Urban Water Supplies in Developing Countries

Conference Moderator: Bradford Gentry
Assistant Moderator: Jamie James

Introduction

The Internet search for best practices in the urban water sector brought together practitioners, advocates and academics in government and multilateral agencies, private firms, NGOs, and universities in over twenty countries.

The discussion was divided into six parts, each lasting for two weeks. During the first session, the participants introduced themselves and described their work. Over the course of the next ten weeks, the group exchanged ideas and experiences on the following topics (culled from a pre-conference survey of priority issues as part of the application process):

1. Models: What are the different models now being used to increase public-private collaboration in the delivery of urban water services?
2. Regulation: How are governments and users regulating the quality and price of the water services being provided?
3. Finance: How is the increasing private involvement in urban water services being financed?
4. User participation: How can increased private involvement best meet the needs of users and citizens, particularly the poor?
5. Capacity needs: What additional capacities are needed by governments, businesses and civil society to increase the effectiveness of their cooperation in the urban water sector?

The objective of the conference was not only to stimulate debate, but also to offer some guidelines, and constructive examples of how the private sector can participate in providing critical urban infrastructure. In the discussion of models, several types of informal arrangements involving community service providers were combined with the traditional structures available to private operators, managers and investors.

Some of the highlights of the discussion are excerpted below.

Models for public-private collaboration in the provision of urban water services

This topic generated a wide range of descriptions of private involvement in the water sector. They ranged from group taps and community bore holes, to privatisation in a U.S. city (Milwaukee), as well as in Argentina and the Philippines. Ideas for future innovations included expanding private sector investment in smaller cities through bundling of markets and establishing linkages between informal (community-based) and formal structures.

Moderator Brad Gentry initiated discussion on the types of approaches to private sector participation with a list of broad categories, including:

1. Informal cooperation
2. De-centralized informal service providers, including community-based approaches
3. Design and construction contracts
4. "Petite privatisation," including operation and maintenance (affirmage) contracts, in which investment obligations remain with the public sector;
5. "Core" public-private partnerships, involving public and private joint shareholdings
6. "Grande privatisation", which can be divided between Build-Operate-Transfer (BOT) arrangements for developing water treatment facilities and system concessions, including distribution systems and tariff collection
7. Full privatisation through sale of the water assets (as demonstrated by the England and Wales model), where the main function and responsibility of government is arms-length regulation.

The choice of any particular approach depends on local circumstances, needs and priorities.

In many places where formal sector services prove to be inadequate, community initiatives may be required to fill a void. Madeleen Wegelin-Schuringa of the IRC International Water and Sanitation Centre identified five alternative de-centralized informal water supply providers:

1. "Group taps" in Central America, Indonesia and India
2. "Communal water point service" and "user associations" in Malawi
3. "Vending kiosks" in Dosso, Niger
4. "Autonomous distribution nets" in Tegucigalpa, Honduras
5. Autonomous "micro-supply" systems in Cali, Colombia.

For more formal, government initiated approaches, one suggestion was to consider several criteria in order to differentiate among various types of agreements:

1. The number and kind of services covered by the agreement
2. The number of different systems the agreement covers, including possible linkages between informal and formal service providers
3. The locus of responsibility for financing and/or planning capital investments (with the private company or the government)
4. The mechanisms for compensating the private company for its services, such as with a fixed management fee or through some arrangement based on collected revenues.

The following criteria were mentioned as relevant for evaluating structures over time:

1. Sustainability
2. Replicability
3. Level of hidden or explicit subsidies
4. Cost recovery
5. Cultural sensitivity and fit.

Major themes of the water discussion

It would be premature to distill out qualitative best practices from the exchanges, as private sector participation in the urban water sector is still in an embryonic stage. This is not to say that robust cases of private sector operation and management do not exist. There are numerous examples. However, the scale of the demand for better urban water supply services is so great, and the social and economic conditions of individual cities is so diverse, that one could venture to say that the best practice for any given situation has not yet been invented.

With that proviso in mind, the conclusion of the Internet Conference offers an opportunity to draw out important themes that public-private partnerships should take into account when implementing water projects. The following is a list of the major issues that emerged from the water discussions.

Water as a social and economic good. Although this principle still generates some controversy based on cultural interpretations of the rights of a nations' citizens to drinking water, private sector participation will not work in situations where true costs and fair profits are precluded. Even public provision of water will fail to meet needs if costs are not recovered. Furthermore, where water resources are scarce or dwindling, the absence of market forces in the water sector will likely lead to unsustainable levels of consumption. The bottom line is that the principle of water as an economic good requires balancing the rights and best interests of consumers with the interests of the water providers and the natural limits of the resource.

Political will. As long as citizens do not acknowledge or comprehend the need for providers to recover real (economic) and hidden (resource scarcity) costs, politicians will face strong opposition to water sector reform. Without consumer awareness, tariff increases will be unacceptable. Where amalgamations offer the best opportunity for supplying smaller cities with reliable drinking water systems, local politicians have to be willing to work together. A case has to be made to politicians and government officials responsible for lagging water supply systems that improved access to water will spur economic activity and growth.

