Public Private Partnerships and the poor
in water supply projects
Author: M. Sohail Khan and Andrew
Cotton, May 2003
This factsheet examines some key issues and implications of involving the private sector in water supply and how this can impact on service delivery for the urban poor. It deals with those situations which involve relationships between organisations from the public and private sectors and identifies issues that are central to promoting the needs of the poor in Public Private Partnerships. The source for this summary is Public-Private Partnerships (PPP) and the poor in water and sanitation. (www/lboro/wedc/projects/PPPandthePoor); series editor M Sohail Khan
It is worth noting that whilst many documents exist which hypothesise about the effects of private sector involvement on the poor, many of which appear to strike up distinctly pro- or anti- positions on the wider and contentious issues around privatisation, there remains little direct evidence-based reporting on what does, and does not, work.
Water supply and the private sector
The involvement of the private sector in partnership with government has been advocated as a means of improving the development of sustainable water and sanitation systems. Public Private Partnership (PPP) is used as a general term to cover a wide range of agreements or partnerships made between private sector concerns, public sector utilities, government departments and civil society/consumer groups in relation to the delivery of water and sanitation services. Largely under donor pressure, governments are turning to PPP arrangements for the provision of services. The rationale includes a variety of factors, which may include:
lack of capacity of government institutions to deliver a reasonable level of service or to improve service quality;
financial weakness of public utilities;
lack of public sector financing capability;
inability of public institutions to respond to increasing growth in demand through, for example, rapid urbanisation; and
problems related to the large numbers of employees in public sector providers and their productivity.
In addition, International Financing Institutions (IFIs) require that certain indebted countries reduce domestic spending as part of structural adjustment programmes; they promote the idea that the private sector is more efficient and effective, and delivers a better quality service.
Box 1. How do we define the private sector?
One of the problems in addressing private sector involvement in water and sanitation is the sheer diversity of the private sector. The headline news about the private sector tends to focus on the involvement of multinational companies; however, this is only part of the story.
We can identify formal private sector organisations ranging from multi-national companies with thousands of employees through to medium and small sized private enterprises with maybe less than one hundred employees, operating either at country level or sub nationally. In addition there is an informal private sector, including water vendors who retail water to citizens who do not have access to a formal supply - primarily the poor.
The contractual framework
The contractual framework is key to understanding the formation and development of PPP arrangements which involve the formal private sector. The process adopted prior to the award of contracts has an important influence on the way in which the operational details of service delivery are worked out. It is these operational details which subsequently impact either positively, negatively or neutrally, on the poor. There are four stages.
Preparing for PPP: strategy development by the public sector client to bring in the private sector
Selection of private sector operators and award of contracts through competitive bidding
Operation and regulation of service delivery within the terms and conditions of the contract
Completion and termination of the contract
Normally, a public sector institution is the client and they engage an operator from the private sector to be responsible for the operation of the water service. Exactly what the roles and responsibilities of the operator are depends on the type of contractual arrangement which is entered into - See Box 2.
Box 2. Type of contractual arrangements in PPPs
Contracting out: The client contracts out services to the private sector for a specific
package of work (e.g. customer billing, specific maintenance tasks).
Private sector role is limited to its tasks.
Management contract: Private sector takes over responsibility for part of the operations (e.g. all of operation and maintenance); client retains responsibility for system expansion and
other capital works
Lease: The private sector organisation is responsible for providing agreed levels of service to customers and for providing working capital for repairs. The main tasks are operation and maintenance but with a greater degree of autonomy than for management contracts
Concession: The private sector organisation is responsible for financing the investment costs of the system including system expansion, as well as for all of the operation and maintenance, in order to achieve prescribed service delivery objectives.
Full divestiture: In addition to responsibilities for service delivery, ownership of existing assets (e.g. the physical infrastructure of the water system) is transferred from the public to the private sector. In the arrangements previously described, ownership of assets remain with the public sector.
It is the more complex contractual relationships, such as concessions, which provide most opportunity for the public sector to make use of the full resources of the private sector. This leads towards hitherto largely unexplored relationships between the formal private sector and groups of consumers who are very poor. Furthermore, relationships may need to be developed with the local informal private sector which may be involved in a secondary market for water and which provide the link to poor consumers.
Preparing for PPP
What happens during the process of preparing for PPPs prior to the award of contracts is crucial; the rules of the game are set. The key facts are as follows.
