"By not addressing the global water crises, none of the UN Sustainable Development Goals will be achievable. Clean Water & Sanitation [SDG 6] is interconnected to all SDGs"
The water crisis is a tragedy of epic proportions. A large part of humanity - more than 2 billion people - do not have access to safe drinking water. An equal number of people do not have access to safe sanitation as well.
This post is part 2 of a series of 8 posts by TIGRIS co-founder, Saud Siddique, detailing thoughts on the current global water crisis, and recommendations on how it can be effectively addressed.
2. Successful Public Private Partnerships (PPPs)
There needs to be effective risk allocation among parties (both public and private) towards
those that are best positioned to assume such risks. This optimal allocation of risk is essential
and will lead to:
the maximization of private sector funding with minimum public sector support;
much greater number of projects being completed; and
project funding at the lowest cost of capital.
Since 1990, there have been more than 260 contracts awarded to private operators for the
management of urban water and sanitation utilities in the developing world. PPP projects are
found throughout the developing world, including Latin America, Sub-Saharan Africa, Asia,
Eastern Europe, and the Middle East and North Africa.
Circumstances Leading to PPPs in Water
While each developing country had its own set of reasons for privatizing water, the impetus to do so has been remarkably similar –– a lack of adequate water supply for drinking and sanitation in urban areas.
Most of the population in a metropolitan area (usually the capital) was connected to the water system, but fewer were connected to the sewerage system. The state-owned water utility had not been investing enough to keep up with the pace of growth especially in outlying, usually poorer, areas of the city. Non-revenue water (NRW), i.e., water lost through leaks, or through theft and metering inaccuracies, was high, from 40 percent to as high as 70 percent, compared to 10 to 20 percent in OECD countries, and less than 5 percent in Singapore.
The public water utility did not invest in drinking water and sanitation for a simple reason: it didn't have the money. Inefficient operations, including NRW and politically driven low water tariffs contributed to this lack of funds.
Role of International Development Agencies
International development agencies led the privatization reform initiatives, rather than the government. The international development agencies are still in the best position to champion reforms in the water sector.
Outcome and Consequences
While there was a lot of momentum towards privatization of water utilities in the 1990s, the PPPs focused on large urban centres, and at its peak covered a population of a few hundred million. Generally, privatizations led to a substantial increase in access to water and sanitation in the urban areas served. Quality and reliability of service also improved, and wastage of water was reduced.
But the experience was mixed and some privatizations were not successful. Due to certain fundamental flaws, public confidence in PPPs eroded, and many concessions were terminated.
Why Things Went Wrong
A principal reason why a privatization failed was the poor information base upon which the concession contract was designed. This led bidders to assume that, after winning the bid, they could renegotiate the contract as new information came to light, (which is what happened in many of the PPPs).
Another striking flaw in the concessions was an opaque tariff regime which allowed for opportunistic behaviour by both the private sector investor and the regulator. Tariff regimes created an incentive to expand services first to those consumers who would pay more, thus reducing the pace of expansion to new areas, especially those in poorer neighbourhoods with subsidised tariffs.
Furthermore, almost all the privatizations were led by a few large international water companies (French, British, Spanish) with little local private sector involvement. It is critical to have strong local partners who have their ears closer to the ground and can navigate local government and community issues.
A critical shortcoming was the focus on policy and institutional change with little regard to looking beyond the decision stage. The follow-up is extremely important. Reformers need to be alert to changes in the operating environment, reactions to which can emerge at any step of the policy cycle that may alter the policy and its outcomes. The interactive approach forces one to check these issues more clearly.
Leaving No One Behind
The United Nations explicitly recognizes the human right to water and sanitation and acknowledges that clean drinking water and sanitation are essential to the realization of all human rights. Therefore, excluding the poor from access to safe drinking water and sanitation should be a non-starter, especially when they account for a large share, if not the majority, of the population.
Clearly, if a large segment of the population is left behind in terms of basic services such as water and sanitation, countries are prone to remain “poverty trapped” nations. Even countries which have progressed from least-developed to middle-income status, face difficulty in moving away from the "middle-income trap". Unless basic services, such as water and sanitation, are provided to all citizens, they will be unable to progress from a growth fueled by resources and cheap labour to inclusive growth driven by higher productivity, which is required to move ahead.
Inclusiveness requires social mobilisation and community participation. Failure to consult communities means that the interests of the poor are often not being represented.
What Should Be the Future Strategy?
Despite the controversial reputation of water PPPs, well-designed partnerships between the public and private sectors can turn around poorly performing water utilities in developing countries. Improvements in service and efficiency are essential components to achieving this, leading to better functioning water utilities and, eventually, to improved credit worthiness.
While publicly-owned water utilities in developing countries are poorly managed, it is possible for water utilities to remain completely under public ownership and be well managed. (A rare example of this is the Phnom Penh Water Supply Authority in Cambodia.)
Given the past mixed history of privatization of water distribution companies in developing countries, in the immediate, or near future, transferring most urban water services to private operators is unlikely to be the optimal choice for most developing countries.
A model in which investment is largely funded by public money, with the private operator focusing on improving service and operational efficiency is also not a viable option given fiscal constraints, and the urgency in achieving SDG 6.
Mixed-financing PPP projects, i.e., a variable mix of government and private sources, should be the immediate strategy.
The Kigali PPP BOT project is a good example of mixed-financing PPP. The well-crafted PPP project involves the development, financing, construction, and operation of a 40,000m3/day Bulk Water plant in Kigali, Rwanda. The BOT project sells potable water to the government-owned utility under a 27-year PPP Agreement.
The Kigali project is one of the first projects in sub-Saharan Africa where the private sector was invited to participate in the development, construction and operation of a water production facility. It is considered a model that can be replicated throughout Africa, and indeed, in other developing countries. See Diagram 1 below:
Diagram 1: Kigali Water PPP
