Viewpoint Note No. 147 August 1998 GiseleSilva, Private Participation in the Water and Nicola Tynan, and Yesim Sewerage Sector-Recent Trenu's Yilmaz The PPI Project In developing countries private sector partici- sewerage services to municipal or provincial Database covers pation in water and sewerage is a relatively re- governments, which often had little experience private participation in infrastructurein cent phenomenon. Before 1990 almost all with private sector contracting and regulation developing countries. developing countries relied on government pro- and were thus relatively unlikely to initiate pri- The database records vision of water supply and sewerage services; vate transactions. details of all projects owned or managed by private participation in the sector was rare. The private companies in potential for gains from private sector involve- Between 1984 and 1990 developing countries 1984-97 in the water, ment, through greater efficiency and improved awarded contracts for only eight water and sew- energy, transport, and telecommunications access to finance for new investments, was as erage projects to private companies. The private sectors. This Note great in water and sewerage as in other infra- capital investment in these projects was USS297 focuses on private water structure sectors. But governments' willingness million.' Since 1990 private participation in the and sewerage projects that reached financial to take the steps to secure private participation water sector in developing countries has accel- closure between 1990 was relatively limited. In many countries water erated (figures 1 and 2). The number of private and 1997 and surveys continued to be treated as a social rather than water projects reaching financial closure increased regional trends, type of private participation, an economic commodity. There was consider- more than tenfold between 1990 and 1997. though project size, and top able political resistance to raising tariffs to cost private involvement is still small relative to public sponsors and operators, recovery levels, increasing the risk of long-term provision in the water sector and to private partici- See box 1 for an explanation of the PPI investment in water and sewerage assets. In ad- pation in other infrastructure sectors (particularly project criteria and dition, many national governments in recent energy; see the forthcoming Viewpoint for data database terminology. years decentralized responsibility for water and on private participation in the energy sector). FIGURE 1 CUMULATIVE WATER AND FIGURE 2 CUMULATIVE NEW CAPITAL SEWERAGE PROJECTS WITH EXPENDITURE IN PRIVATE WATER PRIVATE PARTICIPATION IN AND SEWERAGE PROJECTS IN DEVELOPING COUNTRIES, 1990-97 DEVELOPING COUNTRIES, 1990-97 100 1997 US$ millions 25,000 ec 60 15,000 40 10,000 20 5,1190 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1990 1991 1992 1993 1994 1995 1996 1997 Source: PPI Project Database. Source: PPI Project Database. ON The World Bank Group . Finance, Private Sector, and Infrastructure Network 2 Private Participation in the Water and Sewerage Sector-Recent Trends TABLE 1 PRIVATE WATER AND SEWERAGE PROJECTS IN DEVELOPING COUNTRIES, BY REGION, 1990-97 By the end of 1997 private companies operat- ing in developing countries had reached finan- cial closure on USS25 billion of investment in -t 37water and sewerage projects. In total, ninety- seven projects had been implemented in East Asia and the Pacific 30 11,913 thirty-five developing countries, ranging from Europe and Central Asia 15 1,499 management contracts to leases, concessions, Latin America and the Caribbean 40 8,225 divestitures, and greenfield build-operate-own Middle East and North Africa 4 3,275 (BOO) or build-operate-transfer (BOT) arrange- Sub-Saharan Africa 8 31 ments. This Note provides an overview of pat- terns and trends in these projects. Total 97 24,950 Sector trends Note: Data may not sum to total because of rounding. Source: PPI Project Database. The PPI Project Database reveals the follow- ing trends in private participation in water and sew erage: FIGURE 3 PRIVATE PARTICIPATION IN WATER AND SEWERAGE * Aregionalgandnaonalconcentrationofprivate IN DEVELOPING COUNTRIES, BY REGION, 1990-97Areinladatolcnetainofpive IN DEEOIGCUNRE,B EGO,19water projects, reflecting varied government Projects efforts to create conditions for sustainable pri- Eurotand vate involvement through pricing, regulatory, Eura Asia and institutional reforns, but also a ripple ef- fect from growing government familiarito with private involvement in the sector. East Asia and Sub-Saharan Africa c A dominance of concession contracts com- the Pacific pared with divestitures, BOT contracts, leases, MiddleEast and and m-anagement contracts. North Africa c A few international companies sponsoring and operating most major projects. But the number of companies invulved in private contracts is growing, and it remains too early Latin America to tell whether other new entrants will in- and the Caribbean 42% crease their international presence. Total investment Latin America and East Asia dominate Middle East and l; 13% North Africa A regional breakdowvvn of private sector involve- M T X K Europe and ment in the water and sewerage sector