Non-governmental Organisations Major Group - 2nd World Water Forum

Background Paper for the plenary 'WATER AS AN ECONOMIC & SOCIAL GOOD'

PRIVATE SECTOR PARTICIPATION IN THE WATER SECTOR

Libby Wood, Environmental Economics Programme

International Institute for Environment and Development

Increasing private sector participation

Traditionally, the provision of water supply and sanitation (WSS) services in developing countries has been the responsibility of governments. Substantial private sector involvement was considered inappropriate given the public good and basic need characteristics of water and sanitation, and the monopolistic tendencies of the sector.

However, in recent years, there has been a large increase in private sector participation (PSP) in the provision of WSS, largely driven by a desperate need for increased capital investment. In the majority of developing countries, rapidly growing populations, a reduction in assistance for WSS from international development agencies and severely constrained public sources of finance have all contributed to making it increasingly difficult for governments to bear the costs of system rehabilitation and expansion. In addition to the need for capital, the motivation for PSP has been driven by a belief that private sector providers may be more efficient, reducing costs and increasing service quality and coverage.

Social concerns

Concerns have been raised about the ability of the private sector to address the WSS needs of poorer households. At a regional level, there are concerns that PSP will not benefit the poorest of developing countries which are less attractive to foreign investors. Indeed, investment so far has been concentrated in Latin America and East Asia with Sub-Saharan Africa accounting for less than one per cent of total investment.

Within countries, PSP in WSS tends to be concentrated in urban areas where economies of scale can be realised and potential returns are likely to be higher. Even within urban areas, there are concerns that poorer households may not benefit, either because they live in areas where costs of provision are relatively higher or because their demand is relatively lower.

When households do not have access to formal systems of WSS, they adopt a variety of alternative strategies. For water supply, these range from reliance on surface waters, vendors and wells. For sanitation, households without formal access use pit latrines, septic tanks and simplified sewerage. Some of these strategies (e.g. water vendors and septic tanks) are expensive relative to formal provision not only in financial terms but also in terms of household health. Indeed, inadequate water and sanitation facilities can have detrimental health and environmental effects not only for the users themselves, but also for the wider community.

Why should the private sector be interested in serving the poor?

For a number of reasons, it may actually be in the interest of the private sector to provide WSS for the poor:

Firstly, the high expenditures incurred by lower-income households are not only a reflection of social deprivation, but also of commercial opportunity.

Secondly, since environmental and health externalities are endemic in the sector, the continued existence of a large number of "unserved" households in the city will have adverse effects on the service provider's capacity to meet its contractual obligations and the needs of its customers.

Thirdly, in the longer run, if it is to be given more opportunities to provide WSS in developing countries, the private sector will clearly have to prove itself not only in commercial, but also in social and environmental terms.

Obstacles and solutions to private sector provision in poorer neighbourhoods

However, there is a multitude of related problems which the private sector provider needs to overcome to provide services to poorer areas. For example, households in expansion areas may be unwilling to pay for expansion costs through their connection fees when existing (usually richer) users did not do so when they were first connected to the network. Where they are willing, many households may not be able to finance initial connection costs. From the provider's perspective, the costs of providing a standardised service to some areas, particularly in irregular settlements may be prohibitive.

Overcoming such obstacles requires innovative solutions, some of which have already been adopted by the more far-sighted firms. Issues such as tariff structure, differentiation of services, and local community involvement have to be approached in a new way if the needs of the poor are to be addressed. In particular, increased community participation in deciding on appropriate forms of provision and in the management and operation of provision, including where appropriate, the employment generated by informal provision (e.g. water vendors and neighbourhood resale) is required. Furthermore, attention must be paid to the viability and desirability of differentiated forms of service provision (within and between network areas) and alternative systems of management, more closely reflecting the preferences and ability to pay of users.

Conclusion

There is little question that inappropriate forms of private sector involvement which are inadequately regulated are unlikely to be of much value to poorer households or any other users. However, many publicly managed and operated systems have not themselves been serving poorer households particularly well. As such PSP, is perhaps best seen as an opportunity to right the balance, rather than as a threat to any existing benefits presently enjoyed by poorer households.

It would seem that experience thus far has been mixed. In many cases, there have been clear and important benefits, with positive social consequences: service networks have expanded into poorer neighbourhoods and in some cases, measures are being adopted to make services more affordable. However, there is still a great deal to be done.

What role should the NGO sector play?