Policy: the poor do not get mentioned. At the outset, the client’s objectives and terms of reference do not generally require the needs of the poor to be specifically addressed. Unless provision for poor groups is brought in at the start, it is unlikely to figure at the operational stage. The operator will follow the requirements of the contract; if this does not specifically require him to address the needs of the poor, then he will not do so.
Poor and vulnerable groups exert little pressure on the PPP development process, which focuses on the timely appointment of the operator. Information campaigns are sometimes requested but they are seldom expressly required to ensure access to disadvantaged groups. The poor particularly suffer from “information deficits”, that is, the gap between what is known and what needs to be understood.
Core issues in PPPs are typically technical and financial and not those surrounding poverty. The quest for full cost recovery features prominently; attention is seldom drawn to the ‘public goods’ nature of a more efficient water sector. Wider social and public health objectives are not typically defined or included within contracts
Knowledge and understanding of advisers. Those who advise client governments are often distant from the client’s organisation; their expertise will be determined by the requirement specified by the client and normally focuses on the core specialities of technology and finance.
The time scale for the client’s advisers to prepare the necessary bidding information is relatively short and they focus on the core technical and financial PPP issues. The complex and little understood issues around serving the poor (which are not likely to be part of the terms of reference) are unlikely to receive serious consideration at this stage
Bidding by the potential operators. The harsh commercial realities of competitive bidding often mean there is little material change in final service delivery when compared to that set out in the draft contract. Bidders rarely offer improvements over the minimum stipulated requirement and it is not realistic to anticipate that they will propose to extend service coverage into poor areas about which little is known.
Negotiations with successful bidder. In striving to strike the most favourable economic arrangements there is evidence of asymmetry of influence between clients and bidders. For complex, long term concessions the market is dominated by relatively few major international operators. In some cases government bargaining power is reduced.
Flexibility in the contract: PPP contracts in water supply often rely upon “command and control” contractual provisions that contrast with other services which appear to grow by adding economic value (and economic self-interest) into their business mentality.
Operational framework for PPPs
Once the contract has been awarded, an operator becomes responsible for some or all aspects of service provision in accordance with the terms and conditions of their contract. We have seen that the pre-award stages are crucial in determining the shape of things to come for what is potentially a very long time. We now look at how this works in practice regarding the services to which the poor have access. Based on the findings of a number of case studies of PPPs in Southern Africa and South Asia, this section lists the key issues and summarises their implications for service delivery to the poor.
Building relationships with low income consumers. Private companies have a lot to learn about operating in low-income areas, and consumers and civil society groups can play a key role in helping them, though they also have a lot to learn about private companies.
A key lesson is the need to focus on understanding customer circumstances, offering appropriate service levels and focusing on customer outreach. The learning curve would seem to involve years rather than months. Much depends on continuing relationships between the operator, the public partner, civil society groups and the customers. In this context, it is important to note that the public utilities were never very responsive to low income communities, and hence are unable to transfer much knowledge on how to work in low income areas to private sector operators.
There is little to suggest that the governance mechanisms arising through the formal contractual procedure are effective in terms of building relations with poor consumers. Partnering with either civil society groups (NGOs and CBOs) or small local entrepreneurs can, in the right circumstances, help companies along their learning curve while also increasing the capacities of these groups and consumers to engage with PPP arrangements.
For poor consumers it can be hard to perceive any differences between the private utility and the pre-existing public utility. A sense of continuity is reinforced when, as in some cases, most of the utility staff is kept on. Consumer relations staff of the operators emphasise the efforts made to inform local groups of the new arrangements and how the company intends to operate. However, given the large populations usually involved, such information spreads slowly.
Where other than formal private sector companies are involved, we can see closer and more effective relationships developing both through local entrepreneurs, and NGOs and CBOs. Actual roles range from interlocutors to local service providers on behalf of the operator.
Consumers are concerned with the quality of service at the point of delivery; they have little concern with improvements to physical infrastructure in their own right. Performance measures such as reduced leakage may lead to a more efficient system, but they have to translate into benefits which are tangible to the consumer groups in question
Involvement in the processes leading up to change does appear to be critical. Whilst this does not guarantee success, cases in which stakeholder participation was absent or minimal were the least successful in terms of the perception of the poor.
Financial issues and tariffs. Household cash flow is critical for poor consumers and is highly sensitive to changes in the tariff structure; this can have a major impact on the poor.
It is essential to understand and take account of typical household budgets when determining changes to both the tariff and the methods of payment.
Tariff structure planning needs to identify and address impacts which might undermine the security of low-income households through increasing their vulnerability and exposure to risks.
