Urban Water and Sanitation

Dr Richard Franceys

Richard Franceys WBI ASCI January 2003

The Water Goal

• Effective – Potable Water, 24/7, Adequate Pressure • Equitable – Accessible by ALL ?

• Sustainable – Financially as well as hydrologically • Efficient – Least reasonable cost • Replicable ?

– 4000 to go??

Richard Franceys WBI ASCI January 2003

What makes water special ?

• ‘Heart felt’ basic need • Politically high profile, enhanced by floods and droughts • Relatively simple technology • The most capital intensive of all urban services/networked utiltities ?

Richard Franceys WBI ASCI January 2003

Capital Intensity

• Water • Electricity • Telecoms • Gas • Supermarket 12.2

4.1

2.8

2.1

0.4

Capital intensity: fixed assets to annual revenue ratio Richard Franceys WBI ASCI January 2003

E&W Cost of Water & Sanitation

• The Modern Equivalent Asset Value of the English & Welsh fixed assets is now: • $1,890 per person for water –

Rs 0.9 lakhs

• • $3,530 per person for sewerage & wwt –

Rs 1.7 lakhs continuing to invest at $100 per person per year Richard Franceys WBI ASCI January 2003

Sustainable Water Management

Price

<

Costs?

•

What effects?

– quality will suffer – poor maintenance – no additional infrastructure development – system will not survive for long – consumers not aware of value of water – more leakage & misuse – high UFW

Richard Franceys (CMF, December 2001) WBI ASCI January 2003

Sustainable Water Management

•

Price

>

Costs ?

What effects?

– sustainability ensured – future growth & expansion ensured – attracts investment – demand is limited – demand for quality of services rises – potential for cross-subsidising poor – consumers go for alternatives, maybe poorer quality – danger of profiteering

Richard Franceys WBI ASCI January 2003

Sustainable Water Management

Ofwat Analysis of International Comparisons 2002

WATER

per m3

Cost of operations Cost of capital maintenance Return on capital Abstraction tax

England & Wales

Rs per kl 24 15 14

Australia

Rs per kl 15 6 8

Netherlands

Rs per kl 34 15 9 6

United States

Rs per kl 22 5 19

Indian Metro

Rs per kl 14.5

6.5

0

AVERAGE COST AVERAGE PRICE

LONG RUN MARGINAL COST

52 52

40

30 30 64 64 47 47 Domestic Non-Domestic 21 14.6

3.5

39

43

Richard Franceys WBI ASCI January 2003

Sustainable Water Management

Ofwat Analysis of International Comparisons 2002 Rs per household per month

England & Wales Australia Netherlands United States Indian Metro TOTAL WATER per month TOTAL SEWERAGE per month 875 978 862 920 817 2,322

1,782

100 ?

Richard Franceys WBI ASCI January 2003

Sustainable Water Management: Asia

Price of Water $/m3 Asia

1.20

1.00

0.80

0.60

0.40

0.20

0.00

C he nn ai

WBI ASCI January 2003

M um ba i D el C hi al cu tta

Richard Franceys

Sustainable Water Management: Asia

Ratio Industrial / Domestic Tariff for 30 Cubic Metres per Month

12 10 8 6 4 2 0 Cebu Chiang Mai Kathmandu Mandalay Nuku'alofa Port Vila Shanghai Taipei

1

Bangkok Guangzhou Ho Chi Minh Hong Kong Honiara Jakarta Karachi Lahore Penang Singapore

1 - 2

Bandung Beijing Hanoi Kuala Lumpur Manila Seoul Ulsan Vientiane Apia Dhaka Medan Suva Tianjin

2 - 3 3 - 4 Cost Ratio

Colombo Delhi

4 - 20

Mumbai Chennai

> 20

Richard Franceys

Sustainable Water Management: Overview •

TARIFFS ……

•

‘The water crisis that is affecting so many people is mainly a crisis of governance not of water scarcity’

•

"Governance is the framework of social and economic systems and legal and political structures through which humanity manages itself" Richard Franceys WBI ASCI January 2003

Sustainable Water Management: Solutions ?

• FROM ‘CITIZEN CONSUMER’ TO ‘PAYING CUSTOMER’ – Where of course ‘the customer is king’ –

Paying ‘cost reflective tariffs’

with targeted subsidies where appropriate

– But they have to be

efficient /least cost

tariffs of course, part of the bargain . .

Richard Franceys WBI ASCI January 2003

Sustainable Water Management: Solutions ?

•

The New Public Managerialism

–

‘NPM’

•

Taking the ideas of the efficient private sector into the public sector….

– – – – –

Customer Orientation Commercial Orientation Measurable Objectives Human Resources and Management Development Structural and Organisational Adjustment Richard Franceys WBI ASCI January 2003

Efficient Solutions?

