Richard Franceys WBI ASCI January 2003 Urban Water and Sanitation Dr Richard Franceys.

Richard Franceys WBI ASCI January 2003

Urban Water and Sanitation

Dr Richard Franceys


The Water Goal

• Effective– Potable Water, 24/7, Adequate Pressure

• Equitable– Accessible by ALL ?

• Sustainable– Financially as well as hydrologically

• Efficient– Least reasonable cost

• Replicable ?– 4000 to go??


What makes water special ?

• ‘Heart felt’ basic need

• Politically high profile, enhanced by floods and droughts

• Relatively simple technology

• The most capital intensive of all urban services/networked utiltities ?


12.2

4.1

2.8

2.1

0.4

Capital IntensityCapital Intensity• Water

• Electricity

• Telecoms

• Gas

• Supermarket

Capital intensity: fixed assets to annual revenue ratio


E&W Cost of Water & Sanitation

• The Modern Equivalent Asset Value of the English & Welsh fixed assets is now:

• $1,890 per person for water – Rs 0.9 lakhs

• $3,530 per person for sewerage & wwt– Rs 1.7 lakhs

• continuing to invest at $100 per person per year


Sustainable Water Management

Price < Costs?• What effects?

– quality will suffer– poor maintenance– no additional infrastructure development– system will not survive for long– consumers not aware of value of water– more leakage & misuse– high UFW (CMF, December 2001)



Price > Costs ?• What effects?

– sustainability ensured– future growth & expansion ensured– attracts investment– demand is limited– demand for quality of services rises– potential for cross-subsidising poor– consumers go for alternatives, maybe

poorer quality– danger of profiteering


Ofwat Analysis of International Comparisons 2002

WATEREngland &

Wales Australia Netherlands United StatesIndian Metro

per m3 Rs per kl Rs per kl Rs per kl Rs per kl Rs per kl

Cost of operations 24 15 34 22 14.5Cost of capital maintenance 15 6 15 5 6.5Return on capital 14 8 9 19 0Abstraction tax 6

AVERAGE COST 52 30 64 47 21AVERAGE PRICE 52 30 64 47 14.6

Domestic 3.5

Non-Domestic 39

LONG RUN MARGINAL COST 40 43



Ofwat Analysis of International Comparisons 2002

Rs per household per monthEngland &

Wales Australia Netherlands United StatesIndian Metro

TOTAL WATER per month 875 862 817 2,322

TOTAL SEWERAGE per month 978 920

TOTAL WATER & SEWERAGE per month1,853 1,782 100 ?



Price of Water $/m3 Asia

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Chenn

ai

Mumba

iDelh

i

Calcutt

a

Sustainable Water Management: Asia

Richard Franceys WBI ASCI January 2003Asian Development Bank, Water Utilities Data Book, 1997

Sustainable Water Management: Asia

Ratio Industrial / Domestic Tariff for 30 Cubic Metres per Month

0

2

4

6

8

10

12

1 1 - 2 2 - 3 3 - 4 4 - 20 > 20

Cost Ratio

ColomboDelhi

MumbaiChennai

CebuChiang MaiKathmanduMandalayNuku'alofaPort VilaShanghaiTaipei

BangkokGuangzhouHo Chi MinhHong KongHoniaraJakartaKarachiLahorePenangSingapore

BandungBeijingHanoiKuala LumpurManilaSeoulUlsanVientiane

ApiaDhakaMedanSuvaTianjin


• TARIFFS ……

• ‘The water crisis that is affecting so many people is mainly a crisis of governance-not of water scarcity’

• "Governance is the framework of social and economic systems and legal and political structures through which humanity manages itself"

Sustainable Water Management: Overview


Sustainable Water Management: Solutions ?

• FROM ‘CITIZEN CONSUMER’ TO ‘PAYING CUSTOMER’

– Where of course ‘the customer is king’– Paying ‘cost reflective tariffs’

with targeted subsidies where appropriate

– But they have to be efficient /least cost tariffs of course, part of the bargain . .


• The New Public Managerialism– ‘NPM’

• Taking the ideas of the efficient private sector into the public sector….– Customer Orientation– Commercial Orientation– Measurable Objectives– Human Resources and Management Development– Structural and Organisational Adjustment

Sustainable Water Management: Solutions ?


Efficient Solutions?

