I 1-+31 13 Viewpoint Note No. 126 September 1997 The Private Sector in Water and Sanitation -How to Get Started PenelopeJ. The benefits from private participation in water thirty years, for example, needs to be sure that Brook Cowen and sanitation depend on the level of risk and it does not, in haste, gloss over details that will responsibility the government hands over to the later land it in messy renegotiations, with loss private sector. But strong government commit- of face to all concerned and reduced benefits to ment and careful preparation are required if the consumers. But governments often worry that private sector is to take on significant risks and detailed preparations take too much time. This responsibilities. A government about to enter Note, based on a set of World Bank toolkits into a concession contract for twenty-five or compiled from experiences in involving the pri- vate sector in water and sanitation, reviews the essential factors in choosing a privatization op- tion and argues that preparation pays dividends. BOX 1 TOOLKITS FOR PRIVATE SECTOR PARTICIPATION What makes the business special? IN WATER AND SANITATION The activities of urban water and sanitation The World Bank has recently published a set of toolkits to guide gov- utilities range from impounding and treating ernments in designing and implementing private sector arrangements raw water, to distributing water and collecting for water and sanitation. The toolkits focus on three sets of issues: sewage, to treating sewage. In many ways, How to choose a private sector participation option. What are the decisions about how to involve the private sec- options? What might you have to do to make your preferred option tor in these operations resemble decisions practicable? What are the risks? about privatization in any other utility sector. • Howto design the process for refining and implementing the All such privatizations, for example, require chosen option. What might a critical path look like? How do you decisions on how to set up an independent set up a government unit to run the privatization process? What regulator and how to set and enforce service can you expectfrom legal, financial, economic, and engineering features that governments must take into ac- advisers-and how do you go about hiring them? How do you count in choosing and designing a contract and design a bidding process? What can you do to keep the contract on in designing a supporting policy framework: track once you've chosen a private partner? * Water and sanitation systems are character- • How to ensure that contracts cover all the issues. What should a ized by a high degree of natural monopoly. management build-operate-transfer (BOT), or concession contract Although competition is feasible in such lim- cover? In writing or reviewing contractual documents for a con- ited areas as building capacity and providing cession, a BOT arrangement, or a management conact, how do plumbing services, it is difficult to achieve in you know if you've covered everything? What are your options for distribution and collection, core activities in allocating and managing the many risks that go with the contract? water and sanitation (table 1). So governments wanting to involve the private sector have To order copies of the toolkits, contact the World Bank bookstore, tel: 1 202 473 4266, been able to rely little on competition to assure fax: 12024770604, or enail: books@wortdbank.org (quote stock number 14003) good outcomes for consumers and have in- stead had to devise regulatory systems for this purpose. LIW The World Bank Group * Finance, Private Sector, and Infrastructure Network The Private Sector in Water and Sanitation-How to Get Started efficient use. In India, for example, many cit- Activity Charactensticsefcompeti.on #ies go short of water while farmers continue to Alloctionowaerreourcs Na lmo l ineach receive subsidized water for irrigation. an. ragulation of use hydmgeqsjrapbictl ~ott * Water and sanitation are well suited to local jsuch as a ierasiat tiimanagement, and in many countries, respon- apacit construction i mporv ta nt p usibility for service provision is decentralized a- ccsstowterr-sources- to the provincial or municipal level. As a re- lygeneration Smalloumber ofpossihlo sult, complex interjurisdictional issues often bep ensured -forall. Guarateein access fortneed to be resolved before the private sec- 4MJIpt.a U1WVIJI~ ~fl~Jtor can be brought in. Water treatmear LoeaInlonopoly * Many of the assets of water and sanitation poor will Locaimops requiredesigningsubsi- particiasystems are buried, so obtaining accurate in- Lccal netwring Lorvcal tonohvrpol r. A omliatng tformation about them is costly-increasing the cost of preparing for private sector par- Sewage treatmeor Local monopoly ~ticipation, and the chance of surprises after iquipinentandppliancesales Competitivethe contract is signed. plumbingng seraice raw water resourcesamong invBroad access to water and sanitation yields titoftraditioalwaterndsaniatioe usts-irban cs t,important public health and environmental benefits. Government interventions to pro- mote these benefits are likely to remain after privatization. *Water is essential to life, and access to it must be ensured for all. Guaranteeing access for the None of these issues is a barrier to private sector poor will sometiines require designing subsi- participation-all arise under both public and dies or schemes for reducing the cost of deliv- private provision. But governments often sys- ering services to the very poor. A complicating tematically confront their implications only factor for reformers is that existing systems for when they begin to contemplate private sector allocating scarce raw water resources among involvement. Failure to adequately address alternative uses-urban consumption, irriga- these issues increases the risk that a government tion, industry-are often incompatible with will be unable to find a partner for its pre- tABLE 2 THE MAIN OPTIONS FORPRIVATE SECTOR PARTICIPATION AND THEIR ALLOCATION OF RESPONSIBILITIES~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. .. .. .. . ferred form of private sector participation or proving efficiency, constructing large-scale that a private sector arrangement will fall short projects, cutting the cost of public subsidies or of its broad policy objectives. redirecting them to the poor, and making the sector more responsive to customers. All forms The main private sector options-and of private sector participation can be designed who's doing what to improve technical and managerial capacity. But whether the other objectives can be met Different countries have adopted different op- depends on which option is chosen and whether tions for private sector participation. Trinidad the government can do a good job on the en- and Tobago is using a management contract abling and regulatory environment. A poor job for water and sewerage services