• The New Public Managerialism •

Taking the ideas of the private sector into the public sector….

•

(but without the real competition and personal incentives and …….) Richard Franceys WBI ASCI January 2003

Governance Change

•

‘Force Fields’

(Lewin) “ the stability of human behavior is based on "quasi stationary equilibria” supported by a large force field of driving and restraining forces. For change to occur, this force field has to be altered ” ‘unfreezing’ before ‘changing’ then ‘refreezing’

•

‘driving forces’ forces’?

greater than

‘restraining

Richard Franceys WBI ASCI January 2003

Governance Change

•

What could drive change in water governance in India?

• Decentralisation • Corporatisation • • Commercialisation

Privatisation

• Regulation • Internationalisation • De-politicisation

Richard Franceys WBI ASCI January 2003

Water Governance

•

‘Scanning Globally, Reinventing Locally’

• Dutch Approach: ‘

Public Water plc.’

• French Approach:

Leasing

• English Models:

Divestiture

–

Note: The Scots, part of UK, rejected the ‘English and Welsh’ approach!

• Worldwide Approach:

Concessions

•

Indian Approach: Service Contracts ?

Richard Franceys WBI ASCI January 2003

Basic Modes of Water Sector Organisation

Public Water PLC Joint Venture Private Water PLC/Ltd Concession BOT, BOOT, etc..

Lease contract

Private management

Management Contract Corporatized Utility Service Contract

Public-private partnerships

Municipal Supramunicipal

Public management options

public

Richard Franceys

Blokland, Braadbaart & Schwartz, 1999

mixed Ownership of UtilityAssets

WBI ASCI January 2003

private

Public Private Partnerships

•

A definition of P3

• ‘

A public-private partnership (P3) is a cooperative venture between the public and private sectors, built on the expertise of each partner, which develops or improves facilities and/or services needed by the public through the appropriate allocation of resources, risks, rewards and responsibilities.’ Richard Franceys WBI ASCI January 2003

The main options for private sector participation and their allocation of responsbilities

World Bank, Toolkits for Private participation in Water and Sanitation, 1997

Option Service contract Management contract Lease Concession Build-operate transfer (BOT) Divestiture Asset ownership Public Public Public Public Private and public Private or private Operations & maintenance Public and private Private Private Private Private Private Capital investment Public Public Public Private Private Private Commercial risk Public Public Shared Private Private Private Duration 1-2 years 3-5 years 8-15 years 25-30 years 20-30 years Indefinite (may be limited by license)

Richard Franceys WBI ASCI January 2003

Participation & Partnerships

• • • • •

Participation

Information Consultation Deciding together

}

Partnerships

Acting together Supporting independent community initiatives

Wilcox (1999), Building Effective Local WBI ASCI January 2003

Models? - The Netherlands

• 1850-1920 Private; 1920-1975 Municipal • • 1975 -

Public Water plc

owned by municipalities/government; non-tradeable shares

Aggregation

scale from 231 to < 20 companies -economies of • Minimal profits - minimal distribution (in practice) • High quality water - satisfied customers • Regulated by directors representing customers through their role in local government

Richard Franceys WBI ASCI January 2003

The Netherlands

• Introducing benchmarking to improve efficiency -

(escaping regulation??)

• PPP Knowledge Centre of the Ministry of Finance: ‘to initiate and promote PPPs ..to achieve added value and improved efficiency.’ • DBFO - $750m for waste water treatment • ‘Environment Minister has introduced a bill that will prevent public water companies in The Netherlands from handing over shares or control to non-public bodies as of 1 September 2000 .

(WaterForum Online, Sep2000)

.

Richard Franceys WBI ASCI January 2003

Models? - France

• PPP for 150 years -

‘the experts’

• • • • 58% of the 36,500 communes giving private contracts serving 75% of the population

Vivendi

(formerly Generale des Eaux) Lyonnaise des Eaux) and

Saur

and

Ondeo

(owned by Bouyges) (formerly Suez between them are responsible for 13,000 concession contracts made with regional groupings of municipalities

No foreign competition allowed ?

Lease

(affermage) - moving to

concessions

because of capital requirements

Richard Franceys WBI ASCI January 2003

France

•

Prices

have risen by 83% (1990-97, nominal) (153% in the Isle de France over 13 years) W&S $320/hh average ?

• Regulated through contract renewals ?

(only 5% up for renewal change contractor) • ‘France needs an independent current 20 years.

regulator’

• A much-watered down bill has just had its first reading in parliament, proposing limiting the length of water leasing contracts to 12 years, instead of the • To clarify the sometimes murky business of pricing water, the bill proposes an "Haut conseil des services publics de l'eau" which would offer advice. But with elections in June, nobody expects the bill to get very far.