shows East Asia and Central Asia a concentration of projects in Latin America the Pacific Su-ahan Africa and the Caribbean and East Asia and the Pacific (table 1 and figure 3). This regional concentra- tion is similar to that in energy and transport. The growth of the sector in these two regions coincides with the opening of markets and, America particularly in Latin America, progress towalrd and the Caribbean the establishment of credible legal and regula- 48% tory institutions. Latin American countries have awarded forty private contracts, which have Source: PPI Project Database. brought in-vestment commitments of US$8,225 The World Bank Group 3 BOX I PPI PROJECT DATABASE: PROJECT CRITERIA AND DATABASE TERMINOLOGY Database coverage significant investment risk. This category * To be included, a project must have reached includes build-transfer-operate, build-lease- financial closure and directly or indirectly transfer, and build-rehabilitate-operate-transfer serve the general public. contracts as applied to existing facilities. • Sectors covered are energy, water, transport, * Greenfield projects-A private entity or a and telecommunications. public-private joint venture builds and • The water sector includes the following operates a new facility. This category includes subsectors and segments: potable water build-operate-transfer and build-operate-own treatment and distribution and sewage contracts. collection and treatment. * Divestitures-The state sells an equity stake * Moveable assets, incinerators and stand- to private entities; this may or may not involve alone solid waste projects, and small projects private management. This category includes such ais windmills are excluded. full and partial divestitures. * The period covered is 1984-97. * The countries covered are developing Definition of financial closure. For greenfield countries, as defined and classified by the projects and for operations and maintenance World Bank, in East Asia and the Pacific, contracts with major capital expenditure Europe and Central Asia, Latin America and financial closure is defined as the existence of a the Caribbean, the Middle East and North legally binding commitment of equity holders or Africa, South Asia, and Sub-Saharan Africa. debt financiers to provide or mobilize funding for the project. The funding must account for a Definition of private participation. The private significant part of the project cost, securing the company must assume operating risk during the construction of the facility. For operations and operating period or assume development and management projects a lease agreement or a operating risk during the contract period. In contract authorizing the commencement of addition, the operator must consist of one or management service must exist. For divestitures more coirporate entities, with significant private the equity holders must have a legally binding equity participation, that are separate from any commitment to acquire the assets of the facility. governmient agency. Sources Project iypes * The World Wide Web. * Operations and management contracts-The * Commercial databases. private entity takes over the management of a * Developers and sponsors. publicly owned enterprise for a given period. * Regulatory agencies. This c:ategory includes management contracts and leases. Contact. The database is maintained by the * Operations and management contracts with Private Participation in Infrastructure Group of major capital expenditure-These are the World Bank. For more information contact concession contracts for existing facilities Mina Salehi at 202 473 7157 or msalehi@ under which the private entity also assumes worldbank.org. 4 Private Participation in the Water and Sewerage Sector-Recent Trends TABLE 2 TOP FIVE DEVELOPING COUNTRIES BY TOTAL INVESTMENT IN PRIVATE WATER AND SEWERAGE PROJECTS, 1990-97 Despite an early start in the region, private I I I litil D111 participation in Africa is progressing slowly. In uiitt't.nnaer.iuN IHiir.1111u1 the absence of strong commitments on tariffs and credible regulatory provisions, private com- panies have been unwilling to take investment Argentina 6,183 7 risk in the region. In some cases they have Philippines 5,820 3 taken on a degree of commercial risk under lease contracts. In other cases private partici- Malaysia 5,030 6 pation has been limited to short-term manage- Turkey 1,230 2 ment contracts. No country in South Asia has Mexico 597 12 yet awarded a water or sewerage contract to Source: PPI Project Database. the private sector, but a number of proposals are being considered (for example, in Tiripur, India, and Karachi, Pakistan). TABLE 3 TOP FIVE DEVELOPING COUNTRIES BY NUMBER OF PRIVATE WATER AND SEWERAGE PROJECTS, A few countries lead the way 1990-97 Similar to the trend in power and transport, in each region a few countries have awarded the _________________ majoritv of the water and sewerage contracts _______________________________________________ a(tables 2 and 3). In East Asia, for example, China has awarded thirteen contracts and Malaysia six, China 503 13 together representing 63 percent of the East Mexico 597 12 ~~~~~~~~~~Asian total of thirty projects. A similar picture emerges in Latin America, with Mexico