37546 noTE no. 10 ­ junE 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Meeting water needs in Vietnam How engaging communities can help lead to viable projects Bill Kingdom and Paul Reddel B ringing in the private sector to provide water has often been a service? Provincial water companies, contentious idea, largely because nominally responsible for serving district of a perception that people consider water towns, have only limited resources and supply to be their natural right and some- tend to focus them on major provincial thing to be provided by government. In cities. So the government has been seek- Vietnam the issue is further complicated: ing alternative approaches to service given the history of a strongly centralized provision, including involving the private economy, would the private sector be will- sector. But given the country's history of ing or able to respond to new opportuni- a strongly centralized economy, there has ties in water infrastructure? Pilot projects been a question whether the private sector testing a new approach in two Vietnamese would be willing or able to respond to new towns provide encouragement: Allowing opportunities in infrastructure. communities a voice in determining how Testing a new approach water will be delivered and at what cost Typical is the situation in Lim Town, lying can lead to viable and politically accept- just 25 kilometers northeast of Hanoi, able solutions. And the local private sector along National Highway 1A, and in Minh is responding to the new opportunities. Duc Town, 15 kilometers northeast of Vietnam's remarkable, sustained growth Haiphong City, on the Gia River. With no in recent years has enabled the country to community water supply system in either lift some 20 million people out of poverty of these district towns, residents must rely in less than a decade. Still, Vietnam is far on untreated well or river water. In Minh from a rich country, and the well-being-- Duc Town many households buy drinking and therefore productivity--of its people water from a nearby town, but neither its fall short of their potential. Although source nor its quality is controlled. about 75 percent of the population still lives in rural areas, rapid urbanization is In 2002 PPIAF provided a technical assis- putting a strain on the country, especially tance grant of US$406,000 to pilot a new its ability to finance growing infrastruc- way of providing water supply to district ture needs. Among the country's 627 towns. Lim Town along with part of Noi district towns (with populations ranging Due commune to its east (with a total from 4,000 to 50,000), more than 400 still lack any form of piped water supply. Bill Kingdom is a lead water and sanitation specialist for the World Bank's East Asia and Pacific Region and was Faced with the urgent need in unserved PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY task manager for this PPIAF-funded activity in Vietnam. communities like these, how can Viet- Paul Reddel is PPIAF's program leader for East Asia and nam best expand access to water supply Pacific. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY population of around 12,500) was chosen private operator (amounting to customer as one of the pilots, and Minh Duc Town rates less the operator's costs). along with part of Ngu Lao commune on the south side of the Gia River (11,700) · The private operator was selected was chosen as the other. through open, competitive, transparent bidding. The aim was to test the viability of a new approach to delivering financially · The local authority had a grace period of sustainable, customer-focused services--a 36 months before beginning to repay the demand-driven approach in which each loan, allowing time for the operator to community would determine the best way construct the system, connect custom- to deliver services, one for which its resi- ers, and start collecting revenues. dents would be willing and able to pay. The services required would be bundled Under the approach being piloted in Viet- into a single contract--a design, build, nam, the project owner--which the local and lease (or DBL) contract--and each People's Committee in each case decided community, along with the local authority would be the provincial water company-- and the provincial water company, would would select a contractor through a take part in designing and implementing competitive process. That contractor the scheme. would carry out the detailed design work on the water supply system, construct the While this is a new concept for Vietnam, a system, and then operate the system for demand-based approach has already been a specified lease period. The contractor used in the Philippines, and the experi- would pay a lease fee to the provincial ence there showed that the private sector water company as project owner. Once the could meet the water needs of unserved lease period ended, the provincial water communities through arrangements such company would take over management of as competitively bid DBL contracts. This the system. The aim experience has provided an initial model for engaging with the private sector on the The support provided through the PPIAF was to test pilot projects in Vietnam, though it had to grant included assisting the provincial a demand- be modified to fit that country's character- water companies and local authorities with the unfamiliar tasks involved in preparing driven istics. The Philippine model includes these key features: such novel projects for bidding, evaluating approach bids, and awarding the contracts (Box 1). Construction of the water supply project allowing · The preliminary designs, resulting water rates, and any other obligations were for Lim Town is being financed by a grant communities presented to the community and then from the Swiss Agency for Development to determine refined on the basis of facilitated feed- and Cooperation (SDC), and that for back and discussions. Minh Duc Town by a grant from Finland's the best way Ministry of Foreign Affairs. to deliver · The local authority and potential customers were required to "sign up" for Engaging the communities services a level of service and commitment that At the heart of the pilot projects were they selected. Once the local authority extensive efforts to engage the communi- and at least 60 percent of the poten- ties. These efforts clearly paid off: nearly tial customers had done so, the project 90 percent of households in the two could proceed. towns agreed to connect to the new water systems--at water prices twice those in · The loan to pay for the project was made the areas served by the provincial water to the local authority, which would be companies. responsible for servicing it. Funds for servicing the loan would come from the The pilot projects used a range of tools to lease fee paid to the authority by the engage the communities and other stake- Meeting water needs in Vietnam options primarily addressed the extent of Box 1 the proposed networks and the associated BuIldIng PArtnershIPs costs. Once local authorities chose a tech- The PPIAF support not only helped undertake a nical option for each pilot, drawing on pioneering transaction