian firms (YLI Room F 4K-206, What Will It Take? abridged ed., Task Force on Water and Holdings, Temasek Holdings, Ranhill Utilities, The World Bank, Sanitation (Stockholm: Swedish Water House, 2005). 1818 H Street, NW, PBA Holdings, and DKLS Industries) won five 4. According to a recent study, 55 percent of water con- Washington, DC 20433. contracts awarded in China in 2001­04. cessions in Latin America were renegotiated in the 1990s. Sponsors from developed countries still See J. Luis Guasch, Jean-Jacques Laffont, and Stephane Telephone: accounted for a large share of investment flows Straub, "Renegotiation of Concession Contracts in Latin 001 202 458 7281 in 2001­04 (table 1). But they limited their America" (World Bank, Washington, D.C., 2002). Fax: investment to selected developing countries and 5. For definitions of cancelled and distressed projects, 001 202 522 3480 sought to exit underperforming contracts. RWE see http://ppi.worldbank.org/glossary.asp. Email: Thames announced that it would withdraw from 6. Clive Harris, Private Participation in Infrastructure in ssmith7@worldbank.org most regions while focusing on Central and Developing Countries: Trends, Impacts, and Policy Lessons, Eastern Europe, Veolia Environnement that it World Bank Working Paper 5 (Washington, D.C., 2003). Produced by Grammarians, would concentrate on selected Asian countries, 7. See RWE's 2004 annual report (http://www.rwe Inc. and Suez that it would pull out of Asia and Latin .com/generator.aspx/property=Data/id=190518/ar-2004 America.7 The retrenchment by global sponsors .pdf); Veolia's 2004 annual results (http://www.veoliaenvi Printed on recycled paper in some cases has facilitated greater activity by ronnement-finance.com/frameset.php?page=download/ local and regional sponsors. download_acc.php); and "Savoir Faire: French Companies Dominate the World's Water Industry," Economist, July 17, 2003. Notes 1. The Private Participation in Infrastructure (PPI) Project Database lacks good coverage of small-scale T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l