There is an opportunity to explore alternative financing mechanisms for poor households which minimise the need for large up-front payments. Reducing connection charges to a minimum and recovering them from the consumption tariff will make house connections a more feasible option for the poor, and for the market for the operator - to everyone’s benefit.
Box 3. Tariff structures in South Africa
- Prior to 2001 in Cato Crest, Durban, a system of ‘ground tanks’ enabled the volume of water delivered to each household to be controlled by the local private entrepreneur. This was coupled with a flexible system of prepayment for water supplied; up-front payment could be made in full or in instalments. The system was self-regulating in terms of payment because people were required to pay in advance for the month, in order to receive an agreed volume of water. They knew what they were getting and could budget the cashflow accordingly.
- In Dolphin coast, a new tariff structure was introduced for the PPP; this created a tiered system of service levels and tariffs which includes a ‘lifeline’ tariff of 10 kiloliters. The problem is that for low volume users, which includes most poor consumers, the fixed charges for water and sewerage turn out to be much higher than the metered consumption (variable) charges. Consumers are not able to regulate their consumption to achieve lower bills. As a specific measure targeted at the poor, the lifeline block has had hardly any impact
Technology and innovation. PPPs bring a new operational environment which offers scope for innovation in the use of different technological solutions. The private sector can resources and know-how to exploit such innovations to achieve improved service delivery:
introduction of differentiated levels
of service to take account of users’
ability and willingness to pay.
Secondly, introduction of more flexibility in engineering standards to make them more locally appropriate
Information. There is a pressing need to develop a base of information about low income groups which is directly usable in the development of PPP arrangements.
This requires a clearer understanding on the part of the designers of PPP arrangements, and also local institutions and organisations, about information needs.
There is also a clear need to provide information for consumers particularly about proposed roles and responsibilities. Lack of understanding and consensus leads to operational problems and is ultimately disempowering.
Communication is a vital component of PPPs; investment in it will pay dividends in operational terms. Lack of information does not mean that low-income communities will comply with the partnership; rather, it increases the risk of non-payment of bills.
Land tenure. Lack of formalised land tenure arrangements is normally a barrier to the extension of networked infrastructure. For example
the regularisation and notification process undertaken by the public sector partner in the informal areas of Karachi (Pakistan) was a prerequisite to the successful partnership with a civil society group and the consumers.
however, this is not always necessary. In Kibera, Nairobi (Kenya) when improvements to the water supply were delivered, it gave residents the hope that they would eventually be given title to the land.
Contractual. Operational performance with respect to poor consumers reflects the focus of the contract preparation process, which is usually based around the financial concerns of the client (e.g local government or utility) municipality rather than a concern with the poor.
Approaches where the concepts of the contract are translated clearly into agreed roles and responsibilities down to the household level have been successful.
Non-payments are dealt with in a variety of ways which depend upon the contractual agreements. In one concession contract where non-payment is increasing, it is the public sector partner (municipality) that bears the risk of non-payment by households. The private sector operator is guaranteed payment based on metered supply regardless of household payment levels. The situation of non-payment did not arise in the case where pre-payment for a fixed volume of water was made.
Regulation, monitoring and complaints. There is lack of capacity on the client side, particularly with smaller municipalities, to monitor and regulate complex contracts.
More attention needs to be paid to performance measures; where PPP objectives require service improvements for poor consumers, performance indicators need to reflect the quantitative and qualitative nature of the improvements. For example, the price charged for water by informal vendors is an indicator of water shortage in an urban area, and the operator of the water supply could be given a contractual incentive to reduce it.
Care needs to be taken when making international comparisons on regulation. There are important distinctions between regulating a contract, which may be the responsibility of a municipality, and regulating a sector through a national body such as happens in the UK.
Regulation is not a key issue for all poor households. The “unconnected poor” only become stakeholders in the event that rising tariff revenue leads to coverage being extended into their neighbourhood.
References and further reading
Sohail M (Series Editor) (2002) Pubic Private Partnerships and the poor, WEDC, Loughborough University (www/lboro/wedc/projects/PPPandthePoor)
Water and Sanitation Programme (2002) New designs for water and sanitation transactions: making private sector participation work for the poor, PPIAF/WSP Washington DC
Satterthwaite D, McGranahan G (2003) Water and Sanitation in the World’s Cities; Local Action for Global Goals. London: Earthscan for UN-HABITAT. (see Chapter 5)
Gutierrez E, Calaguas B, Green J, Roaf V (2003) New rules, new roles; does PSP benefit the poor? Synthesis Report. Longon: WaterAid and Tearfund. 36 pp.
Annexes to this Factsheet
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