Private sector participation in water and sanitation: promises and pitfalls

The perception that governments cannot efficiently provide water and sanitation (WSS) services has led to greatly increased private sector participation (PSP). Are regulatory regimes ensuring that service providers do not exploit their customers? Can PSPs save water and make it safer? Are the poor getting basic services?

An overview report from environmental economists at the International Institute for Environment and Development looks at recent experience in five cities (Manila, Buenos Aires, Cordoba, Mexico City and Abidjan) which have gone down the private road.

Water sector PSPs are growing fast as globalisation and deregulation allow European and North American firms to enter new markets. In 1990-1997 new private sector capital expenditure on WSS projects was $25billion compared with $297million 1984-1990. By 1997 there were 97 WSS PSPs in 35 developing countries.

PSPs can take many forms:

• Service contracts for limited services (meter reading, leak detection, billing).
• Management contracts in which governments retain financial and legal responsibility for delivery.
• Leases: renting a system for a stipulated period.
• Build, Own, Operation and Transfer (BOOT) arrangements, increasingly used to build new wastewater treatment facilities.
• Concessions, the most popular kind of PSP, usually giving the concessionaire monopoly service provision for a fixed period.
• Divestiture, partial or total, of state ownership.

The report recognises that there are numerous examples of efficiently managed public WSS utilities in developing countries. As far as PSP performance goes, experience to date has been mixed:

• There is little empirical evidence that PSP leads to economic efficiency. A study in Buenos Aires found that the water company is performing worse than other privatised utilities.
• Excessive groundwater depletion has not been checked by privatisation.
• The general tendency to provide free raw water to concessionaires is not conducive to creating a climate in which the scarcity value of water is reflected in costs faced by service providers and users.
• In many cases the expectation that householders will be able, or desire, to pay for connections to new sewerage systems, has been unrealistic.

The policy implications emerging from the report include :

• Contracts require more than technical specifications. Household surveys are needed to determine preferences and ability to pay.
• Service improvements in poor neighborhoods would be more affordable if there were increased access to credit and alternative payment schemes.
• Better cooperation is needed between different agencies involved in the regulatory environment.
• The need, as PSPs spread to countries with more extreme urban poverty, environmental degradation and weak or non-existent regulatory capacity, for existing forms of PSP to be modified, not simply replicated.
• Setting targets to reduce leakage rates, while at the same time providing raw water at zero cost, is inefficient and a burden to the regulator.
• For many cities the goal of universal water and sewerage coverage is decades away. Interim pro-poor measures are required to oblige operators to provide and manage public standpipes and septic tanks in poor neighborhoods pending their incorporation in city-wide WSS schemes.

Source(s):
‘The regulation of private sector participation in urban water supply and sanitation: realising social and environmental objectives in developing countries’, Discussion Paper 99-01, Environmental Economics Programme, International Institute for Environment and Development by Nick Johnstone, Libby Wood and Robert Hearne September 1999 Full document.

Funded by: Danish Development Agency (DANIDA), Swedish International Development Cooperation Agency (SIDA)

id21 Research Highlight: 26 September 2001

Further Information:
Libby Wood
Environmental Economics Programme
International Institute for Environment and Development
3 Endsleigh Street
London WC1H 0DD
UK

Tel: +44 (0)20 7388 2117
Fax: +44 (0)20 7388 2826
Contact the contributor: elisabeth.wood@iied.org

Contact the contributor: Frances.Reynolds@iied.org

Environmental Economics Programme, IIED, UK

Other related links:
Insights #37 'Tapping the market. Can private enterprise supply water to the poor?'

'Drinking Water and Sanitation 2000 in the Americas'

WHO focuses on Water and Sanitation

'Water Supply and Sanitation Assessment 2000'

See the Water Supply and Sanitation Collaborative Council

The International Water and Sanitation Centre, Delft, provides low-cost water supply and sanitation

The International Private Water Association promotes opportunities for private sector participation in water utilities