• The New Public Managerialism

• Taking the ideas of the private sector into the public sector….

• (but without the real competition and personal incentives and …….)


Governance Change• ‘Force Fields’ (Lewin)

“the stability of human behavior is based on "quasi- stationary equilibria” supported by a large force field of driving and restraining forces. For change to occur, this force field has to be altered”

‘unfreezing’ before ‘changing’ then ‘refreezing’

• ‘driving forces’ greater than ‘restraining forces’?


Governance Change

• What could drive change in water governance in India?

• Decentralisation• Corporatisation• Commercialisation• Privatisation • Regulation • Internationalisation• De-politicisation


Water Governance

• ‘Scanning Globally, Reinventing Locally’

• Dutch Approach: ‘Public Water plc.’

• French Approach: Leasing

• English Models: Divestiture– Note: The Scots, part of UK, rejected the ‘English and

Welsh’ approach!

• Worldwide Approach: Concessions

• Indian Approach: Service Contracts ?

Richard Franceys WBI ASCI January 2003Ownership of UtilityAssets

Utility M

anagement

public private

Private/com

mercial

public

mixed

mixed

MunicipalSupramunicipal

CorporatizedUtility

Public WaterPLC

JointVenture

Private WaterPLC/Ltd

Concession

Lease contract

Management Contract

Service Contract

BOT, BOOT, etc..

Public-private partnerships

Private management

Public management options

Differen

t types

of User

Managem

ent

Blokland, Braadbaart & Schwartz, 1999

Basic Modes of Water Sector Organisation


Public Private Partnerships

• A definition of P3

• ‘A public-private partnership (P3) is a cooperative venture between the public and private sectors, built on the expertise of each partner, which develops or improves facilities and/or services needed by the public through the appropriate allocation of resources, risks, rewards and responsibilities.’


The main options for private sector participation and their allocation of responsbilities

World Bank, Toolkits for Private participation in Water and Sanitation, 1997

Option Assetownership

Operations &maintenance

Capitalinvestment

Commercialrisk

Duration

Servicecontract

Public Public andprivate

Public Public 1-2 years

Managementcontract

Public Private Public Public 3-5 years

Lease Public Private Public Shared 8-15 yearsConcession Public Private Private Private 25-30 yearsBuild-operate-transfer (BOT)

Private andpublic

Private Private Private 20-30 years

Divestiture Private orprivate

Private Private Private Indefinite (maybe limited bylicense)


Participation & Partnerships

Participation• Information• Consultation• Deciding together• Acting together• Supporting independent

community initiatives

Wilcox (1999), Building Effective Local Partnerships

}Partnerships


Models? - The Netherlands

• 1850-1920 Private; 1920-1975 Municipal• 1975 - Public Water plc - owned by

municipalities/government; non-tradeable shares

• Aggregation - from 231 to < 20 companies -economies of scale

• Minimal profits - minimal distribution (in practice)

• High quality water - satisfied customers• Regulated by directors representing customers

through their role in local government


The Netherlands• Introducing benchmarking to improve efficiency -

(escaping regulation??)

• PPP Knowledge Centre of the Ministry of Finance: ‘to initiate and promote PPPs ..to achieve added value

and improved efficiency.’ • DBFO - $750m for waste water treatment

• ‘Environment Minister has introduced a bill that will prevent public water companies in The Netherlands from handing

over shares or control to non-public bodies as of 1 September 2000.

(WaterForum Online, Sep2000).


Models? - France

• PPP for 150 years - ‘the experts’• 58% of the 36,500 communes giving private

contracts serving 75% of the population• Vivendi (formerly Generale des Eaux) and Ondeo (formerly Suez

Lyonnaise des Eaux) and Saur (owned by Bouyges) between them are responsible for 13,000 concession contracts made with regional groupings of municipalities

• No foreign competition allowed ?

• Lease (affermage) - moving to concessions because of

capital requirements


France• Prices have risen by 83% (1990-97, nominal)

(153% in the Isle de France over 13 years) W&S $320/hh average ?

• Regulated through contract renewals ?(only 5% up for renewal change contractor)

• ‘France needs an independent regulator’ • A much-watered down bill has just had its first

reading in parliament, proposing limiting the length of water leasing contracts to 12 years, instead of the current 20 years.

