Bridging the water gap: what role for the private sector?

To tackle the growing water crisis the world is facing, we need to look for new and innovative ways in which the private sector can help to improve the management and delivery of this precious resource, the IFC’s Jane Jamieson and Vipul Bhagat argue.

There is no denying that the world is facing a water crisis. Despite concerted efforts by governments and the international community, over 880 million people still lack access to clean water  and water scarcity affects one in three people in the world.

Water scarcity forces people to rely on unsafe sources of drinking water and limits agricultural production. Factors such as urbanization and climate change only exacerbate the situation. And yet, water scarcity often occurs in areas where there is plenty of rainfall or freshwater and much of this precious commodity literally goes down the drain; this includes an estimated 50 percent of water used for agriculture which is wasted. Improving the way we use, manage and deliver water will be fundamental to addressing the looming water crisis.

A more pragmatic approach is needed to move forward

Traditionally, the private sector’s role in water has been largely limited to the delivery of urban water services. This role has been a controversial one, where high-profile failures are at times held up as evidence of the fundamental inadequacy of the private sector to deliver water services, particularly to populations with limited ability to pay. Although perhaps ideology in getting in the way of the facts.

Evidence is now emerging of the significant contribution the private sector has made to water services. By 2007, private water operators were delivering services to about 160 million people in the developing world and it is estimated that public-private partnerships have expanded water access to more than 24 million people since the 1990s; and, many times done so at lower cost than their public predecessors.

Thus, the time has come to move away from the public versus private debate to recognize the contributions all parties have to play in delivering sustainable, affordable water.

A new generation of public-private partnerships can be part of the solution. These public-private partnership arrangements are evolving from the early privatizations and concessions to the more pragmatic approaches used today. These new approaches, which can vary widely and be adapted to specific circumstances and needs, build on the private sector’s ability to improve quality, efficiency and extend access; and the government’s capacity to raise finance and subsidize expansion to the poor.

The impact of public-private partnerships in water and sanitation has been significant. There is a growing body of evidence suggesting that, despite allegations to the contrary, private participation in the water sector does improve efficiency and increase coverage. In addition, while price increases are often held up as an argument against these types of arrangements in the water sector, this is not necessarily borne out by evidence.

Research by the Public Private Infrastructure Advisory Facility (PPIAF) found that in a sample of 1,200 water and energy utilities in 71 developing and transition countries there was no systematic change in residential prices as a result of public-private partnerships .  In fact, two of the most successful examples – the concession of water services in Manila, Philippines, in 1997 and Bucharest, Romania, in 2000 – illustrate the benefits these public private partnerships can bring and the ability of the private sector to “make a difference.”

Bucharest Water

In 2000, the city of Bucharest awarded a 25-year concession contract for its water and sewerage system to Apa Nova Bucuresti, a subsidiary of the international water operator Veolia, a transaction in which IFC was the lead adviser to the municipality. Ten years on, an evaluation commissioned by IFC found that water services had improved markedly.

Bucharest had some of the worst water quality in Romania at the start of the concession whereas today the utility delivers uninterrupted high-quality water which even exceeds European Union water quality standards. Customer service has also improved dramatically since the start of the concession with complaints falling to 1/7th of pre-concession levels and customer satisfaction rising to 75 percent.

But, could these same improvements have been achieved without the private operator? To some extent, yes. The performance of all publicly run municipal water operators in Romania improved over the same period. However, Apa Nova Bucuresti consistently did better than other operators. The figure below highlights that for four out of six key indicators, services in Bucharest improved faster and reached better levels that in other Romanian cities.

However, not all water concessions have produced such admirable outcomes and many have even resulted in acrimony and termination. Key lessons learned from the Bucharest experience were that innovative and thorough transaction preparation and contract design, with well-designed monitoring and dispute resolution provisions are critical. Couple this with dedicated government and private sector partners and the outcome can be substantial improvements to water services for the population.

We can therefore conclude that private participation does have a continuing role to play in the delivery of water services in developing and transition countries; and if well designed and implemented by strong and committed partners, it can have a real impact. The challenge now is how these lessons can also be applied to improve the efficiency of water resources management more generally.

Manila Water

Similar positive results were achieved through the 1997 concession of the Metropolitan Waterworks and Sewerage System of Manila, Philippines, into two service areas. The winning bidders are investing $7 billion to expand and improve the system resulting in better service, lower rates and significantly fewer leaks and illegal connections. Rates initially dropped by 74 percent in the east zone, operated by Manila Water, and 43 percent in the west zone, operated by Maynilad Water Services.

