There is much debate over the increased costs associated with private sector involvement. Advocates often suggest that, in practice, costs do not increase (see Box 3.8 compared with Box 7.18 in relation to water tariffs in Buenos Aires), or that those costs cannot be attributed to private sector involvement. One argument is that many changes frequently associated with private sector participation are in fact due to implicit or explicit government reform programmes (including pricing reform), and that it is incorrect to blame the private sector for a wide range of changes and impacts which come about because the sector is reformed.7
A key issue is the assumption that the private sector increases tariffs. While it is often the case that tariffs increase when the private sector assumes responsibility, it is also a result of the introduction of a cost-recovery policy by government. If the government has the intention of improving efficiency and increasing potential investment, a first step is establishing a commercial operation, and cost recovery is at the heart of that reform. Although they are often carried out simultaneously, it can be argued that private sector participation is a separate decision; the decision leading to higher tariffs could have been associated with a corporatisation process. Advocates also argue that prices may go down, that they are simply adjusted to bring them in line with the real cost of providing that service.
From the perspective of the political opponents, consumers and unions, the shift from public sector services to private sector delivery is associated with higher prices, higher costs and lost jobs. They argue that the private sector inevitably results in increased tariffs, as it is often a condition in PPP negotiations. The introduction of a commercial approach to service delivery and the associated cost-recovery reform also means that the utility operator will increase its efficiency in collecting tariffs. This will mean that those poor households that have received a service for free - because they did not pay - will see an end to this implicit subsidy arrangement.
However, in the context of partnerships, cost-benefit is a key issue. Few municipalities have undertaken adequate cost-benefit analyses that realistically compare the costs of public and private provision. This is an essential response in the context of discussions over increased costs. In order to focus partnerships on the poor, the key issue lies in the complex debate over sustainability, including the conditions required for the financial sustainability of the private operator, and those required in order that the poor might be able to make use of the service on a sustainable basis.
Box 3.8 Why Involve the Private Sector in Service Delivery? |
A Financier's Perspective |
About 100 serious ventures in private sector participation in the delivery of water and sanitation services have taken place worldwide over the past decade or so. This is a still a relatively modest phenomenon, though, involving at most about 5% of the urban population in the developing world. Most involve contracts or concessions, not a complete sale of assets, or what I would call a 'true' privatisation. The impetus for private sector involvement in water supply and treatment came not from ideology but typically because the public systems have been grossly inefficient, the finances precarious, and the infrastructure deteriorating. Theft of water is rampant. Rates of leakage and unaccounted-for water in many municipal systems in developing countries exceed 40%, even 60% to 70% in some old systems in Eastern Europe. The norm for well-managed systems is 10%, maybe 15%. |
The promise of private sector involvement is real. New sources of funding are essential given that most countries will have to finance the bulk of water service improvements themselves. The assistance available from bilateral and multilateral donors is simply too limited. |
The private sector brings more to the effort than money, though. Private contracts, concessions or outright ownership of components of the water sector also can improve incentives for efficiency in husbanding and allocating scarce water supplies. Private entities can reduce waste and unaccounted-for water quite significantly, and can get more productivity from fewer staff than public bodies typically can. And the private sector can bring state-of-the-art technologies to bear. |
Notwithstanding Argentina's current economic circumstances, the experience of the private sector in Buenos Aires is instructive. Since 1993, rehabilitation of the existing system has cut water losses from about 40% to about 25%; water supply coverage of the population has increased by 10% without any new water sources; sewerage service has increased by 8%; and despite a recent increase, tariffs are lower than those charged by the public utility before the public-private partnership was formed. |
One major hurdle to developing municipal water and sanitation projects involving the private sector, however, has been that they are quite costly to design and package. Standardised concession agreements and other elements of project development for the most part have not been widely adopted, even within the same country. Each project seems unique in its legal and financial underpinnings, making the transaction costs substantial for all parties. Labour unions and others often object to private sector participation, fearing lay-offs, and that can lead to time-consuming litigation. |
The willingness or ability to pay the full cost of providing water services in host countries is another barrier to private sector involvement. Water has been heavily subsidised in some places and attempts to get consumers to pay more have met resistance. Customer willingness to pay for the collection and treatment of wastewater is even lower than for water supply. |
The tariff - how much to charge for clean water - is often a contentious issue. There is a spectrum of views about water tariffs, ranging from water as a right, whose cost should be subsidised or even free, to water as a good or commodity, the price of which should reflect the true cost of providing it. Without the right tariff structure, a water authority lacks the funds to expand coverage or repair leaking pipes, adopt new methods or collect payments. With tariffs that are artificially low, there is little incentive for consumers to conserve and the resulting use of water is distorted and excessive. |
I hasten to add that there are good and bad ways to invite the private sector to play a larger role in meeting the public's water needs. In some places, private sector involvement has meant merely turning over concessions to the same people who operated them previously, now regrouped into a private company and better paid. For others, the shift to private sector delivery has favoured the insiders and those with government connections. |
A new discipline and an active role by government are required to ensure that private sector participation meets public objectives. Private investors will require - and governments will be wise to ensure - that transactions are transparent, bidding is conducted in the open and without favouritism, contracts are respected and enforced, agreements and standards are policed, and economic rewards are conditioned on performance. A strong private sector role requires strong and sophisticated government oversight. |
William K Reilly, Founder and Chief Executive Officer, Aqua International Partners, San Francisco, USA |