37550 noTE no. 14 ­ SEpT. 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Private participation in water Toward a new generation of projects? Philippe Marin and Ada Karina Izaguirre I n the water sector of developing countries operators lost much of their appetite for further the investment boom of the late 1990s has investment in developing countries. been followed by declining investment flows and the cancellation or distress of several In recent years private activity has both slowed high-profile projects. Enthusiasm has been and become more concentrated (Figure 1). In 2005 replaced by doubts. But recent data paint a investment flows amounted to US$1.5 billion, more nuanced picture. Activity in 2005 suggests within the US$1­2 billion range of the past five that private participation in the water sector is years (excluding the US$2.5 billion Syabas conces- entering a new phase. New private activity is sion in Malaysia in 2004). Although private activity took place in 10 countries, most of the investment focusing on smaller projects, a few countries, flows went to just 2: China (56 percent) and Algeria and bulk facilities. Contractual arrangements (34 percent). Beyond these 2 countries commit- involving utilities are combining private opera- ments amounted to around US$150 million. This tion with public financing. And new players are confirms that private investors are increasingly entering the market. selective in choosing where to invest and are concen- During the 1990s private participation was broadly trating on the higher end of emerging markets. hailed as the solution to developing countries' problems in the water sector. Private investors were In sharp contrast with the decline in investment expected to provide not only much-needed expertise flows is the growth in new contracts. Indeed, 2005 but also the sizable funding required to rehabili- was a record year: 41 projects reached financial tate infrastructure and expand coverage. Indeed, closure, the most since 1990. So while investment private investors committed US$50 billion to more commitments have declined, the perception that than 380 water infrastructure projects in develop- private participation in water has come to a stand- ing countries in 1990­2005.1 Concessions involving still does not reflect the whole truth. large investment commitments in major cities such as Buenos Aires and Manila were highly publicized. A new profile for projects Most of the private activity was undertaken by a Looked at more closely, the data suggest that the few international investors. profile of private water projects has changed since 2001. The decline in investment flows mostly The enthusiasm of the 1990s has faded away. affected water utility projects (Figure 2). Water Contracts often reflected excessive optimism by both private investors and governments, and the sociopolitical difficulties of raising tariffs to levels Philippe Marin is a senior water and sanitation specialist covering costs were often underestimated. Finan- in the World Bank's Energy and Water Department, and cial markets were hesitant to provide nonrecourse Ada Karina Izaguirre is an infrastructure specialist in its financing for water projects (unlike projects in Infrastructure Economics and Finance Department. This other infrastructure sectors), often requiring that note was developed in partnership by the two departments, financing be backed by the sponsors' balance sheets. both in the Bank's Sustainable Development Vice Finally, some of the largest water projects were in Presidency. The note is a product of the Private Participation East Asia and Argentina, and when financial crisis PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY in Infrastructure (PPI) Project Database, a joint initiative of broke out, the contracts proved insufficiently robust PPIAF and the World Bank's Infrastructure Economics and to weather the storm. Several international water Finance Department. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY fIguRE 1 Investment commitments slowing, number of projects increasing in recent years Private participation in water projects in developing countries, 1995­2005 Source: World Bank and PPIAF, PPI Project Database. treatmentplantssawinvestmentflowsincreasefrom The growing importance of such projects among US$2.9 billion in 1995­2000 to US$4.1 billion in private investors is not surprising given the risks 2001­05, raising their share in total flows from 9 inherent in the water sector. Greenfield treatment percent to 35 percent. In 2005 investments in bulk plants routinely include off-take ("take or pay") Risks in the facilities (mostly greenfield) amounted to US$1 agreements, a big help in obtaining nonrecourse water sector billion, representing almost two-thirds of commit- financing. And they entail much less political and ted investments and 60 percent of projects. commercial risk (nonpayment of water bills, resis- are driving a change in fIguRE 2 the profile A changing allocation of private activity of private Investment in water projects with private participation in developing countries by segment, 1995­2005 (uS$ billions) projects Source: World Bank and PPIAF, PPI Project Database. Private