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Does it Work?
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Is there room for private sector participation in the water sector? The answer is yes. The Millennium Development Goals call for increased access to potable water and sanitation.
Considerable amounts of investment are needed to meet these targets. As public budgets are limited, many governments will be looking for other options.
The private sector, both domestic and foreign, is in a good position to complement public funds. In addition, the private sector can infuse the technology and managerial expertise needed to increase efficiency and lower cost of service delivery. And the funding supplied by the private sector can free up government resources for other public services.
Since 1999, ADB’s Private Sector Operations Department has been involved in helping finance water projects in ADB’s developing member countries.
“All the financing activities we undertake must adhere to three core principles,” says Robert Bestani, Director General of the Department. “Are they sound financially? Do they support development? Is ADB adding value?
In all cases, ADB’s assistance to water infrastructure projects has been catalytic, facilitating funding commitments from investors and lenders for critical investments in the water sector.”
For instance, ADB, together with the European Investment Bank, facilitated the participation of a group of six international commercial banks, providing debt funding of $75 million to Chengdu Generale des-Eaux Marubeni, a consortium of Vivendi Environnment (France) and Marubeni (Japan), for constructing a 400,000 cubic meter per day water treatment plant under a build-operate-transfer (BOT) scheme for Chengdu in the People’s Republic of China.
Completed in February 2002, the plant has been delivering its contracted capacity to the Chengdu municipality, providing an additional source of clean water to its residents.
The Chengdu Project also yielded additional benefits, such as the introduction of modern management techniques. As the first (pilot) BOT project in the water sector in the PRC, the project provided an example of limited-recourse financing of a water infrastructure project that can be replicated in other municipalities.
Central to the success of the Chengdu Project was the early involvement of the PRC’s State Development and Planning Commission, and the active participation of ADB. Creation of enabling conditions, such as tariff reform to enable cost recovery, was another critical success factor.
The involvement of private sector operators in the water sector can take various forms: service contracts to reduce water losses, leases or concessions to operate water distribution systems, and BOT schemes to provide bulk treated water to local water utilities.
Government decisions to involve the private sector should be based on well-defined criteria of efficiency and cost effectiveness. The award of concessions or other contracts to private sector operators should be made following a transparent, competitive process.
A sound regulatory framework should be in place to minimize uncertainties for the private sector and ensure the protection of water users.
There are several ways in which ADB can assist private sector participation in water projects. The traditional forms of assistance are equity investments in and direct loans to a project company.
ADB can also provide credit enhancements to cover risks that are not easily managed by the private sector. Political risk guarantees are designed to facilitate commercial cofinancing by covering specifically defined sovereign or political risks.
Partial credit guarantees can be tapped for projects considered fundamentally creditworthy and sound by ADB, but where long-term funds on reasonable terms cannot be obtained from commercial lenders in underdeveloped local financial markets. Most recently, ADB has begun to offer in selected countries debt financing in local currency for infrastructure projects.
ADB is committed to facilitating investments in the water sector. It will continue to support private sector participation in water infrastructure development to help secure adequate water supply and sanitation services for the people of Asia and the Pacific.
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