TRENDS AND POLICY OPTIONS No. 8 HELPING TO ELIMINATE POVERTY THROUGH PRIVATE INVOLVEMENT IN INFRASTRUCTURE Public Disclosure Authorized Public-Private Partnerships for Urban Water Utilities Public Disclosure Authorized A Review of Experiences in Developing Countries Philippe Marin Public Disclosure Authorized Public Disclosure Authorized Public-Private Partnerships for Urban Water Utilities TRENDS AND POLICY OPTIONS No. 8 HELPING TO ELIMINATE POVERTY THROUGH PRIVATE INVOLVEMENT IN INFRASTRUCTURE Public-Private Partnerships for Urban Water Utilities A Review of Experiences in Developing Countries Philippe Marin © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Devel- opment / The World Bank. 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HD4465.D44M37 2009 363.6’1091724--dc22 2009019190 Cover: Naylor Design, Inc. CONTENTS FOREWORD xi ACKNOWLEDGMENTS xiii ABOUT THE AUTHOR xv ABBREVIATIONS xvi OVERVIEW 1 Growth of Water PPPs since 1990 2 Performance of Water PPP Projects 2 Key Findings 6 Looking Forward 8 Toward a More Balanced Debate 10 1. INTRODUCTION 13 2. EVOLUTION OF WATER PPPs IN DEVELOPING COUNTRIES 17 The Water Sector in the 1990s 18 Private Financing of Water Infrastructure 19 Evolution of the Water PPP Market since 1990 20 v Early Termination and Expiration of PPP Projects 26 New Operators 29 Conclusions from Trend Analysis 36 3. PERFORMANCE AND IMPACT OF WATER PPP PROJECTS 39 Evidence from the Literature 40 Access 45 Quality of Service 68 Operational Effi ciency 75 Tariffs 107 Overall Performance of PPP Projects 116 4. TOWARD MORE SUSTAINABLE WATER PPPs 123 Lessons for More Effi cient and Sustainable Water PPPs 123 A New Generation of PPPs for Urban Water Utilities 138 Time to Rebalance the Debate 145 APPENDIXES A. Water PPPs Whose Performance Was Reviewed under This Study 149 B. New Connections and Increased Access in 36 Large PPP Projects 155 BIBLIOGRAPHY 159 INDEX 177 BOXESboxes 2.1 Putting in Place a Modern Regulatory Framework: The 1989 Water Privatization in England and Wales 20 2.2 New Private Water Operators from Developing Countries 30 3.1 Coverage Ratio: The Challenge of Estimating an Apparently Simple Indicator 41 3.2 Using Subsidized Water Connection Programs to Expand Access in Sub-Saharan Africa 61 vi Contents 3.3 Introducing Special Incentives for Effi ciency in Affermages in Western Africa 82 3.4 The Concept of the Economically Optimal Level of Leakage: Illustration from Chile 85 3.5 Reducing Water Losses by Combining a Management Contract with Large Rehabilitation Work in Amman, Jordan 89 3.6 The Management Contract: Remarkable Success in Improving Bill Collection in Yerevan, Armenia 95 3.7 Using a Management Contract to Carry Out a Complete Corporate Reorganization of the Water Utility in Johannesburg, South Africa 101 3.8 Raising the Water Tariff While Introducing a Private Operator in Guyana 108 3.9 Multiple Tariff Renegotiations and Sharp Increases for Customers: The Concession in Greater Buenos Aires, Argentina 113 3.10 A Snapshot of Successful Urban Water PPPs in Developing and Transition Countries 120 4.1 How Private Operators Helped Foster Effi cient Public Investment in Affermages in Senegal and Niger 144 FIGURES 2.1 Water Utility PPPs Awarded and Urban Populations Served in Developing Countries, by Region, 1991–2000 23 2.2 Water Utility PPPs Awarded and Urban Populations Served in Developing Countries, by Region, 1991–2007 24 2.3 Status of Water Utility PPP Projects—Active, Expired, and Terminated, by Region, 2007 25 2.4 Urban Populations Served by Private Water Supply Operators in Developing Countries, by Country of Origin, 1991–2007 29 2.5 International Operators in Water Utility PPPs in Developing Countries, 1991–2007 35 3.1 Increases in Coverage under Five Concessions Compared with the National Increase in Argentina 46 Contents