• To clarify the sometimes murky business of pricing water, the bill proposes an "Haut conseil des services publics de l'eau" which would offer advice. But with elections in June, nobody expects the bill to get very far.


‘United Kingdom’

Public Department

Privatisation, 1989

Public Water Authority


England & Wales: Radical PPP

• Excellent water quality improvements, excellent service improvements, ever increasing efficiency (Thames porpoise, Mersey salmon!)

• Massive capital investments ($58 bn over 10 yrs - another $20 bn to come in next five years?

• ‘Privatisation has transformed investment’ –‘It was a major issue and there has been a big transformation.’ Thames now has 99.984% of its samples passing all tests.


‘Not a smooth ride’

• High Profits– or what is required by private companies?

• Disconnections rising– ‘Can’t pays’ and ‘Won’t pays’ ?

• Drought [in English terms !]– leakage monitoring

• Fat cats – excessive management pay rises?

• Metering for all?


E&W Regulation

• Drinking Water Inspectorate• Environment Agency

(unable to justify investments but ‘trust us, we’re scientists’)

• The (Economic) Regulator - Ofwat ($0.40 pc pa)

– Primary duty: ensure the functions of a water and sewerage

company are properly carried out companies can secure a reasonable rate of return

on their capital

– Secondary duty: – looking after customers


1989 Privatisation

Capexefficienciesof PPP

Ofwat1999


E&W Economic Regulation

• Five year ‘price caps’ (revenue caps?) to deliver incentive based regulation

• ‘Light handed regulation’ ?(452 pages of reports in 1999 (177 in 90/91) plus full CD ROM of company data plus 312 pages of Price Review Report plus MD/RD letters)

• Expensive for companies to give necessary information? >$5.5 per person served per year ? (Wessex)

• Average household bills had risen on average by 40% in real terms since privatisation


1994 Price Review 1999 Price

Review

Opexefficienciesof PPP

Ofwat1999


Customer Service Committees

• Part of Regulator Ofwat (Govt proposing ‘independence’)

• Complaints Auditing (as well as complaints appeal

process) • Public Meetings (to question the water companies)


• Compensation costs (for company errors etc) achieved for customers from private companies currently exceeding running costs of Central CSC

• CSC Comments:• Privatisation has been:

– ‘a move forward’ – ‘standard of service is unbelievably better’ – ‘a two edged sword’ – ‘the basic concept is good, they were in a state of

disrepair; but costs have risen disproportionally’


The Cost of CapitalEngland & Wales - Return on Capital Employed

(after tax)

4

6

8

10

12

14

16

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Per

cent

age

Rea

l Ret

urns

on

Cap

ital

Industry ROCE after tax

Regulatory Cost of Capitalafter tax (large companies)

Ofwat 1994 'Glide Path'(after tax- presumed)

'The Profit Sawtooth' ? (aftertax)


Competition - the answer?

• Comparative competition

• Competition between regulators ?

• Inset appointments

• Common carriage - statutory right of competitors since 1 March 2000

• Access codes (‘Government should tell us’)

• Competition Act - fines of up to 10% of turnover


Patterns for Low & Middle Income Countries

• What is the significance of these patterns for the one billion people without clean water and two and half billion without adequate sanitation?

Patterns for India ?

• Public Private Partnerships, Regulation, Competition?

• Or simply wealth??


Reported PPPs by RegionBy Reported Capital Investment Value

Middle East 4%

Proportion of 370 Operating MLICs PPPs by Region by Capital Value

Latin America & Caribbean

43%

East Asia and Pacific

31%

South Asia0%

Eastern Europe &

Central Asia11%

Middle East4%

Africa11%


Case Study - Buenos Aires

• Capital city

of what has been an upper middle income country

• Now 48% living in ‘poverty’ or ‘extreme poverty’ in Argentina


Water Utility Privatised In 1993

>$1,200 m Invested

Nearly 2 millionAdditional people served

And then the Economic crisis

Service Coverage - Buenos Aires

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

199

3

199

4

19

95

19

96

19

97

19

98

19

99

20

00

200

1

200

2

20

03

TargetServed byWater

ActualsWater

TargetServed bySewerage

ActualsSewerage

Population


Aguas Argentinas Returns on Capital and Equity

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1994 1995 1996 1997 1998 1999 2000

ROCE

ROE

Dividends/Equity


Questions of PPP

• Is it ‘development’?