Risk. The conference highlighted different aspects of the risk calculus that remains the paramount concern for private investors and, together with higher transaction costs, is the principle obstacle to investment in smaller cities. There is some concern that private investors do not assume enough risk, in part, because they tend to invest a small percentage of overall equity. Governments have to improve their role as facilitators, regulators and guarantors, and financing institutions should seek innovative financing mechanisms.

Willingness-to-pay. The poor demonstrate a high willingness-to-pay for water, as they dedicate a higher percentage of their income to obtaining water than their wealthier neighbors. This fact should mitigate some risks associated with investment in poorer areas and demonstrates that water supply systems can be income-generating ventures. However, the ability-to-pay needs to be studied closely prior to establishing fixed tariffs and connection fees.

Cash flow. Regulations have to balance the needs of users with the investor's reliance on cash flow to bolster investments and guarantee financing arrangements.

Hybrid systems. Where poorer neighborhoods reflect variable capacities for paying water fees, universal household coverage should be compromised in favor of adequate community-based supplies. Intermediaries can offer water services in a manner that is acceptable to citizens who would otherwise be neglected. Informal community groups have demonstrated that they can play a role in providing water supply services. Some service for all is better than all service for some.

Flexible arrangements and contracts. Water sector arrangements have to be able to evolve over time to meet changing demands and to match urban growth patterns.

Waste water. As urban populations increase and overall access to household or communal water connections rises, the need to remove waste water will also increase. Currently this matter does not receive enough attention.

Conservation. More attention needs to be devoted to managing natural resources to protect watersheds, reduce overconsumption, and manage water supplies sustainably.

Information. Practitioners and businesses need to share knowledge. The few private multinational water companies have to balance a moral obligation of providing information that can help reduce suffering in poorly served urban centers with the business advantages of withholding information from competitors. Governments and civil society have to make sure that users are knowledgeable about water consumption and that they can perform tasks to increase overall access within their communities. Although the IRC Water and Sanitation Centre of the Netherlands has prepared numerous case studies of community participation in water supply services, there are few studies of private sector projects other than the main examples popular in World Bank literature (U.K., Buenos Aires, Guinea, Malaysia, Manila). This conference was just the beginning of what should be a sustained effort to document private practices in urban water supply systems.

Urban Planning. Risks associated with insecure land tenure and variable infrastructure conditions in urban settlements and peri-urban areas are significant obstacles to capturing private sector investment to meet the needs of the poor. Governments need to rationalize tenure and settlement patterns so that long-term planning on the community and municipal level can start to shape urban growth.

The Role of Development Institutions. Given the imbalance that occurs when sophisticated multinational corporations negotiate contracts with inexperienced government officials, objective development agency representatives can offer important services to level the playing field.

Accountability. The distrust among users and public advocacy groups towards dealings between governments and the private sector stems as much from the corruption of civil servants in high offices as it does from the perception of profiteering corporations. These fears can be mitigated under circumstances where all interactions are open and accessible to public comment and where third parties (development agencies perhaps) can act as honest brokers. For PPP's to work with a commodity as vital as water, all parties have to be accountable.

Inter-sectoral partnering. The best solutions will probably be those where everyone makes an investment: government as a facilitator and shareholder; private operators as managers and principle investors; development agencies as good will brokers; development banks as partial financiers; poor communities' as active participants; and all users as customers paying real cost fees.

One of the leading private sector providers of water services in the world is Lyonnaise des Eaux. It is fitting, therefore, to conclude with remarks provided by a company representative who participated in the Internet Conference. Dr. Ian Robson writes:

The one thing that LdE will say is that every contract and every location is different - due to different environmental, psychological, technical, regulatory, historical and many other factors. What is regarded as acceptable or advanced in one place, can be construed as exploitative and/or manipulative in others. This makes it sound almost like a matter of selecting suitable project tools from a tool bag, but equally often the existing tools are inappropriate and new and location-specific ones must be designed. One final comment is that the tools, which are seen as ideal in 1998, are almost certain to be superseded (by technical, legislative, governmental, ethical and other changes) over the lifetime of these contracts (typically 20-30 years). A fair bit of the dialogue within this conference has been about the best way to do things. In reality, however, these contracts are living, changing agreements. They commence with the need to improve the existing situation (hence initial priorities are set), but continue thereafter by maintaining improvement over the long-term in accordance with the host municipality's ongoing wishes.

Dr. Robson's remarks encapsulate the real challenge - there is no prescriptive remedy that can be universally applied to the water sector. A process-oriented approach that focuses on partnerships is more likely to succeed than a product-oriented one, as systems are bound to become antiquated in a rapidly changing world. Public-private partnerships, therefore, will have to be dynamic, open-minded and participatory in order to identify, design and implement solutions that will meet the needs of tomorrow's urban citizens.

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