Box 8.4 The Return of Technical Assistance
Maseru, Lesotho

Since the landmark privatisations of state-owned utilities in the UK in the latter part of the 1980s, culminating in the privatisation of the water industry in 1989, it has become the accepted wisdom that the only way to improve the performance of such utilities is by some form of privatisation. However, the failure of some private sector management contracts in developing countries to deliver expected (and legally enforceable) improvement in standards has led to the questioning in some quarters of the previously unchallenged tenet, and the realisation that in some circumstances, technical assistance could be a better option than privatisation.

An interesting recent example is that of the Water and Sewerage Authority (WASA) of Lesotho. When it was established in 1992, the Government of Lesotho (GoL) declared a long-term objective of privatising WASA within a decade. GoL also recognised that this objective could not be achieved without improving WASA's performance to the point where some form of privatisation would be viable. The provision of long-term technical assistance for WASA was agreed between GoL and the UK's Overseas Develoment Administration (ODA and later DFID), and ran (through two phases and a number of interruptions due to political instability following Lesotho's return to democracy in 1993), for eight-and-a-half years from October 1991 to March 2000.

In October 2000, a project identification mission from the World Bank visited Lesotho as part of a proposed water sector reform project. Part of its ToR was to recommend options to improve the performance of WASA, and it was confidently expected that this would include some form of private sector participation. However, the report of this mission concluded that …it is unlikely that a long-term private sector contract would be feasible at this time, and that the core problems of WASA… cannot be remedied by the use of a management contract. The report went on to recommend a performance agreement between WASA and GoL for a period of 3-4 years, supported by continued technical assistance (TA).

These conclusions/recommendations are all the more remarkable given the World Bank's insistence, in a previous mission to assess the water sector in Lesotho, on some form of privatisation as the only practical solution to the problems of WASA. A further reading of the report of the more recent Bank mission indicates an acceptance of the benefits and improvements that WASA has achieved through the provision of TA, and that its continuation is the most appropriate mechanism for maintaining the progress of WASA.

Behind this change of mind is an implicit admission of the limitations of the management contract concept, both financial and practical, to improve the performance of this category of public utility. The financial limitations of a management contract became clear once analysis by the World Bank team revealed that the improvements in WASA's performance, achieved through the provision of technical assistance, left insufficient scope for the additional cost savings upon which a management contract would rely in order to be viable. In other words, in this particular case, the cost of a management contract would be greater than the savings that would accrue from the greater efficiencies that such a contract would be expected to bring.

The practical limitations are exemplified in the second of the two conclusions reached by the World Bank mission: that, in this case, the core problems of WASA cannot be remedied by a management contract. These core problems are identified as staffing, tariffs, and the collection of government debts. The reason given is that these issues are outside the jurisdiction of a management contract, as they are primarily the result of policy decisions of the government. However, the World Bank mission felt that addressing them can be made a 'conditionality' by the Bank for a TA-supported performance agreement.

This project (now renamed the Lesotho Water Sector improvement Project) is still in the early stages of preparation, with the signing of the loan agreement not expected before the latter part of 2002. The performance agreement would require WASA to meet specific operational, financial and staffing level targets to be achieved over the duration of the agreement. In return, the government would agree to certain obligations which might include (i) a revision of the current tariff structure (including a mechanism for annual adjustments), (ii) to pay its water bills in a timely fashion, and (iii) to adopt a hands-off approach to the day-to-day running of WASA to enable the company to address its core problems on commercial principles. It is expected that the TA will provide support to WASA in the areas of engineering, finance, planning and human resources, which would be financed as part of the overall loan package.

The performance agreement concept has previously been successful in Swaziland, where the Water Services Corporation has a performance contract with government (in the form of the Public Enterprise Unit). This was a condition of a World Bank loan for the urban development project, and DFID supported the TA for the corporation. As long as the agreement is well drafted without areas of ambiguity, it provides the performance-based incentives normally associated with the private sector while leaving responsibility for achievement with the organisation's own staff. This is more likely to contribute to the overall objective of sustainable development than the handing over of responsibility to an international company.