award- Brazil 583 8 ing twelve contracts, Brazil eight, and Argen- Argentina 6,183 7 tina seven. This pattern is largely explained by Malaysia 5,030 6a the relative ease of implementing further projects once an initial project is in place, given the de- a. The Czech Republic also implemented six projects between 1990 and 1997, with total velopment of local private participation models investment of US$25 million. Source: PPI Project Database. and a degree of local experience with private transaction processes. In Argentina, for example, the availability of model contracts and regula- tory documents is assisting smaller cities and million. East Asian countries have awarded provinces in working with the private sector. thirty contracts, with investment commitments of US$11,913 million.2 The relationship between total investment and the number of projects awarded is not strong. Europe and Central Asia and the Middle East The total investment in any country depends and North Africa have small but growing private on how and where the projects have been involvement in the water sector, and recent implemented. The top three countries in terms projects are likely to encourage imitation. For of number of projects-China, Mexico, and example, the Moroccan government awarded Brazil-have awarded small contracts, and they a thirty-year concession contract for a power- account for only 7 percent of investment in water-sewerage operation in the Rabat and Sale developing countries in the water and sewer- regions, following a similar project imple- age sector. The top three countries as ranked mented in Casablanca in 1997. Sub-Saharan by investment in private projects have awarded Africa has almost no private investment, but fewer contracts but of larger scale. Argentina, has eight management and lease contracts. the Philippines, and Malaysia have awarded 16 The World Bank Group 5 TABLE 4 PRIVATE WATER AND SEWERAGE PROJECTS IN DEVELOPING COUNTRIES, BY TYPE, 1990-97 percent of private projects, but they account _1 _ _ for 69 percent of all private investment in water and sewerage. Z Projects differ vastly in size Concession 48 19,909 Project sizes also differ within countries. In Ar- Greenfield 30 4,037 gentina, for example, one project, Aguas Operations and management 13 n.a. Argentinas, accounts for US$4,464 million (54 Divestiture 6 997 percent) of the planned private investment in Latin America, while the country as a whole Total 97 24,950 accounts for US$6,183 million. Similarly, in East n.a. Not applicable. Asia three Philippine projects account for half Note:Datamaynotsumtowotalbecauseofrounding. the total investment commitments. Source. PPI Project Database. Concessions are the most popular FIGURE 4 PRIVATE PARTICIPATION IN WATER AND SEWERAGE IN One striking feature of the water and sewerage DEVELOPING COUNTRIES, BY TYPE OF CONTRACT, 1990-97 sector is the dominance of concessions com- pared with other forms of private participation.3 Projects Concessions are attractive to governments be- Operations and management cause they place full operational and investment 13% responsibilit:ies, and associated commercial and Greenfield Divestiture investment risk, with the private sector, maxi- 6% mizing potential benefits from efficiency gains and access to private sector financing. But they also require significant government commitment, and efforts to create a credible regulatory envi- ronment for private investment. Of ninety-seven - 0 contracts with the private sector, forty-eight are concession contracts, accounting for 49 percent goncessions of all water and sewerage projects and 80 per- cent of all private capital investment (table 4 and figure 4). By contrast, in the energy sector most private projects are greenfield projects or Total investment divestitures. - Greenfield Differences in government objectives help Ds explain differences in the contracts preferred in 4 Divestiture each sector. tn the energy sector private involve- - ment has been driven largely by an increasing demand for new capacity, requiring significant t ; private sector investment. In the water sector . most developing countries not only need to expand capacity and distribution networks, but Concessions also face high levels of unaccounted-for water and inefficient services. The creation of new < capacity detached from the management of distribution networks can exacerbate system Source: PPI Project Database. 6 Private Participation in the Water and Sewerage Sector-Recent Trends TABLE 5 PRIVATE WATER AND SEWERAGE PROJECTS IN DEVELOPING COUNTRIES, BY SUBSECTOR, 1990-97 jects in which the private company retains own- u_ ership of the facilities. All these build-operate- own schemes are in Latin America and the mi-u . _ Caribbean. _S3~~~~~~~ Most of the greenfield projects in the sector Water treatment 25 4.249 (twenty-five of thirty, with one project covering Full water and sewerage service 19 11,935 both water and sewerage) are for the construc Water treatment and distribution 16 1,177 tion and operation of water treatment plants in countries with an increasing demand for piped water. In these cases companies typically have Water and sewerage networks 7 496 a take-or-pay agreement with the municipal gov- Water distribution 5 218 