participation in water tance to tariff increases) because the private operator 2001­05. Indeed, its private water activity came has no direct relationship with final customers. largely to a standstill in 2005, with only four small private projects awarded (San Andrés Island in Still, concessions for water utilities have not disap- Colombia, Tumbes in Peru, and two treatment peared. Thirty-six were granted in 2002­05. But plants in Chile and Colombia). The drop in private most were in countries with access to long-term local activity appears to be the direct result of a back- currency financing, such as Chile, China, Colombia, lash against utility concessions, which had been the and Malaysia. And the average size of concessions favored scheme for introducing the private sector in has diminished. A concession contract represented the region. an investment of only US$54 million on average in 2005, compared with more than US$270 million in East Asia has replaced Latin America as the most 1995­2000. active region, attracting half of all new private water projects and investment flows in 2001­05. The activ- In addition, a growing number of concession Is the private ity was driven largely by China--by far the biggest projects are based on a mix of public and private market for private water investors among emerging sector in financing (in Colombia, Malaysia, and Peru, for market economies today--but also by Malaysia. In example). The era of megaconcessions financed by retreat 2005 East Asia was again the most active region, international operators in foreign currency seems with more than 60 percent of the activity. This activ- from water to be over. The only large concessions reaching ity includes both greenfield bulk projects and utility financial closure since 2000 are the two in Malay- activity? The concessions. sia (the Johor and Syabas concessions), and these facts suggest involved local companies and tapped local capital Eastern Europe and Central Asia ranks third, but markets for funding. presents a different picture. Most of its private waternot. projectsreliedonpublicinvestmentforcapitalexpen- Whileconcessionshavebeendeclining,management diture, taking advantage of public financing from the and lease contracts have been gaining in importance. European Union (at a concessional rate) or the Euro- Together they accounted for 24 percent of projects pean Bank for Reconstruction and Development in 2005, similar to their share in 2001­04 (25 (which can lend directly to municipal governments percent) and significantly higher than their share in without sovereign guarantees). As a consequence, the second half of the 1990s (19 percent). management and lease contracts accounted for As private operators shy away from large invest- 70 percent of all projects. In 2005 private activity ments, management and lease contracts are remained modest but steady with six new projects: a becoming a convenient way to introduce private lease contract in the Czech Republic, a management participation in developing countries. They allow contract for the Armenian city of Yerevan, and three the private operator to concentrate on improving leases and a management contract in Russia. the utility's operational efficiency and viability Lagging behind are the Middle East and North while leaving the public authority in charge of rais- Africa, with 10 stand-alone water projects, and Sub- ing investment financing (which it can often obtain Saharan Africa, with 17. These regions also had on better terms from donors). In 2005 manage- contracts combining water and electricity services (7 ment and lease contracts were used to introduce in the Middle East and North Africa and 12 in Sub- private participation in water utilities for the first Saharan Africa). Because of the high country risk time in Algeria, Ghana, and the Russian Federation, in Sub-Saharan Africa, private operators had been and a new management contract was successfully reluctant to invest there even during the "concession awarded in Yerevan, Armenia, after the previous boom," leading to a predominance of management one expired. and lease contracts. As these schemes have proved to be more sustainable, such countries as Côte d'Ivoire Much diversity across regions and Senegal have become international success Developing regions show remarkable variation in stories for private participation. their share of private activity and in the type of contractual arrangements used. East Asia and Latin In South Asia private activity remains rare. Only a America have led the regions, accounting for 75 greenfield project and a management contract were percent of projects and 90 percent of investment awarded in 1990­2005. flows in 1990­2005. Is private activity in retreat? Latin America was the most active region in the The dwindling appetite of several large interna- 1990s, but its share of investment flows fell from tional operators for developing country projects, almost 50 percent in the 1990s to 30 percent in along with the troubles of a significant share of awarded projects, has spurred a debate on the look for contractual arrangements allowing them to adequacy of private participation in water. By 2005 concentrate on