2008 - 2009 - Pinsent Masons Water Yearbook 2012 - 2013

APPENDIX 2: PRIVATE SECTOR PARTICIPATION
O&M and lease contracts
The next step up involves awarding O&M or lease contracts. Operations & Maintenance (O&M)
contracts usually operate on a fixed fee basis. Lease contracts typically involve asset operation and
tariffs, but not capital expenditure. These two types of contract do not delegate full financial
responsibility to the private operator, especially with regards to private capital investments.
Concessions
Concessions involve the private sector operation of assets in order to pay for new facilities and
upgrading work. Build-own-operate (BOO) and build-operate-transfer (BOT) contracts sell specific
services to the municipality in relation to a specific programme of capital improvements, while the full
utility concession contract embraces all aspects of service provision and capital spending. These
contracts require a much more specific regulatory environment so as to account for the elements of
risk involved. Other varieties sometimes seen are BOTT (build, operate, train and transfer) and
DFBOT (design, finance, build, operate and transfer) contracts.
A BOO/BOT project’s cash flow is usually contractually pre-determined, often with government
backing. There is an element of construction risk, but the absence of market risk means that the
project can have more debt loaded in than in a full utility privatisation. A project’s construction risk can
be mitigated whereby a facility already generating cash flow gets taken over for expansion by the
private sector. Therefore BOT/BOO projects are an effective means of rapidly organising private
capital and management towards a narrow range of services. However, some of the simpler projectoriented
contracts do not affect the utility’s management and operation, thus underlying problems such
as leakage (and illegal interception), over-staffing and poor tariff collection may not be addressed. In
these cases, the underlying utility remains uncreditworthy, and it can be argued that a BOO/BOT
contract may therefore in fact delay system-wide improvements.
In full utility concessions, existing revenues can be used immediately to service debt, thereby
mitigating construction risk. Over a period of time, a utility can benefit from a steady flow of revenues
from a diversified customer base and, if it integrates horizontally, from a diversified asset base. A more
robust balance sheet can be created, allowing for internal finance as well as the use of capital markets
to sell long term debt.
Asset sale
The most dramatic and politically contentious form of privatisation is the outright sale of the utility’s
assets. To date this has been used in the 1989 sale of the English and Welsh water and sewage
companies (WASCs), in two examples in the Czech Republic, in one in Belize (subsequently bought
back) and in Chile up to 2000. While the assets are in private hands, the licence to operate them can
be subject to renewal. In the case of the UK WASCs, a 30 year operating licence was awarded to
each entity in 1989. It is evident that the assets carry no value unless one can operate them, while the
cost of building a duplicate network would be prohibitive.
The problem with losing stakeholder participation in utility services is that it can erode the customers’
sense of civic duty. During the 1976 drought, water consumption in England and Wales fell and
standpipes and supplies brought in by tankers were accepted stoically. "Share a bath with a friend"
suggested Dennis Howell, the then Minister for Drought. In contrast, during the 1995 drought,
consumption rose amidst intense bitterness even at the possibility of water restrictions being imposed.
They were not, but it was evident that an unexpectedly large element of the public’s goodwill was
unintentionally divested in 1989. In contrast, Aguas de Barcelona (Agbar) experienced a significant
drop in consumption during the 1994-96 drought in Spain. Agbar is a private sector operator of
municipally owned assets on a concession basis.
424
Pinsent Masons Water Yearbook 2008-2009