in Vietnam's water sector. the results of initial consultation with the Importantly, it also helped mobilize support from other bilateral and multilateral sources. This community, the option was taken back to includes the financial support provided by the the community for final assessment. Swiss Agency for Development and Cooperation The consultation process also included (SDC) and Finland's Ministry of Foreign Affairs for construction of the water supply projects in Lim discussions of two customer-oriented and Minh Duc Towns. It also includes support from issues. First, the communities had a choice Nearly 90 the SDC for several additional capacity building of two household connection options, one activities: requiring that customers pay an up-front percent of · Training bidders and provincial water companies connection charge and then lower rates for households in preparing for the bidding of the design, build, water, and the other involving no connec- agreed to and lease (DBL) contracts and in evaluating bids. tion charge but higher rates. Both chose the connect to This included developing a simple spreadsheet second option. This option also included to allow bidders to manage relatively complex a minimum consumption charge for each the new water computations for financial bids. connection equivalent to 5 cubic meters systems · Carrying out information, education, and commu- a month, a mechanism to demonstrate nication activities to promote hygiene. potential customers' commitment to using · Establishing a revolving fund, managed by the the service once connected and to reduce Province Women's Union, to make small loans to the commercial risks for the operator. households for investments in sanitation facilities. · Conducting a study on the health and poverty Second, the communities, understanding impacts of the water supply project in Lim Town. that prices would increase over time as a result of inflation, were asked whether · Funding the activities aimed at engaging the communities. they preferred annual but smaller price increases or less frequent (such as every The Water and Sanitation Program, an interna- tional partnership housed in the World Bank, three years) but larger price increases. Both is documenting and disseminating the lessons communities opted for annual increases, learned from the pilot projects. and this choice was incorporated into the project design. Awarding the contracts holders, including socioeconomic surveys While bidding proceeded separately for and surveys to assess demand, willing- each town, the process was the same for ness to connect, and willingness to pay. A both. The contractor was to be selected crucial element in achieving broad buy-in through competitive bidding, with the was the commitment by local authorities bidding based on a combined technical to the initiatives. and financial proposal. Potential bidders To allow the communities to decide which had to meet prequalification criteria. approach to water supply was best, each Those that did so then went onto a list for was consulted on technical, financial, and approval by the provincial or municipal cost recovery options, taking into account People's Committee. In Lim Town only projected water demand up to 2015. private contractors were allowed to bid (a Two technical water supply options were requirement under the SDC's funding). In developed for each pilot, reflecting the Minh Duc Town any eligible contractor was town's situation and characteristics. These allowed, including state-owned enterprises. During the 12-year contract period (up · The willingness and ability of the local to two years for design and construction private sector to participate in the bidding followed by a 10-year lease period) no forthecontractsconfirmthelocalmarket's adjustments in construction prices will be appetite for such opportunities. allowed. But the contract does allow adjust- ments in water charges over the 10-year · Still, it must be kept in mind that lease period to account for general price developing and implementing effective inflation as well as adjustments in the lease approaches to seeking private sector fees to reflect growth in customer demand. participation takes time. Support is The contract design includes a three-year required to build capacity in both the grace period before lease payments become public and the private sectors. The due, and careful attention was paid to commitment of time and other resources ensuring that the contractors would have needed to ensure success should not be a cumulatively positive cash flow over the underestimated. contract period. As construction is completed and long- Multiple enterprises, both private opera- term operations begin in Lim and Minh tors and eligible state-owned companies, Duc Towns in early 2007, the results are participated in the prequalification and likely to provide more guidance on involv- bidding rounds. After evaluation of ing the private sector in such communities. the bids, both contracts were awarded But the pilots have already had influence to local private operators in Janu- on the scaling-up of opportunities for ary 2006. These operators, now in the private sector participation in Vietnam. construction phase, are expected to begin delivering water to customers by Two World Bank­financed projects have January 2007. applied the demand-responsive design Early lessons approach for providing services and will seek to contract out system operations: the The pilot initiatives in Lim and Minh Urban Water Supply Development Project, Duc Towns demonstrate the potential of a strongly participatory approach--paying which includes a US$56 million initiative particular attention to poor households-- targeting district towns, and the Red River for realizing financially sustainable projects Delta Rural Water Supply and Sanitation that meet the articulated needs of small Project. The Finnish Small Towns Water towns. And they show that open, transpar- Supply and Sanitation Program has also ent, competitive bidding can be used to applied these principles. engage private operators to provide water service to district towns in Vietnam. GRIDLINES The pilots have also produced early lessons with broader import: Gridlines share emerging knowledge on PPP and give an overview of a wide · Whenconsultedonwhatthey selection of projects from various regions of want and are willing to pay the world. Past notes can be found at www. ppiaf.org/gridlines. Gridlines are a publication for, consumers are willing of PPIAF (Public-Private Infrastructure Advisory to pay prices for water that Facility), a multidonor technical assistance PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY facility. Through technical assistance and exceed current charges, knowledge dissemination PPIAF supports the efforts especially when service of policymakers, nongovernmental organizations, quality will improve. research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA the views or the policy of PPIAF, the World Bank, Phone(+1) 202 458 5588 FAx(+1) 202 522 7466 or any other affiliated organization. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY generAl eMAIlppiaf@ppiaf.orgweB www.ppiaf.org