• How can the process be ‘localised’?

• How to manage regulation?

• How to ensure affordability?

• How to ensure the needs of disadvantaged groups are recognised?

• And what about the poor . . . ?


PPCPs and the PoorHigh Income Countries

• England and Wales (as part of a process)

– disconnections banned– capped tariffs for lowest income– capped tariffs for specified medical conditions– charitable trusts– subsidising rural areas

• France - Charter to help underprivileged– help in paying water bills and avoidance of

disconnections for people living in poverty and unstable situations


Serving the Poor

• Services to the poor:

• 146,000 by 1998 • 260,000 by 2000

‘800,000 from depressed areas’

by 2002?• Profiteering from the

poor ?

Buenos Aires - 10% (‘32%’) below the poverty line

Photo: Tracey Osborne


Service Differentiation for the Poor

Manila:400,000 ‘low-income’ served

•Individual metered connections;•Labour contribution from community;•Reduced connection fee•Standard water tariff;

Photo: Almud Weitz - Project 8, Quezon City, Maynilad Water


Benefits of reform

• Using the variation in ownership of water provision across time and space generated by the privatization process, it was found [in Argentin] that child mortality fell 5 to 7 percent in areas that privatized their water services overall; and that the effect was largest in the poorest areas. It is estimated that child mortality fell by 24 percent in the poorest municipalities.

• Galiani, S. ; Gertler, P. and Schargrodsky, E. (2002).


What does the private sector bring?

• Capital for investment?• Private management with incentives?• (remembering that not all international PPPs are

immediate success stories eg Kampala, Malaysia, T&T, Mexico City etc)

• Or Lewin’s ‘unfreezing’ and force field of driving and restraining forces:

• ‘Foreignisation’? 70% of ‘major contracts’are international


The PPP Gamble

?Experienced

foreign privateoperator

1st RatePerformance

2nd RatePerformance

PublicSector

ProviderPPP

Inexperiencedand/or rent-

seeking foreignand/or nationalprivate operator

3rd RatePerformance


‘Nehru’s Dictum’

“It is better to have a second-rate thing made in one’s own country than a

first-rate thing one has to import”

(quoted in The Economist, 2001)


From Vision to Action

• PPP’s DO GIVE BENEFITS (most of the time - and at a [usually] valid cost - perhaps shouldn’t be necessary but they are!)

• But we have to get it ‘right’ using a process, not a model (always adapting)

• Expert contract preparation & transparent contract awarding (unhelpful terminology of ‘success fees’ of $2m to $5m?)

• ‘Open book accounting’? as well as International Auditors for International Contractors


From Vision to Action

• Using special skills to assist eg NGO’s &

international NGO’s as social consultants?

• Always remembering affordability and willingness to pay Targeted subsidies have a part to play?

International donors have a part to play?

• Vigorously ‘segmenting and differentiating’ (not neglecting) to assist the poorer customers

• Requiring labour intensive technologies - though not necessarily subsidising job creation


From Vision to Action• Regulating wisely and being ready to adapt?

Regulation is a process which needs to be supported– For corporatisations as well as PPP’s?

– Capacity building for regulators?

• Customer committees for oversight?

How to escape ‘politicisation’? • Generating competition wherever possible

Cross-border comparative competition? (ADB/IWA/WB/Ofwat benchmarking approaches)


• Never neglecting to develop national private and public capacity (both are still required)

• Localisation plans? Expatriate matching? Share selling?

• Service contracts as ‘Starter PPPs’, promoting SME development

• Institutional development programmes wherevalid leadership and governance environment

• Continuing capacity building

(Legislative studies, MBA Programmes, Change Management Forum, Study visits etc..)


Emerging patterns• Concessions with Regulation • 88 PPPs (operating/planned - all countries)

out of the 433 cities > 750,00020%PPP

• 2,350 PPPs (operating/planned - all countries) out of ‘40,000’ cities and towns

6% PPP• Does India needs a driving force greater than New

Public Managerialism, Commercialisation and Customer Orientation to reform water supply in the 4,000 ULBs ?

• What approach will deliver Effective, Equitable, Sustainable, Efficient water and sanitation for all?

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Richard Franceys WBI ASCI January 2003 Urban Water and Sanitation Dr Richard Franceys.

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