Manila Water also launched a “Water for the Poor” programme which allows residents in the poorest neighbourhoods to pay just $1.50 a month for clean water—a small fraction of what they paid before. In addition, Manila Water Company has also emerged as an outstanding model of a successful emerging markets water services company, with operations outside Manila as well as the Philippines, and public listing on the local stock exchange.

Public-private partnership solutions for water management problems

Agriculture accounts for 70 percent of global fresh water use, so how we manage agricultural water use will have an enormous impact on how we address all aspects of the water crisis as well as the economic growth of many developing countries.

For example, developing the agricultural potential of Africa would have a massive impact on food security, economic growth and people’s livelihoods. Yet this remains an area where public-private partnerships have been relatively untried. If the private sector is to have a role in addressing the water crisis, it needs to play a stronger role in agricultural water management.

A good example of this can be found in Morocco.  Citrus farming in the Guerdane district was becoming increasingly unsustainable as the area’s 600 citrus farmers were dependent on water from an underground aquifer that was rapidly diminishing. This meant they were also facing increasing pumping costs as the water table fell by two to three meters every year.

To address this chronic overexploitation, the government of Morocco, in 2004, supported by the IFC, implemented the world’s first public-private partnership in the irrigation sector to attract private investment to construct a new irrigation network that would deliver water from an existing dam.

The project was structured as a 30-year build-operate-transfer (BOT) and involved the co-financing, design, construction, operation and maintenance of a 90-kilometre conveyor pipeline and a 300-kilometre distribution network. The bid was won by a consortium led by Morocco’s Omnium Nord Africain (ONA) creating the first domestic private sector infrastructure operator in irrigation.

Today, the project delivers up to 45 million cubic meters of irrigation water per year to the area’s farms which, in turn, support the livelihoods of 1,900 people. Given the public good nature of the project to ensure small farmers continue to receive affordable and sustainable water, the project benefited from $58 million of grant and soft loan funding from the government. In addition, to date the operator has also invested $36.9 million in the network.

As a result of this success, IFC continues to be actively engaged in developing public-private partnerships in irrigation and is currently working in similar projects in Brazil and Morocco.

Innovative solutions for perennial problems

With diminishing resources and over 800 million people still lacking access to clean drinking water, how to deliver clean affordable drinking water will be a recurring challenge in the years to come. If the private sector is to continue to play a role in the delivery of water services, the models and approach we employ will need to evolve as the public-private partnership landscape changes. And, not only are the forms of public-private partnership changing, but so are the operators.

Still, today, the perception is that private operators are mainly large European multinationals, as was the case in the early 1990s. However, this is no longer the case and we are seeing an increasing participation of operators from developing countries active in international markets. Also, the domestic private sector is playing a greater role in the operation and delivery of water services. If we are to harness domestic entrepreneurship and unlock local markets new approaches to public-private partnership design and structuring are needed.

The IFC has recently supported the government of Uganda to successfully bid out the expansion and management of water services for the town of Busembatia to the domestic private sector. Crucial to the success of this project was that the traditional public-private partnership transaction advice provided by IFC was complemented by a range of activities that addressed some of the key challenges faced by the domestic private sector such as access to credit.

The project worked with local private operators to increase their ability to access finance from local banks and also with financial institutions to help them to understand the risks faced by small-town water operators and develop risk mitigation strategies. While the transaction was small in scale, this project also helped the government to facilitate the management of water public-private partnership contracts by developing a “generic” management contract for use on privately managed piped water systems that will ensure consistency in contract administration and management.

In addition, training was provided to representatives of the government and private operators in order that all signatories to the contract understand their obligations within the “generic” management contract. The operator has also committed to maintain tariffs at its current, government threshold tariff. IFC is now engaged in other African and Asian countries to further this model for rural water.

Creative Futures

The “non-traditional” model of public-private partnership transaction is going to be crucial if we are to support the development of the water sector in many developing countries. In particular, to unlock the potential of the domestic private sector which is often better suited to the scale and sensitivities of developing country markets.

So, as we look forward, the private sector must have a key role to play in finding innovative solutions to the looming dual challenges of scaling up access to water supply and managing the water crisis. But we all need to think “out of the box”, look at public-private partnerships from a different perspective and develop creative solutions for a more sustainable water future.