ernment for bulk water sales. All six greenfield Sewage collection and treatment 5 2,754 projects in China, for example, are for water Other 8 3,536 treatment plants. In the relatively high-income countries of Latin America governments have Total 97 24,950 awarded greenfield contracts to meet the grow- Note: Data may not sum to total because of rounding. ing demand for sewage treatment plants. Source: PPI Project Database. Divestitures are rare Divestiture of public water and sewerage as- inefficiencies. The construction of new water sets is comparatively rare; six projects, all par- treatment plants, for example, increases the pres- tial divestitures, account for 6 percent of all sure of water going into the distribution net- water projects and only 4 percent of private work, increasing leaks. If, in addition, collections investments. This small share highlights the performance is poor, raising funds to meet take- sectoral difference between water and energy or-pay commitments will be difficult. Greenfield in asset ownership: most water and sewerage contracts often do not give the private contrac- assets remain in the public sector, and govern- tor an incentive to take these prohlems into ac- ments are resistant to giving them Lip. The avail- count. By contrast, concessions can encourage ability of concession contracts as an alternative improved management and maintenance of the to divestiture has allowed governments to main- whole network. tain ownership of sector assets while delegat- ing substantial responsibility and risk to the Greenfield projects typically involve bulk private sector. water sales Management and lease contracts are less risky The thirty greenfield contracts account for 31 percent of all projects and US$4,037 million of Management contracts and leases are intended private investment. Almost all greenfield to improve the performance of loss-making pub- projects take the form of BOT contracts, with lic utilities while leaving the public sector pri- ownership reverting to the government after marily responsible for new investments. Funding the initial contract period. In public-private joint for this investment often comes from develop- ventures ownership of the assets often remains ment bank loans, and all investment risk is borne with the public partner during the contract term. by the government. These types of contracts Some BOT contracts also give the private spon- have therefore proved attractive in countries sor responsibility for mainagemiienlt of the dis- where the private sector perceives investment tribution network, making them more like risk to be high. Management contracts attempt concession contracts. There are only five pro- to improve efficiency through incentive pay- The World Bank Group 7 TABLE 6 TOP FIVE PRIVATE SPONSORS BY NUMBER OF PROJECTS, 1990-97 I Eli a liSli I i~~~~~~~~~~~~~~111'1 1;1 i il1i; Suez Lyonnaise des Eaux 28 16,153 Vivendi (formerly CGE) 13 5,275 Aguas de Barcelona 6 9,072 Thames Water 6 1,375 SAUR Inteirnational 5 38 Source: PPI Project Database. TABLE 7 TOP FIVE PRIVATE SPONSORS, BY REGION, 1990-97 Number of projects Sponsor i. *' w'.*. Suez Lyotnaise des Eaux 11 7 6 2 2 28 Vivendi (formerly CGE) 4 3 3 0 3 13 Aguas de Barcelona 0 0 6 0 0 6 Thames Water 4 1 1 0 0 6 SAUR International 1 1 0 0 3 5 Source: PPI Project Database. ments based on measured performance and in- ment in water relative to sewerage (table 5). volve minimal transfer of risk to the private sec- Government priorities have generally given tor. Leases do transfer commercial risk to the greater emphasis to supplying water than to private partner, thereby creating direct incen- removing wastewater after use. Consumers are tives to improve revenues and reduce costs. more willing to pay for water delivery service Together, management contracts and leases con- that yields immediate and direct benefits than stitute 13 percent of all projects. Seven of the for services such as sewage treatment, the ben- ten projects in Africa are management contracts efits of which are more dispersed. In Asia con- or leases. Management and lease contracts ac- tracts commonly focus solely on the water count for all single-sector water projects in Af- sector (the national concession for sewerage rica; all three concessions for water services in services in Malaysia is an exception, as are the Africa also irvolve electricity generation, trans- Manila water and sewerage concessions in the mission, and distribution. Philippines). By contrast, concessions cover- ing water treatment, water distribution, and Private participation is easier in water than sewerage services, as well as BOTs for sewage in sewerage treatment, are relatively common in Latin American countries. In this region a well- A breakdown of private involvement by sub- developed water infrastructure is more often sector (water treatment, water distribution, sew- already in place, and increasing wealth allows age collection, sewage treatment) highlights the municipal governments to extend concessions greater prevalence of private sector involve- to sewerage. 