Richard Franceys WBI ASCI January 2003

Public Department

‘United Kingdom’

Public Water Authority

Richard Franceys

Privatisation, 1989

WBI ASCI January 2003

England & Wales: Radical PPP

•

Excellent

water quality improvements, excellent service improvements, ever increasing efficiency

(Thames porpoise, Mersey salmon!)

•

Massive

capital investments ($58 bn over 10 yrs another $20 bn to come in next five years?

• ‘Privatisation has transformed investment’ –‘It was a major issue and there has been a big transformation.’ Thames now has 99.984% of its samples passing all tests.

Richard Franceys WBI ASCI January 2003

‘Not a smooth ride’

• High Profits – or what is required by private companies?

• Disconnections rising – ‘Can’t pays’ and ‘Won’t pays’ ?

• Drought

[in English terms !]

– leakage monitoring • Fat cats – excessive management pay rises?

• Metering for all?

Richard Franceys WBI ASCI January 2003

E&W Regulation

• Drinking Water Inspectorate • Environment Agency (unable to justify investments but

‘trust us, we’re scientists’

) • The (Economic) Regulator - Ofwat

($0.40 pc pa)

– Primary duty:  ensure the functions of a water and sewerage company are properly carried out  companies can secure a reasonable rate of return on their capital – Secondary duty:

Richard Franceys

– looking after customers

WBI ASCI January 2003

Richard Franceys

1989 Privatisation

WBI ASCI January 2003

Capex efficiencies of PPP

Ofwat 1999

E&W Economic Regulation

• Five year ‘price caps’ (revenue caps?) to deliver incentive based regulation • ‘ Light handed regulation’ ?

(452 pages of reports in 1999 (177 in 90/91) plus full CD ROM of company data plus 312 pages of Price Review Report plus MD/RD letters) • Expensive for companies to give necessary information?

(Wessex) >$5.5 per person served per year ? • Average household bills had risen on average by 40% in real terms since privatisation

Richard Franceys WBI ASCI January 2003

Opex efficiencies of PPP

1994 Price Review 1999 Price Review

Richard Franceys WBI ASCI January 2003 Ofwat 1999

Customer Service Committees

• Part of Regulator Ofwat (Govt proposing ‘independence’) • Complaints Auditing ( as well as complaints appeal process) • Public Meetings (to question the water companies)

Richard Franceys WBI ASCI January 2003

• Compensation costs (for company errors etc) achieved for customers from private companies currently exceeding running costs of Central CSC •

CSC Comments:

• Privatisation has been: – ‘a move forward’ – ‘standard of service is unbelievably better’ – ‘a two edged sword’ – ‘the basic concept is good, they were in a state of disrepair; but costs have risen disproportionally’

Richard Franceys WBI ASCI January 2003

The Cost of Capital

England & Wales - Return on Capital Employed (after tax)

16 14 Industry ROCE after tax 12 10 8 6 Regulatory Cost of Capital after tax (large companies) Ofwat 1994 'Glide Path' (after tax- presumed) 'The Profit Sawtooth' ? (after tax) 4

Richard Franceys WBI ASCI January 2003

Competition - the answer?

• Comparative competition • Competition between regulators ?

• Inset appointments • Common carriage - statutory right of competitors since 1 March 2000 • Access codes

us’) (‘Government should tell

• Competition Act - fines of up to 10% of turnover

Richard Franceys WBI ASCI January 2003

Patterns for Low & Middle Income Countries • What is the significance of these patterns for the one billion people without clean water and two and half billion without adequate sanitation ?

Patterns for India ?

• Public Private Partnerships, Regulation, Competition?

• Or simply wealth??

Richard Franceys WBI ASCI January 2003

Reported PPPs by Region

By Reported Capital Investment Value

Proportion of 370 Operating MLICs PPPs by Region by Capital Value

East Asia and Pacific 31% Latin America & Caribbean 43%

Richard Franceys

South Asia 0%

Africa 11%

4%

WBI ASCI January 2003

Eastern Europe & Central Asia 11%

Case Study - Buenos Aires

• Capital city of what has been an upper middle income country •

Now 48% living in ‘poverty’ or ‘extreme poverty’ in Argentina Richard Franceys WBI ASCI January 2003

10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

Richard Franceys

Service Coverage - Buenos Aires

WBI ASCI January 2003

Target Served by Water Actuals Water Target Served by Sewerage Actuals Sewerage Population Water Utility Privatised In 1993 >$1,200 m Invested Nearly 2 million Additional people served

And then the Economic crisis

Aguas Argentinas Returns on Capital and Equity

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1994 1995 1996 1997 1998 1999 2000 ROCE ROE Dividends /Equity

Richard Franceys WBI ASCI January 2003

Questions of PPP

• Is it ‘development’?

