Starting small

After trailblazing deals began to sour in the late 1990s, many governments in the developing world lost their appetite for any private sector involvement in their water utilities. Recently though, governments are slowly regaining interest in the different models for private sector participation (PSP), backed by as they are by healthy, sometimes even strong, performances.

Still, governments and the private sector have become more cautious in doing business together. Armenia is one of the latest countries to prove that a little caution goes a long way when it comes to PSP.

Armenia did not exactly embrace the private sector right off, but the transition began in its capital city, Yerevan, in 1998 when the government started to seriously consider engaging the private sector to manage the Yerevan Water and Sewerage Company CJSC (YWSC) and solve the worsening water supply situation.

A modest 4-year management contract in 2000 helped address some of YWSC's biggest issues, such as high nonrevenue water and low collection rates. Its success was followed by a 10-year lease which began in 2006.

Today, Armenia's secondary towns are taking the same approach a step further by applying it to clusters of towns and with a community-based management framework.

A long and bumpy detour

In the late 1990s, Yerevan's water supply system, both its books and its pipes, were in no condition to attract a private firm ready for the long haul and lined with deep pockets, which is what was needed to turn things around.

Yet Yerevan's problems were not all that different than other systems in the developing world: high system losses, low tariff rates and inefficient billing and collections. At a glance:

  • Only 20% of the 1.3 million residents had 24-hour water supply.
  • The average 2-8 hours of available water was intermittent throughout the day, complicated further by little to no pressure on the higher floors in multi-storied buildings, which are prevalent in most former Soviet urban landscapes.
  • Collection efficiency on sales and accounts receivable was only 45% (in 1997).
  • Unaccounted-for water was at a high 72%.
  • The average residential consumption was estimated at 250 liters per connection per day (average residential consumption was later found to be closer to 800 liters per connection per day due to system losses).

Underpinning these service failures was the technically insolvent and bankrupt YWSC:

  • Supply tariffs were the same for residential and nonresidential users, about $0.10 per cubic meter.
  • Tariffs did not cover operating costs or even the electricity costs of the pumping system, which was 75% of operating costs, a problematic figure in itself.
  • In 1998, bad debts were projected to be 50% of receivables.
  • In 2000, operating revenue was US$10 million, with 75% consumed by electricity costs and 8% by staff costs.
  • In 2000, accounts receivables equaled four times the revenue.

The 4-year management contract slowly but surely turned things around. Energy consumption was reduced by 48%, collection efficiency increased to 79%, and water became available 16 hours a day. These results paved the way for the signing of the 10-year lease contract.

All these would not have been possible without the Government's commitment. For instance, it passed a debt-forgiveness law that offered amnesty to indebted customers on a condition that they apply for metered connections. Metering increased from 1,000 in 1999 to 277,000 by 2005. The contract only called for the operator to install 20,000 new meters. Being able to bill and collect put the utility's ailing finances on the path to recovery and gave the utility a real chance at sustainability.

Backtrack to fast-track

Most observers say that PSP in Armenia has been successful. The gradual approach has ushered in major improvements in Yerevan that were not likely to happen had the government kept the private sector locked out. Here's a look at the lessons learned under Yerevan's first management contract.

Starting short term is a confidence boosting step for more productive, long-term public-private venture. By opting for a 4-year management contract with a skilled, international firm, the deal gave all stakeholders a chance to test the waters. The larger private sector gallery could also gauge the risks and gains in Armenia and in similar countries in economic transition. The customers, on the other hand, could adjust to the changes the PSP introduced, such as actually paying for the water they get.

Government commitment is fundamental.1 The Government of Armenia paved the entrance for private sector operations, but a bulk of the legal, institutional and regulatory reforms were designed, signed, and put into practice during the management contract period. This made for a bumpy ride at times for everyone, and the management contract was nearly derailed at one point early on. What saved Yerevan's management contract, observers say, was the government's commitment.

Information campaigns are important to prepare the public. People long-used to free water needed to understand why tariffs are necessary and what benefits they would gain from paying them. The Government supported PSP and its changes, such as metering and billing, with widespread awareness campaign that effectively paid off. For instance, tariff was increased to AMD 56 ($0.18) per m3 prior to the contract but no further increases were permitted during the 4-year management contract. To prepare for that one-time increase, the Government undertook a massive information campaign.

Flexibility in target setting is critical. The private operator's own improvements in metering, volume, and pressure uncovered far greater system losses than what the baseline figures projected. In short, pipe conditions were far worse than what anybody had imagined. In such cases, when baseline data has been grossly underestimated, targets should be renegotiated to maintain fairness.

Reducing unaccounted-for-water requires substantial investments. Often, there is just no way around investing in infrastructure. Where physical leakage is significant, governments must increase investments in repair and replacement of pipelines in order to reduce unaccounted-for-water.

Giving the private operator control over infrastructure investments is key. The YWSC undertook two infrastructure loans from the World Bank amounting to $45 million and was given control over these loans, which involved them in planning, purchasing, and procurement. This arrangement allowed the private operator in both contracts to use their expertise and match investments with the system's priority needs.

Relishing the homestretch

In general, Armenia's reform of the sector began in 1999, a year ahead of the management contract for Yerevan water services and continued progressively during the period of the management contract. After the Yerevan experience, the Government has now put its second largest water utility, the Armenia Water and Sewerage Company, a closed joint stock company, on the same path as Yerevan.

Now on the third year of the 10-year lease contract, YWSC has achieved the following performance improvements: 17.5 hours of average water supply with 37% of subscribers receiving 24 hours water supply, 90.3% collection efficiency with 91.1% of subscribers now with metered connections. About 5,000 illegal connections have also been detected and eliminated.

At this rate, one can only imagine YWSC's achievements by the end of the contract, safe and sustainable water supply for all of Armenia.

The Country Water Action series was developed to showcase reforms and good practices in the water sector undertaken by ADB's member countries. It offers a mix of experience and insights from projects funded by ADB and those undertaken directly by civil society, local governments, the private sector, media, and the academe. The Country Water Actions are regularly featured in ADB's Water for All News, which covers water sector developments in the Asia and Pacific region.