privateP UBLIC POLICY FORsector THE NOTE NUMBER 248

JUNE 2002 Multi-Utilities and Access

Sophie Trémolet

This case study is part of Can Private Multi-Utilities Help Expand Service to Rural Areas? a series reviewing business models for private In 1997 awarded the first real concession in Africa, under a companies providing contract that introduced coverage targets for expanding service to infrastructure services to rural customers in previously unconnected rural areas. SEEG, the new concessionaire, developing countries. The offers both water and electricity service, with the electricity business case studies assess factors driving the performance cross-subsidizing the less developed water business. Five years on, the of private companies in a concessionaire has performed well in established service areas, often variety of rural contexts and sectors and under exceeding targets, but has made less progress in more isolated areas. diverse legal and This Note assesses lessons for the design of contracts with incentives regulatory arrangements. for expanding service beyond the immediate circles of major urban The objective is to identify lessons that can inform centers—and on the potential role of multi-utilities. the design of private rural In July 1997 SEEG (Société d’energie et d’eau du The company, owned principally by Vivendi infrastructure schemes. The primary funding for Gabon) signed a 20-year concession contract with since its privatization in 1997, earns most of its this series came from the the government of Gabon for operating both revenue from electricity sales in and Public-Private water and electricity service throughout the coun- Port-Gentil (figure 1). These sales subsidize 1 Infrastructure Advisory try. SEEG grew out of private municipal compa- water and electricity service in the rest of the

PRIVATE SECTOR AND INFRASTRUCTURE NETWORK Facility, a multidonor nies that provided water and electricity service in country. SEEG manages its business on the basis technical assistance fund. the two main urban centers —Libreville (the cap- of operating regions (five until 2000, when the The World Bank task ital) and Port-Gentil (the main port, serving the two smallest were combined into one). team for the case studies country’s primary oil-producing region)—with was Alan Townsend, half the population. Rapid expansion followed Introducing private participation Clive Harris, Lorenzo the nationalization of SEEG in the early 1960s, so The signing of the concession contract was pre- Bertolini, Michael Schur, that by the time the company was privatized in ceded by about 10 years of preparation. This Juan Navas-Sabater, and 1997 it provided electricity to 39 centers and water period was longer than might be expected, but John Newstead. to 32. Given Gabon’s small population and dis- it allowed important reforms, such as defining a persed rural communities (a population of just legal framework, raising tariffs to levels reflect- over 1 million, with four people per square kilo- ing costs, and reducing staffing between 1989 meter on average), some of these centers are tiny, and 1997. Once the groundwork had been laid,

THE WORLD BANK GROUP with just over 1,000 inhabitants. the transaction proceeded smoothly and trans- MULTI-UTILITIES AND ACCESS CAN PRIVATE MULTI-UTILITIES HELP EXPAND SERVICE TO RURAL AREAS?

Water and electricity customers and sales The contract includes regional coverage tar- Figure revenue of SEEG, 2000 gets defined by the percentage of the popula- tion with access to the network as well as a list of Revenue per customer new centers to be served (30 for water and 21 (thousands of CFA francs) Customers (thousands) 1 for electricity). The targets reflect the charac- 800 80 teristics of SEEG’s systems: for electricity, there 700 70 are three interconnected networks to cover the 600 60 main urban areas (powered by hydroelectric 500 50 plants), while the rest are isolated centers 2 400 40 served by small thermal generators. For water, 300 30 centers are served from local water points. Some aspects of the contract remained unde- 200 20 fined at award. For example, no dedicated regu- 100 10 latory body was set up, so the contract was 0 0 Libreville Port- Oyem Tchibanga administered by a government ministry. When Gentil the government entered the concession con- tract, it lacked key information. Rather than Water revenue Water customers per customer invest time in gathering information before- Electricity revenue Electricity customers hand, the government decided to set aside a per customer transition period of two and a half years during