The changing relationship between the state, the private sector and civil society is brought clearly into focus with PSP in WSS. Indeed, in some senses PSP in the sector has become the vehicle through which the relationship between the urban poor and the wider urban community has also been brought clearly into focus. In this context, there are a number of important contributions that the NGO sector can take to ensuring that PSP benefits poorer neighbourhoods.

1) Pre-PSP institutional support

Internal and external pressures to introduce the private sector in WSS provision are considerable. In the face of this, it is important that governments be able to evaluate the relative merits of PSP with some degree of objectivity. In some cases (particularly low-income countries), reform of public provision may be a more appropriate option in the first instance. In the event that it is decided that PSP is a sensible option, governments will need support in evaluating which form of PSP is most appropriate. In some areas, the appropriate form of PSP (given market, information, regulatory and other constraints) may be limited to the legalisation of informal providers, e.g. door-to-door vendors and neighbourhood resale, through licensing or service contracts. In other areas, large-scale concessions may be preferable. NGOs and donor organisations have a role to play in ensuring that governments are not forced into pursuing strategies which are not in their long-run interest.

 

2) Institutional support for regulatory authorities

Due to the very "public" nature of the sector, public authorities continue to have an important role to play. Rather than being a manager and provider of services, the government must serve as a regulator and a guarantor of a certain level and quality of provision. The objectives may remain the same, but the instruments have changed. In this respect, PSP may actually place more rather than less demand on effective and capable public authorities. Intervention through incentives requires more skill than intervention through investment. New regulatory capacity is required to deal with these new roles.

In most developing countries in which PSP is being introduced, conditions for the development of the new regulatory capacity required are far from ideal. Rent-seeking, regulatory capture and technical constraints all pose problems. Donor agencies and NGOs have an important role to play in ensuring that such capacity is adequate to the task of protecting the needs of poorer households and neighbourhoods - e.g. meeting expansion targets in poorer neighbourhoods, ensuring that water quality standards are met, introducing adequate interim measures, etc.

3) Ensure that the needs of the poor are reflected

In order to be effective, users or their representatives should be consulted when designing the specifications of the PSP contract. This will ensure that the services provided reflect household needs and that the households are willing and able to pay for the services provided. For instance, users can be provided with a set of service options (including cost and other implications). Few examples of PSP have allowed for such efforts since it is perceived to be quite time-consuming and costly. NGOs, CBOs and development agencies, familiar with working in poorer neighbourhoods and with relevant experience, are well placed to assist with these assessments.

4) Assisting in effective operation of differentiated services

The ultimate objective in most contracts remains universal coverage of a standardised type of service provision. In some areas this may be appropriate. However, in many it may well not be. By "vertically unbundling" the sector, it may be possible to provide different types and levels of services in different areas. For example, in poorer neighbourhoods, households may have preferences for efficient, but inexpensive, collective forms of provision. In many cases such services will require delegated management responsibilities. It is only by working closely with the users themselves that the demand for, and the cost implications of, differentiated services can be known with any degree of certainty. NGOs and donar agencies may have a role to play in terms of capacity building for user associations, community-based organisations, etc

5) Attention on poorer countries, small to medium sized towns and rural areas

Attention thus far has largely concentrated on large cities within middle-income developing countries. Innovative solutions need to be found for poorer countries, small-medium sized towns and rural areas if they are to benefit from private sector investment.



REFERENCES

Franceys, Richard (1997), 'Private Sector Participation in the Water and Sanitation Sector', UK Department for International Development Occasional Paper No. 3, DfID, London.

Johnstone, Nick, Libby Wood and Robert Hearne (1999), 'The Regulation of Private Sector Participation in Urban Water Supply and Sanitation' IIED, Environmental Economics Programme, Discussion Paper 99-01.

Johnstone, Nick and Libby Wood (2000), 'Private Sector Participation in Water and Sanitation: Realising Social and Environmental Objectives in Developing Countries', Edward Elgar (forthcoming)

Lyonnaise des Eaux (1998), 'Alternative Solutions for Water Supply and Sanitation in Sectors with Limited Financial Resources'

Rivera, Daniel (1996), 'Private Sector Participation in Water Supply and Sanitation: Lessons from Six Developing Countries', World Bank, Directions in Development, Washington D.C.

Silva, Gisele, Nicola Tynan and Yesim Yilmaz (1998), 'Private Participation in the Water and Sewerage Sector - Recent Trends' in Public Policy for the Private Sector World Bank, Note No. 147, August.