• How can the process be ‘localised’?

• How to manage regulation?

• How to ensure affordability?

• How to ensure the needs of disadvantaged groups are recognised?

• And what about the

poor

. . . ?

Richard Franceys WBI ASCI January 2003

PPCPs and the Poor

High Income Countries • England and Wales – disconnections banned

(as part of a process)

– capped tariffs for lowest income – capped tariffs for specified medical conditions – charitable trusts – subsidising rural areas • France - Charter to help underprivileged – help in paying water bills and avoidance of disconnections for people living in poverty and unstable situations

Richard Franceys WBI ASCI January 2003

Serving the Poor

Buenos Aires 10% (‘32%’) below the poverty line • • Services to the poor: • 146,000 by 1998 • 260,000 by 2000 ‘800,000 from depressed areas’ by 2002?

Profiteering from the poor ?

Photo: Tracey Osborne Richard Franceys WBI ASCI January 2003

Service Differentiation for the Poor

Manila: 400,000 ‘low income’ served •Individual metered connections; •Labour contribution from community; •Reduced connection fee •Standard water tariff;

Richard Franceys Photo: Almud Weitz - Project 8, Quezon City, Maynilad Water WBI ASCI January 2003

Benefits of reform

• • Using the variation in ownership of water provision across time and space generated by the privatization process, it was found [in Argentin] that child mortality fell 5 to 7 percent in areas that privatized their water services overall; and that the effect was largest in the poorest areas. It is estimated that child mortality fell by 24 percent in the poorest municipalities.

Galiani, S. ; Gertler, P. and Schargrodsky, E. (2002).

Richard Franceys WBI ASCI January 2003

What does the private sector bring?

• Capital for investment?

• • Private management with incentives?

(remembering that not all international PPPs are immediate success stories eg Kampala, Malaysia, T&T, Mexico City etc)

• Or Lewin’s ‘unfreezing’ and force field of driving and restraining forces: • ‘Foreignisation’? 70% of ‘major contracts’are international

Richard Franceys WBI ASCI January 2003

The PPP Gamble

?

Experienced foreign private operator 1 st Rate Performance 2 nd Rate Performance Public Sector Provider

PPP

Inexperienced and/or rent seeking foreign and/or national private operator 3 rd Rate Performance

WBI ASCI January 2003 Richard Franceys

‘Nehru’s Dictum’ “It is better to have a second-rate thing made in one’s own country than a first rate thing one has to import”

(quoted in The Economist, 2001) Richard Franceys WBI ASCI January 2003

From Vision to Action

• PPP’s DO GIVE BENEFITS and at a [usually] valid cost (most of the time perhaps shouldn’t be necessary but they are!) • But we have to get it ‘right’ using a

process

, not a model (always adapting) • Expert contract preparation & transparent contract awarding (unhelpful terminology of ‘success fees’ of $2m to $5m?) • ‘Open book accounting’? as well as International Auditors for International Contractors

Richard Franceys WBI ASCI January 2003

From Vision to Action

• Using special skills to assist eg NGO’s & international NGO’s as social consultants?

• Always remembering affordability and willingness to pay Targeted subsidies have a part to play?

International donors have a part to play?

• Vigorously ‘segmenting and differentiating’ (not neglecting) to assist the poorer customers • Requiring labour intensive technologies though not necessarily subsidising job creation

Richard Franceys WBI ASCI January 2003

From Vision to Action

• Regulating wisely and being ready to adapt? Regulation is a

process

which needs to be supported – For corporatisations as well as PPP’s?

– Capacity building for regulators?

• Customer committees for oversight? How to escape ‘politicisation’?

• Generating competition wherever possible Cross-border comparative competition? (ADB/IWA/WB/Ofwat benchmarking

WBI ASCI January 2003

• Never neglecting to develop national private and public capacity (both are still required) • Localisation plans? Share selling?

Expatriate matching? • Service contracts as ‘Starter PPPs’, promoting SME development • Institutional development programmes where valid leadership and governance environment • Continuing capacity building (Legislative studies, MBA Programmes, Change Management Forum, Study visits etc..)

Richard Franceys WBI ASCI January 2003

Emerging patterns

• Concessions with Regulation • 88 PPPs (operating/planned - all countries) • out of the 433 cities > 750,000

20%PPP

• 2,350 PPPs (operating/planned - all countries) out of ‘40,000’ cities and towns

6% PPP

Does India needs a driving force greater than New Public Managerialism, Commercialisation and Customer Orientation to reform water supply in the 4,000 ULBs ?

• What approach will deliver Effective, Equitable, Sustainable, Efficient water and sanitation for all?

Richard Franceys WBI ASCI January 2003