Note: The figure shows SEEG’s five operating regions, each centered around the city from which it would agree on key contractual docu- which it takes its name. Source: SEEG annual reports. ments with the company. During that period the company would not be subject to any penalty parently. Vivendi won the concession tender on relating to performance. Five years down the the basis of a proposed 17.25 percent price line, however, both parties have clearly overshot reduction for water and electricity service. It the transition period, and important regulatory later acquired 51 percent of SEEG’s shares and tools are still being prepared or negotiated simultaneously signed the 20-year concession (such as the inventory of assets, the cost account- contract. A public offering of SEEG’s shares fol- ing system, and annexes setting service quality lowed, organized by banks. standards). The contract retained a single national tariff Designing the contract for residential customers—the backbone of a SEEG’s concession contract is interesting in sev- national utility with cross-subsidization. But it eral respects. It is mainly an output-driven con- differentiated medium-voltage electricity tariffs tract, defining quality requirements and to reflect the large variations in production coverage targets as the main drivers of private costs (medium-voltage tariffs for isolated cen- investment. The private operator is obligated to ters are roughly twice those on the intercon- invest a minimum of US$135 million in rehabili- nected network, to reflect the high costs of tation (60 percent in water). Besides operating thermal generation compared with hydroelec- and renewing the network, SEEG’s main con- tric generation). In addition, the operator can tractual obligation is to expand it to previously modify the tariff structure every year as long as unconnected areas, by increasing the density of certain tariffs (including social tariffs) do not the network in centers where it already exists or increase by more than 1 percent a year. expanding the service to new centers. It has infor- The contract provides flexibility on service mally committed to investing another US$130 standards, to avoid overburdening the company million over the life of the contract, mainly in with unnecessary requirements in rural areas and increasing network density and extending the to keep costs down. However, the ministry has network. In addition, given the size of the invest- been reluctant to grant more flexibility in subse- ment needs, the government has chosen to take quent negotiations. Within exclusive service areas part in major network investments. water and electricity resellers are tolerated, but Electricity coverage rates: targets and performance Table (percentage of population with electricity connection)

Observed rate Target rate Actual rate Target rate 1 Region in 1993 for 2000 in 2000 for 2015 Libreville network 68.50 73 74 83 Franceville network 63.50 67 90 80 Louetsi network 49.60 54 76 66 Port-Gentil network 81.00 83 91 91 Isolated centers served in 1996 33.00 65 89 60 3 Isolated centers to be served 0 15 0 54

Note: The regions in the table correspond to those used in the concession contract to define coverage targets, which are based on areas around existing networks or isolated centers. Source: SEEG.

Water coverage rates: targets and performance Table (percentage of population with water connection)

Observed rate Target rate Actual rate Target rate 2 Region in 1993 for 2000 in 2000 for 2015 Libreville network 49.30 53 62 70 Franceville network 38.60 43 58 65 Port-Gentil network 37.70 43 50 63 Isolated centers served in 1996 33.00 38 40 60 Isolated centers to be served 0 12 7 54

Note: See note to table 1. Source: SEEG. neither the operator nor the ministry has tried to formance, it has been a good payer since sign- develop arrangements with these small-scale ing a debt moratorium in 1999. operators to speed service expansion. The only The private operator has consistently im- significant interaction SEEG has with small busi- proved service quality and reduced tariffs ness is through local vendors selling prepaid cards substantially. It has already made 80 percent of for electricity services in isolated villages. SEEG the contractually required investments, self- uses two types of prepaid meters for electricity financing all of them. It has posted good prof- service: one for urban areas, where customers its since the start of its operations and paid its obtain a code from the nearest SEEG branch to shareholders higher dividends every year (divi- add to their credit, and one for rural areas, where dends rose from a contractually guaranteed 6.5 customers purchase prepaid cards from local ven- percent of the share price in the first year of dors to recharge their meters. Prepaid metering operations to 20 percent in 2000). Finally, the cuts the costs of customer management substan- company has managed to become truly inde- tially for SEEG. But the benefits of this system pendent in the face of potential political pres- could be even greater if it were also used for water sures, as demonstrated by the improved service. payment record of government customers. The private operator is gradually fulfilling one Improving performance and coverage of the main objectives of the contract, to expand Gabon can be seen as a relatively successful case service in small towns and rural areas. It has met of private sector participation, one in which or exceeded its targets for 2000 (and in some strong government commitment has been key. cases those for 2015) in all regions except the Although the government was initially slow to centers that were previously unserved (tables 1 pay its bills, undercutting the company’s per- and 2). In centers where it missed the targets, the MULTI-UTILITIES AND ACCESS CAN PRIVATE MULTI-UTILITIES HELP EXPAND SERVICE TO RURAL AREAS?