8 Private Participation in the Water and Sewerage Sector-Recent Trends Few major players so far dominance of a few major international play- ers are characteristics of an industry in transi- A few major companies dominate private par- tion. Developing countries are opening their ticipation in the water and sewerage sector in water and sewerage sectors to greater private developing countries (see table 6 for the top participation and giving more private opera- five sponsors by number of projects in which tors the opportunity to gain experience in the they are involved).4 The top five sponsors are sector. As opportunities in developing coun- involved primarily in concessions and lease or tries increase, water sector projects are likely management contracts, more rarely in divesti- to attract companies with domestic experience, tures and greenfield projects. as well as new companies. (We have recently witnessed Enron's acquisition of a water com The small number of major players reveals the pany in England with the aim of expanding novelty of private contracts in the water sector into the water sector overseas.) Companies al- compared with other sectors. Many contracts are ready operating in developing countries are awarded to consortia made up of local compa- taking on additional projects as they acquire nies, often operating in other industries, and one experience in the sector. but may face a con- or two experienced international companies. A straint from managerial economies of scale. breakdown of the major players by region high- Expansion may therefore depend on new en- lights even more clearly how few major inter- trants to the sector. national players operate in developing countries forum intended to (table 7). Only one of the top five sponsors op- MI dollar amounts are in 1997 IJ.S. dollars. encourage dissemina- erates in all five developing regions. There are Any impact of thie East Asian financial crisis is likely to show in the tion of and debate on signs, however, that the growth of the sector next update of the water project datahase. ideas, innovationis, and wilbiga nraei h u bro nen- For cdetails on concession contracts see Pierre Cruislain andi Micliel best practices for x will bring an increase in the number of interna- erf, "Concessions-The Was to Priatize infrastructure Sectir Mo- panding the private tional players. Water and sewerage contracts in- nopolies' (viewpoint 59, October 1995), Claude crampes and An- sector. The views pub- creasingly are attracting bids from consortia of tonio Estacle, Regulating Water concessions (viewspoint 91, Sep- lisoed are tose of the mttltisector utility and constrmuction companies. tember 1996). PenelopeJ. Brook Cosen, The F rivate Sector in sauthors and should not WVater andi Sanitanon Bosw to Get Ston-ed" (Viewpoint 126, Sep- be attributed to the tetober 1997), and Helen Nankani testing the W\aters-A Phased World Bank or any of Conclusion Approach to a Watcr concession in Trinidad anct Tohago (view- its affiliated organiza- point 103, lanciars 1997). tions. Nor do any of the Sponsoir companies that flase a sinall stake in a few large projects contusions represent The water sector has a long history of tariffs have an inflated market share if market share is calculated accord off ical policy of the below costs and political resistance to raising ing to the total investment in projects. At trie otlher extrenie, tmajor toecutnko its them. Considerable government commitment is sponsors that focus on managenie-it and lease contceacts but undet- Executive Directors thcm. Conslderablc govcrnment commlt lS take little or no capital investment are excludcd firm a calculattion or the countries they required to raise tariffs to cover costs, and to hased on investment. t sing the number of projects avoicds this bias represent. build regulatorv arrangements that give private and highlights tire major plavers in the sector bettcr than the size of projects in wihich each conp any lijs a stake.'tc number cf prrojects To rde aditinal companies confidence that they can make a fair poetiwihahnpn aaaeTeuierpoer To order additional companies confidence that they can make a fal still lls not a perfect measure, hoxever because it ignores the cross copies please call rate of return on their investments. Even rela- owsnershipbetweensomesponsorcompaniesanctthereforeckduhle 202-458-1111 or contact tively low-risk contracts, such as management contns when tVO affiliated companies hase a stake in -he satie Suzanne Smith, editor, contracts and leases, still require governments pljcct. Room F6P-188, The WNorld Bank, to establish their credibility as good partners for Gisele Silta. iVicola Tynan, and Yesim Yilmaz 1818 H Street, NW, the private sector. While many governments are Ge/Sia. a eo / 1n an, and Yrn l7/na z Washington, D.C. 20433, piaegvrmnsGeorgqe Mason U-n ivers~ity and Private Participa- or Internet address currently contemplating reforms that will make in or Internet address t~~~~~~~ion inInfrastructure Group ssmith7@worldbank.org. private participation in water and sewerage The series is also possible, only thirty-five countries in the devel- available on-line oping world have so far succeeded in imple- (www.worldbank.org/ htmlifpd/notes/ menting private transactions in the sector. notelist.htmi). ® Printed on recycled Private participation in the water sector is very paper. new. The small number of projects and the