B. Public-Private Partnerships: Poverty Reduction & Community Participation

Working Group I

I. General Discussion

Tariffs and Standards

A typical argument used to support cost recovery pricing is based on evidence that residents of poorer urban communities invariably end up paying more for their water supply services than the middle class households that live in the City Center, largely because many of them are not connected to the central grid and have to rely on informal water vendors who cart water into unserved areas at comparatively high prices. These circumstances suggest that higher tariffs and full cost recovery are viable since they demonstrate an intrinsic willingness-to-pay for adequate levels of services. The murky part of the analysis lies in matching willingness-to-pay with acceptable levels of service. Higher tariffs may be practical - and necessary - in order to obtain better quality service, but tariffs that surpass consumers' willingness-to-pay threshold can also lead to de-investment. When this occurs, the whole system can collapse.

PPP projects need to understand the many factors that ensure long-term sustainability. The point at which private investors are prepared to invest private capital represents a good indicator that a project or system meets sustainability criteria. In the past, when donor agencies contributed to the establishment of high cost services that required large revenue streams, they were not necessarily developing the kinds of profitable enterprises that were a) affordable to users, nor b) attractive to private investors.

Today, some PPP experts and private operators are suggesting that it may be necessary to lower the service standards (for example, Lyonnaise des Eaux, the leading private water supply investor, has proposed that "some services for all consumers" is better than "all services for some consumers"). Is this fair? Should people have to accept lower drinking water quality or service standards simply because they are poor? How ethical is it, especially for European donors and investors, to provide services at levels below those enjoyed back home?

In answering these questions, discussion focuses on several levels of standards and on establishing appropriate priorities within the different categories. These include: 1) technical standards that determine the kind of hardware used; 2) levels-of-service that prescribe how much water is accessible to a household (household tap, stand pipe, and kiosk, for example); and 3) chemical and biological requirements that determine actual water quality reaching the end user.

Sometimes high standards can prevent otherwise constructive initiatives involving private sector participation. If the system and its standards are left up to the government, then it will likely be a very expensive system. High standards are sometimes used as an excuse by municipal governments to explain why they are unable to provide any services at all in some areas. Very often the political will to find low cost solutions is also lacking.

Bringing the consumers into the process of identifying appropriate levels of service could help to ensure that people get what they need. If there is to be a minimum level of services agreed upon, then the decision is best left to the people living in the beneficiary communities. In Lima, for example, one community chose waste collection once or twice a week as opposed to elsewhere in Lima where the rubbish is collected twice daily. This resulted in a lower cost service and increased likelihood for cost recovery.

What are consumers willing to pay? In Addis Ababa one project targeted the neediest consumers. Local residents there were willing to invest relatively large amounts of capital and accepted the associated financial risks because they expected better quality of service. In addition, calculations of a community's or household's willingness-to-pay should include opportunity costs borne by consumers.

The role of subsidies?

The role of subsidies has been debated. On the one hand the experience of some professionals suggests that subsidies can benefit the wrong constituencies (middle or high-income households and industry, for example). There is additional evidence that subsidies do not really matter for the poorest 10-20% of the urban population, as these residents are without services altogether.

On the other hand, elected municipal leaders may have a strong political interest in limiting the financial burden on the poorer communities. According to the Mayor of Colombo, poor urban residents are politically active and turn out at the voting stations more often than their upper middle class counterparts. It is therefore politically expedient to provide subsidies for those communities who may not even be able to pay taxes.

Some countries, namely Chile, allow residents to apply for a subsidy from the government to meet their service payments. This approach is useful as a means of separating out real costs and subsidies. If subsidies are going to be applied, what is the rationale for hiding them? Why not make them explicit?

In the CIS, there has been a sharp increase in water borne diseases. Currency crises and the complicated relationships between national and local governments complicate investments in maintenance, expansion and renovation of existing services. One approach for fixing the water problem has come from the industrial sector, which provides cross-subsidies for household consumers.

Problem with supply side setting the standard.

If the demand does not drive the process for selecting service levels and options, there is a risk that distorted priorities will lead to inefficient outcomes. Some potential distortions include the following:

• Traditional suppliers do not make full use of all cost reduction options because they may not have adequate incentives;
• Communities not involved enough in defining standards may modify their consumption levels;
• High standards of formal enterprises may be much costlier than what end users are willing to pay.

II. Study Questions

Working Group I participants contributed the following list of questions for follow-up research and for consideration by decision-makers deliberating private sector participation in urban environmental services:

• Compared to the public sector acting alone, what is the relative potential for services provided by PPP-type arrangements to reach the poorest of the urban poor?
• Generally speaking, what is the capacity of local Community-Based Organisations?
• To date, who has really benefited the most from PPPs (the poor, the private sector, municipalities, middle-income households)?
• How can PPPs balance participation and utility management?
• How can PPPs integrate the informal sector?
• How can cost recovery pricing avoid being regressive and leading to social exclusion? How does cost recovery pricing hurt or benefit the poorest of the urban poor?
• How much does successful PPP development depend on good governance?
• What is the appropriate balance between adequate levels of service provision and affordability?
• What characterises the best practices interface between community-based organisations and private business involvement?
• Is it possible to force a private service provider to provide services to poor areas (for example, conditionalities attached to macro-level financing arrangements)?
• What impact does PPP development have on job creation?
• What is the best way to start a dialogue between the government and communities?
• How should PPP projects distinguish between financial and human capital?
• How can PPPs balance local interests and the interests of the larger metropolitan area?
• Who pays for facilitating the negotiations between the public and private sectors, especially given the historical distrust between the two?

Home  |  About PPPUE  | Innovative Partnership Grant  |  Global Learning Network