vii 3.2 Increases in Water Supply Coverage under Private Operators Compared with That of Public Utilities and with the National Urban Average in Colombia 53 3.3 Evolution of Water Supply Coverage under PPPs in Manila, the Philippines, 1997–2006 57 3.4 Evolution of Household Water Supply Coverage under PPPs in Sub-Saharan Africa 59 3.5 Evolution of Service Continuity in Selected PPPs in Colombia 70 3.6 Gains in Service Continuity under 12 Management Contracts 72 3.7 Evolution of Water Losses under Eight PPPs, by NRW Level and Losses per Connections in Colombia 78 3.8 Water Losses under Private Operators and Public Utilities, by NRW Level in Morocco 79 3.9 Evolution of Water Losses under Private Operators and Public Utilities, by Connections in Morocco 80 3.10 Water Losses under Eight Long-Term PPPs, by NRW Level in Sub-Saharan Africa 80 3.11 Evolution of Water Losses under 14 PPPs, by NRW Level in Latin America 83 3.12 Water Losses under Seven PPPs, by NRW Level in Southeast Asia 86 3.13 Water Losses under 14 Management Contracts, by NRW Level 86 3.14 Increases in Bill Collection Ratio under PPPs in Latin America 91 3.15 Improvements in the Bill Collection Ratio under 15 Management Contracts 94 3.16 Evolution of the Labor Productivity Ratio for 17 Large PPPs 97 3.17 Employment Reduction Associated with Implementation of 10 Large PPPs in Latin America 98 3.18 Effi ciency Gains under Leases-Affermages in Cartagena, Colombia and Senegal 104 viii Contents 3.19 Global Effi ciency Gains under 12 Management Contracts 105 3.20 Example of Effi ciency Gains under Management Contracts in Amman, Jordan and Johannesburg, South Africa 106 3.21 Evolution of Water Tariffs after Entry of Private Operators in Western Africa 111 3.22 Changes in Water Tariffs over 10 Years of Concessions (Eastern and Western Zones) in Manila, the Philippines 115 3.23 Overall Outcomes of Water PPP Projects, by Size of Population Served, 1992–2007 118 TABLES 2.1 Large Water Utility PPPs That Returned to Public Management between 1990 and 2007 27 2.2 Largest Private Water Operators Owned by Investors from Developing Countries (excluding China) 32 3.1 Summary of Study Findings on the Impact of PPPs on Water Utility Performance 43 A.1 Water PPPs Whose Performance Was Reviewed under This Study 150 B.1 New Connections and Increased Access in 36 Large PPP Projects 156 Contents ix FOREWORD In its look back at more than 15 years of experience with public-private partnerships (PPPs) for urban water utilities in developing countries, this book examines the performance of a large sample of PPPs in different regions. Directed at policy makers in governments as well as donors and other stakeholders, its aim is to better understand the contribution of water PPPs to help improve the provision of water and sanitation services to the urban populations of the developing world. This report shows that despite diffi culties in several countries, water PPP has largely passed the test of time. The urban population served by private water operators in the developing world has been growing every year since 1990, reaching about 160 million people by 2007. The positive record on service and effi ciency improvements reaffi rms the value of PPPs, even though the level of private fi nancing did not match initial expectations. Over time, a more realistic market has developed, with a growing number of private investors from developing countries and with contract designs based on a more pragmatic allocation of risks between partners. What emerges from examining the available empirical evidence is that well-designed partner- ships between the public and the private sectors are a valid option to turn around poorly performing water utilities in developing countries. The water sector has many features that set it apart from other infra- structure sectors.