the operational side of the business projects involving more than 34 percent of the rather than construction and large capital invest- investment commitments made since 1990 either ment. This has reinforced the tendency toward had been canceled or were under distress (in inter- management and lease contracts. national arbitration or subject to a formal request for cancellation). But these projects accounted for Traditional private operators are still interested just 11 percent of the total number of projects. in developing countries, but they are focusing on So the problem seems to stem from a few large, selected markets and lower-risk projects. In 2005 well-publicized concessions in Latin America and Veolia was the most active, with seven management East Asia.2 contracts (one each in Armenia, the Czech Republic, and Russia and four in China). Suez was the private Overall, 84 percent of the more than 220 contracts sponsor for the management contract in Algeria's awarded for water utilities in 1990­2005 were still capital city of Algiers. operational by 2005. Some projects are bound to fail in a market economy, and a 16 percent failure rate The long-awaited move from an oligopoly to a more is not high. Indeed, it compares well with the large open and competitive market seems finally to be share of poorly performing public water utilities in taking place. In 1990­97 the top five sponsors developing countries. But in these cases, of course, ranked by number of projects held 54 percent of dissatisfied governments cannot cancel "contracts." all projects closed. But in 2002­05 their share fell to 30 percent--and three of the top five were from In the past 15 years 68 developing countries developing countries. brought private participation to their water sector.3 By 2005, 54 of those countries still had operational So what we are seeing today is not a backlash but a water projects. And in the past three years coun- natural maturation of the market following an initial tries as diverse as Albania, Algeria, Ghana, Peru, boom. Now more aware of the benefits and risks and Russia have opened their water utilities to involved, stakeholders are looking for contractual private participation. These facts suggest that the arrangements best suited to each country's situa- perception of a widespread retreat by the private tion. This is clearly a positive development. In the sector from water activity in developing countries coming years a new generation of projects can be is unfounded. expected to emerge. These are likely to be moderate in size. They are likely to include more management New players arriving on the scene and lease contracts as tools to improve the perfor- Another positive trend confirmed in 2005 is the mance of utilities, and more greenfield projects for changing market for private sponsors. New private bulk facilities. And they are likely to increasingly firms are entering the water business in developing involve regional players.4 countries. National or regional firms from Argentina, Notes Brazil, China, Colombia, Malaysia, and Russia were 1. Data are from the Private Participation in Infrastructure (PPI) the primary sponsors of utility concessions awarded Project Database, which includes only low- and middle-income in 2005. countries as classified by the World Bank. Country classifications and project information are updated annually. All U.S. dollar amounts are in nominal terms as posted on the PPI Web site (http://ppi. In addition, since 2001 European water compa- worldbank.org). The database lacks good coverage of small-scale nies--from such countries as Germany, Italy, providers of water and sewerage services because projects involving such providers usually are not reported by the sources it uses. GRIDLINES Portugal, and Sweden--have shown new 2. In Sub-Saharan Africa the share of water projects canceled or in interest in developing countries. Join- distress by 2005 is 25 percent when combined water and electricity ing them in 2005 was Vittens of projects are included. Gridlines share emerging knowledge on PPP the Netherlands, which won the 3. Of these countries, 56 introduced private participation in stand- alone water business, while the other 12 countries did so in combined and give an overview of a wide selection of management contract for Ghana's water and electricity utilities. projects from various regions of the world. Past 4. A forthcoming World Bank Water Supply and Sanitation Sector notes can be found at www.ppiaf.org/gridlines. national water utility in a consor- Board Discussion Paper will discuss in further detail the trends in Gridlines are a publication of PPIAF (Public-Private tium with Rand Water of South PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY private participation in water. Infrastructure Advisory Facility), a multidonor Africa. Most of these firms technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA views are those of the author(s) and do not necessarily PhoNE (+1) 202 458 5588 fAX(+1) 202 522 7466 reflect the views or the policy of PPIAF, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY gENERAl EMAIl ppiaf@ppiaf.org wEB www.ppiaf.org the World Bank, or any other affiliated organization.