reason was often delays in government invest- SEEG’s revenue, it will receive 60 percent of ments, either in roads (indispensable for reach- pledged investments over the life of the con- ing the villages) or in electricity transmission tract. So water customers benefit from both networks. Coverage targets have provided effec- lower tariffs and greater investment. tive incentives for quickly increasing network In villages and towns connected to electricity view density in newly served areas. The company has but not to water (often the case, since electric- point carried out active commercial campaigns in ity tends to precede water), the benefits can be small villages to encourage people to connect substantial. But in some places the benefits have is an open forum to and has developed innovative technologies (such been limited by lack of coordination with the encourage dissemination of as prepaid meters) to reduce the costs of provid- government, because while water service in a vil- public policy innovations for ing service to these difficult-to-reach areas. lage may be managed by the ministry, electric- private sector–led and In rural areas the private operator offers ser- ity service may be SEEG’s responsibility. market-based solutions for vice far superior to that provided by the gov- Several factors have made multi-utility provi- development. The views ernment outside SEEG’s service area and at sion possible at a national level. During periods of published are those of the prices that remain affordable because of the public ownership SEEG was already integrated, authors and should not be high degree of cross-subsidization. Although and when it was privatized a single contract was attributed to the World the government is nominally responsible for signed for both services. In addition, the system is Bank or any other affiliated providing service in rural areas, lack of financial relatively small, so combining the services proved organizations. Nor do any of resources and poor choice of technology have crucial for achieving economies of scale and the conclusions represent led to ineffectiveness. scope, particularly in rural areas. Moreover, the official policy of the World potential for competition appeared small, partic- Bank or of its Executive How multi-utility provision can improve ularly in electricity generation. Directors or the countries rural service Gabon’s experience with a multi-utility con- they represent. For Gabon multi-utility provision appears to cession offers two lessons. First, when services have brought several benefits, although they are are already integrated, the benefits (and costs) To order additional copies difficult to quantify precisely and the dynamics of the integration should be closely reviewed, to contact Suzanne Smith, are not yet fully understood. First, combining avoid jumping too quickly to the conclusion managing editor, water and electricity service allowed cost reduc- that unbundling is preferable. A more detailed Room I9-009, tions through the sharing of resources. These cost-benefit analysis could help in understand- The World Bank, cost reductions were especially evident at the ing the merits of combining utilities. Second, if 1818 H Street, NW, Washington, DC 20433. center, with shared headquarter functions and services are separated at the national level, inte- centralized planning and operations. At the grated contracts with small private operators Telephone: regional level commercial functions can be could be signed at the local level to make the 001 202 458 7281 shared, and so can some technical functions if most of multi-utility provision in rural areas. Fax: personnel can be trained to manage both water Innovative technologies (such as prepayment) 001 202 522 3181 and electricity systems. and community relations can be used to make Email: Second, multi-utility provision has allowed the rural service provision both more sustainable [email protected] creation of a platform for more integrated invest- and more attractive for private operators. ment planning and coordination with key stake- Copyedited and produced by holders (such as ministries and communities). Communications And it has placed SEEG in a stronger position to Development Inc. negotiate prices in the notoriously uncompetitive Note local markets for construction services, enabling 1. The International Finance Corporation (IFC) Printed on recycled paper it to reduce contracting costs by about 30 percent. acted as transaction adviser. Finally, since SEEG is mostly an electricity business, cross-subsidization can help bring the Sophie Trémolet is a consultant at Environmental Management water sector up to speed with the electricity sec- Resources in London ([email protected]). tor. The water sector, a lower revenue genera- tor, often lags behind in investment. But even though water accounts for only 15 percent of This Note is available online: www.worldbank.org/viewpoint/