and plans to can lead to dissatisfied customers and difficult replace it with a concession. Guinea has a lease renegotiations with the private partner. Under arrangement for water treatment and supply in the Guinea lease, for example, consumers have seventeen cities. Buenos Aires and several other lost out because disputes over the division of Argentine provinces have concessions for wa- responsibilities between the government and the ter and sewerage. And England and Wales have operator have hampered new connections and divested their water and sanitation utilities, service improvements. The Buenos Aires con- cession has led to better service, but there have The main options can be clearly distinguished been costly disputes over the definition of the by how they allocate responsibility for such func- regulator's role (for example, in determining in- tions as asset ownership and capital investment vestment requirements) and the handling of ad- between the public and private sectors (table 2). justments in tariff levels and structure. The more risk and responsibility are passed to the private sector, the more powerful are its in- To determine which private sector options are centives to improve services. Service contracts, feasible-or what must be done to make a pre- which confer little risk and responsibility on the ferred option possible-a government needs private sector, offer commensurately small gains to undertake a range of analyses: -and are simply not designed to address mana- * An analysis of the state of the utility-looking gerial inefficiency or chronic underinvestment. at the current level and standard of service, Concessions and divestitures are well suited to the condition and serviceability of assets, the tackling these problems-but demand more from human resources, and the financial perfor- government in commitment and preparation. mance. Is information about the utility's assets good enough to serve as a base for long- In practice, private sector arrangements are of- term contracts? If not, can better information ten hybrids of these models. For example, be produced rapidly? Where information leases may pass some responsibility for small- about the quality of underground pipes, for scale investment to the private sector, and example, is partial or inaccurate, revelations management contracts may, like leases, have about the true state of the system that come revenue-sharing provisions that pass on some after a concession contract has been signed commercial risk. Options can also be used in may lead to costly renegotiations. combination-for example, a build-operate- An analysis of the existing regulatory frame- transfer contract for bulk water supply might work-both general laws that might affect be combined with a management or lease private participation in the sector and sector- contract for operating the distribution system. specific laws and institutions focusing on pric- ing and quality standards. Does the existing Key factors in choosing an option regulatory framework provide sufficient sup- port for the private sector so that it will take Governments seeking to involve the private sec- on commercial risk? If not, can the necessary tor in water and sanitation may have a range of changes be made fairly easily? And if not, can objectives-introducing greater technical and parts of the regulatory function be simplified managerial expertise and new technology, im- or contracted out in the short term? Where The Private Sector in Water and Sanitation-How to Get Started Stak*hoder s,- :lPotential 00~~~~~pr and0000 pol 3200Vitical otrecvrn Goo infrtio Develped reglatory Good conty benefits: : :0 0 Opt:ion j 0 9 i 00 0 commtment00 000 0, g tariffs about te! Esy stem frafimework cd rating : 0 : f : of the option Service0tf : 0 ;.;:0Unimportant Not necessary Possible to proceed Minimal monitoring Not necessary Low cont00 >ri d =act in the short term with only limited capacity needed information Management LQwlooweoIeratn referretFbntinot Aufflt~Ieattinfomintin s:M, t~tffettito1in~ Not necessary Nte; The shading signals@tedegreeof importance: nt ignificant mNderatenecessary Etlow Ehigh~~~~~~~~~~~~Hg The views published in regulatory capacity is weak, for example, col- analysis can sometimes lead to redefinition of this series are those of lection of information on the utility's techni- a private sector project-for example, re- the authors and should not he attributed no the cal and financial performance could be balancing planned investment expenditures World Bank or any of contracted out to a private auditing company. between new production capacity and the re- its affiliated organiza- *An analysis of which stakeholders (employees, habilitation of existing distribution systems. tions. Nor do any of the con clusions represenit consumers, environmentalists, government official policy of the agencies) support private participation and As table 3 shows, in a very simplified way, the World Bank or of its which oppose it. Can processes and policies results of these analyses can point the govern- Executive Directors or the countries they be put in place to meet stakeholder concerns? ment to an appropriate choice of private sec- represent. Can the risk of political interference be mini- tor option. If regulatory capacity is weak and mized? Often, a key factor in the success of a political commitment is low, for example, a con- To order additional private sector project is identifyin-g the con- cession will be difficult to implement. Even with copiestE plRease oiH calli0 0 00 0 0 2028 pL1 ose cntac cerns of employees early on and finding con- strong political commitment to a concession Suzanne Smith, editor, structive ways of addressing them-rather than or divestiture, however, countries that lack a Room F6P-1t8, allowing those concerns to derail the reform good business climate or a strong track record The World Bank, process later. of successful private investment may not im- 1818 H Street, NW, Washington, D.C. 20433, * An analysis of the financial viability of alter- mediately be able to attract large-scale private or internet address native options. Do current tariffs cover costs? financing for infrastructure projects. These ssminh7c worldbank.org. Can the private sector reasonably be expected countries may need to start out with a man- The series is also availble on-line to boost efficiency enough to meet the pro- agement contract and work up to options that (www.worldbank.org/ posed service objectives without increasing demand more of the private sector. html/fpd/notes/ tariffs? if not, will consumers be willing to pay copiesleasehcall. notelist8htm111 onc higher tariffs? And if not, can grant finance Pestelopej. Brook Cowen (pbrookcowen c S Printed on recycled (or subsidies to needy households) support worldbank.org), Private SectorDevelopment paper. service improvements? This kind of financial Specialist, P rivate Sector Development Deparntment