What is the Actual Performance of Public-Private Partnerships for Urban Water Utilities in Developing Countries?
By examining progress achieved and problems encountered by 65 public-private partnerships (PPPs) implemented on different continents, a recent World Bank study is providing some objective facts from an analysis of the practice. Overall, the performance achieved by PPPs in terms of improving access, service quality and operating efficiency has been quite satisfactory, even though the level of private investment has proved disappointing.
Public-Private Partnerships for urban water utilities in the developing world is a rather conflictive topic. PPPs were widely promoted by International Financial Institutions and donors back in the 1990s to turn around poorlyperforming water utilities and help improve services for the population. Yet the problems many large PPP projects have encountered during implementation, combined with a series of highly publicized contract cancelations in recent years, have shed doubts on the validity of this approach for developing countries.
Need for a comprehensive review
Unfortunately, the debate about water PPPs has often been more about ideology than objective data. While a rather large body of literature has been published about PPPs in the water sector, there is a lack of quantitative data and indicators upon which to judge the actual performance of PPP projects. After more than 15 years of experience in the developing world, the time had come to carry out a comprehensive review of the overall performance of water PPPs. Between 2005 and 2007, the Water Anchor Department of the World Bank carried out a major study – with financial support from PPIAF – to gather and analyze performance data from 65 water PPPs for urban utilities in 30 developing or transition countries. The sample represented close to 80% of the population served by private operators in developing countries since 1990, under contracts signed before 2003 and in place for at least 3 years.
The analysis focused on the improvements achieved in access, service quality and operational efficiency. This new study provides a fresh perspective on the contribution water PPPs make in developing countries, and brings several important findings for water practitioners (Marin, 2009).
The first of these finding is that – contrary to a rather widespread belief – water PPPs in the developing world are not in retreat. Out of about 260 PPPs for urban water utilities awarded in developing and transition countries in the last 15 years, as many as 84% of them were still active by the end of 2007, and the overall rate of early contract termination stands at just 9%. In spite of several large contract cancelations (in Buenos Aires and La Paz for example), the population served by private water operators in developing countries has in fact been growing every year since 1990 and rose from about 94 million in 2000 to 160 million by the end of 2007. In recent years, several large countries have started experimenting with water PPPs on a large scale, including China, Russia, Malaysia, Algeria, Ghana and Cameroon. What has been going on since 2001 is not so much a downturn but a change in the market. Several large international operators have withdrawn, but they have gradually been replaced by local private investors that entered the business. Water PPPs run by private water operators from developing countries have accounted for the bulk of market growth since 2001. They now represent more than 40% of the market and as many as 28 have been identified that each serves at least 400,000 people. If anything, the market for water PPPs in developing countries has become more mature. There is a more diverse supply side and private operators have generally learnt their lesson: they have become much more aware of the risks inherent to water PPP projects in developing countries when they submit bids for new contracts.
The second major finding is that, overall, the performance of water PPP projects has been quite satisfactory.Even though PPPs have proved to be complex arrangements, often difficult to implement in the context of developing countries, many projects have achieved sizeable improvements in terms of access, service quality and/or operational efficiency. While the total amount of private investment2 in the water sector has been disappointing, water PPP projects have provided access to piped water to more than 24 million people over the last 15 years. This is not insignificant when considering that private water operators served just 7% of the urban population in 20073.
Experience in Colombia and Western Africa – as well as with many management contracts – shows that PPPs can help reduce water rationing and improve service quality for populations. The analysis of the evolution of water losses (non-revenue water), bill collection and labor productivity shows that PPP projects can be efficient in improving operational efficiency. The current low mood about water PPPs is probably more the result of exaggerated early expectations back in the 1990s about what private operators could achieve than a reflection of their actual contribution to improving services. Successful PPP projects can be seen on all continents, for instance the national utilities in Cote d’Ivoire, Senegal and Gabon, the concessions in Eastern Manila (Philippines), Macao (China) and Guayaquil (Ecuador), as well as many PPPs for municipal or provincial water utilities in Morocco, Chile, Armenia, Colombia, Brazil and Argentina.
The third important finding, when looking at what worked and what did not work in practice, is that the most suitable PPP model for the developing world seems to combine public financing of investment with private operation which is, incidentally, the approach that has been adopted for more than a century by municipalities in France and Spain.
This suggests a new paradigm for PPPs in water utilities: they should not be about attracting private money, but rather about using private operators to improve services and efficiency. Under such arrangements, private operators do have a positive financial contribution, but it is largely indirect. Improving service quality and operational efficiency generates a “virtuous circle” whereby the utility graduallyimproves its financial situation and creditworthiness, allowing it in turn to gain easier access to financing for investment in expansion and rehabilitation. The most successful water PPPs are essentially long-term contracts with hybrid financing arrangements and an optimal mix between government, donors and private financiers depending on the case. Such hybrid schemes have taken various forms in practice, such as with the affermage contracts in Senegal, Côte d’Ivoire, Niger and Cameroon, the mixed-ownership companies in Cartagena (Colombia) and La Havana (Cuba), or the concessions with public funding in Colombia, Cordoba (Argentina) and Guayaquil (Ecuador).
No magic formula
While this new study confirms that PPPs are a viable option for reforming the urban water sector in developing countries, it is also clear that it is not a magical formula that can solve the sector’s many problems. PPPs have proved to be challenging endeavors, and they should not be the sole option on the table for governments seeking to reform their urban water sector. Reforming poorly performing water utilities under public management is an equally viable option: there are well managed public water utilities in the developing world, and several donor-supported projects based on public management have worked well (as in Burkina Faso, Uganda and Phnom Penh, Cambodia). As for PPPs, they can be made to work and bring very sizeable benefits, provided they are properly designed and implemented. Experience over the last 15 years has taught us valuable lessons about what works and what does not. Other approaches for involving the private sector also exist and are gaining acceptance in many countries, such as performance-based service contracts, subcontracting and Build-Operate-Transfer (BOT) schemes for treatment facilities. When it comes to improving water and sanitation services for populations, decision-makers need a choice of options and the private sector does have a lot to bring.
¹ This short article is a personal contribution by the author. It is a short and incomplete digest of the findings developed in the study of reference currently being published by the World Bank by the same author. The positions expressed do not necessarily reflect the view of the World Bank, PPIAF, the Executive Directors of the World Bank and/or the governments they represent.
² Keeping in mind that not all PPPs involve private investors
³ Up from less than 1% of the urban population back in 1997, and 4% in 2003
References / Marin, P., 2009. Public-Private Partnerships for Urban Water Utilities – A Review of Experiences in Developing Countries, World Bank Publications, Washington, forthcoming.