Water

Country Water Action: Asia
Public-Private Models Offer Options to Utilities
(August 2005)

• Giving the Water Sector A Helping Hand
• Finding the Right Private-Public Mix: The Models
• Getting PSP to Work
• ADB's Positon on PSP
• Related Links
• Contact

Asia is facing a stunning bill, with much of it owed to the poor: $8 billion to be paid annually until 2015. That is what it will cost to halve the number of Asians living without access to safe water and sanitation by 2015, according to a forthcoming report on Asia's progress toward meeting Target 10 of the Millennium Development Goals.

Who is going to pay that bill?

For cities, it has rarely been within the reach of public utilities, which typically lack the capital, the management expertise and sometimes even the political will to undertake such large scale reforms and investments. A few cases of public-led reform can be found in Phnom Penh, Kuala Lumpur and Singapore.

Most public utilities, however, are turning to private companies, where there is the capital, expertise and market-driven incentives to offer the public what they deserve-clean, affordable, reliable water and sanitation services.

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The private sector has always been involved in the urban water sector. Private companies tender for construction contracts, sell meters to utilities and provide water vending in areas lacking network connections.

The last several years, however, have ushered in a greater role for private sector participation (PSP) in Asia. Across the region, governments are beginning to look more closely at the following three models of PSP, weighing the advantages and disadvantages and learning from Asia's experiences with these models.

• Management contracts: The public sector transfers the management of only specific activities to the private sector, such as metering or bill collection, for a fee.




Advantage	These smaller-scope contracts may specifically benefit local governments, who more and more are being held responsible for service delivery as a result of decentralization. Too often, responsibility is decentralized but not the money to deliver proper services. To make matters worse, local governments rarely have the capacity to run systems or qualify for lending to improve the systems. Where there is improved capacity at the subsovereign level, though, there is potential for PSP.
Disadvantage	Because investment is not directly linked to service provision, these contracts tend to focus on existing customers, with the public sector still responsible for financing and developing expansion programs.
Examples	Azerbaijan, Malaysia, India



• Build-Operate-Transfer (BOT) projects: The private operator is responsible for financing, constructing, operating and maintaining a bulk water supply facility for a specific period of time before transferring it back to the public authority. During the period of the BOT-often up to 30 years-the operator is responsible for meeting certain targets, such as amounts of water supply or wastewater treatment, in exchange for guarantee on the prices they charge to users.




Advantage	BOT is specifically used for large infrastructure projects, such as water and production of wastewater treatment projects, which the public sector often lacks sufficient funds to do alone.
Disadvantage	Because of the emphasis on infrastructure, BOT rarely helps to improve the efficiency of water distribution or lead to a reduction in illegal connections.
Examples	ADB-financed Chengdu Water Supply Project, the first such BOT project in the People's Republic of China.



• Concessions: The private sector takes full responsibility-not only for operations and maintenance of a system but also for investments to improve it-while ownership of assets remain with the public authority. Concessions tend to be substantial in scope, covering whole cities and regions over a 25-30 year period and normally include one or all of the following: the rights to provide water, sewerage and/or drainage services.




Advantage	Concessions with clear targets and an independent or credible regulator can be an excellent means of using the skills of the private sector to leverage investment, provide high-quality service as well as expand it and collect a viable tariff to help with cost recovery.
Examples	Macau, Indonesia (Jakarta and Batam Island), Manila

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Asia's experience with PSP in the water and sanitation sector offers mixed results, usually because the arrangements lacked at least one of the following essential components of any PSP model.

• Equitable tariff structure, which can finance the investments needed to expand infrastructure that leads to the urban poor gaining access. Tariffs add value to water, causing users to conserve. Tariffs should be based on cost recovery and balanced with the consumer's ability to pay, offer flexible payment options and impose higher rates for higher consumption.
• Credible regulator, which looks after all interests at stake in PSP. It provides the private sector with the necessary confidence that their investments are safe. And it provides consumers with the comfort that their interests are being looked after and not just left to the hands of a commercial enterprise.
• Involvement of community groups and users. Users and civil society groups must be involved at every stage of PSP. Governments need to know what types of services consumers expect and what they are willing to pay, so that the right choice of PSP model can be made. In Kathmandu, a nongovernment organization (NGO) forum has been set up to communicate with the private sector companies and governments.

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ADB does not support water privatization, but advocates for improved delivery of water services, which may require the participation of the private sector.

ADB advises it's developing member countries through roundtable discussions, as well as finances system improvements itself through loans for infrastructure and technical assistance grants to help reform the sector before definitive decisions are made about financing.

ADB is currently exploring ways of extending financing to those actually charged with service delivery, which is increasingly becoming devolved to local government units. Technical assistance grants have been offered at the subsovereign level to improve their capacity and make them attractive for private sector participation.

"To make PSP work," ADB's Stephen Wermert said,"you need good people on both sides-people who have been in the sector or business for a while, know what's going on and are genuinely committed to making it work."

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• Get an overview of ADB's experience and approach to PSP
• Read about the role of the regulator.

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