2008 - 2009 - Pinsent Masons Water Yearbook 2012 - 2013

APPENDIX 2: PRIVATE SECTOR PARTICIPATION
Water and power contracts compared
Water is too often seen as power’s poor relative. It lacks the glamour of the major power contracts in
terms of immediacy of delivery and the prospect of expensive new plant. Even so, its lower profile
offers the prospect of more attractive returns.
Power and water privatisation pros and cons compared:
Service sector Water / Wastewater Power
Political risk
Politics
High political risk
‘God’s gift’ ought to be free
Essential for life & health
At the national level
Essential for modern comforts
A new resource needs to be paid for
Rate of return High (15-25%)
A few global and local players
Lower degree of competition
Size of project Small to medium
(for first 5 years) USD50–400million capex
Technology import Low part of overall cost
Mainly local construction
Medium (10-15%)
Many global and regional players
Highly competitive market
Medium to large
USD250–1,100million capex
The main cost component
Imported or via joint ventures
It is interesting to note that some of the arguments against water, when compared with power, appeal
to the sense of the irrational. These arguments are being eroded by the expediencies noted in the
sections above. One of the more common arguments against private sector involvement in water and
sewerage services against power (and telecommunications) is that the former are more ‘essential’ or
‘basic’ than the latter, especially for poorer people. The manifest shortcomings of the status quo tend
to be overlooked in such debates, along with the fact that water and sewerage programmes can
largely be put into place with the judicious use of local manufacturing and technological capabilities.
This is not to denigrate energy provision projects, but to highlight the importance of adequate water
and sewerage services in economic development.
The bad news (except for project arrangers) is that the amount of legal and preparatory work for a
water/sewerage and a power project is broadly similar. It is tempting, given the disparity in size
between these projects to stint on such work. It is to be hoped that the examples included in this
publication will demonstrate the paramount importance of due diligence in both bid preparation and
contract negotiation, while treating each contract on its own.
The politics of PSP and service extension
One of the most common political arguments against privatising water and sewerage services is that it
will mean that water will be too costly for poorer people. In fact, pragmatic pricing policies based upon
charging more per unit of water for households who use water for non-essential purposes has made
private water provision both affordable and viable. Cross-subsidies and social provisioning lie at the
core of service extension. Appropriate and safe water and sanitation services can be provided for 2-
5% of household income. Questions about affordability and private sector involvement in developing
economies tend to ignore the fact that under the current arrangements, it is the poorer people living in
urban areas who have to pay over the odds to water vendors for supplies of distinctly dubious quality.
People are willing to pay an economic price for water services if it comes with guarantees of quality
and availability.
Comparing the cost of water supplied from household connections and informal vendors
USD per m 3 Household tap Public tap Water vendor
Bandung, Indonesia 0.38 0.26 3.60
Dhaka, Bangladesh N/A 0.08 0.84
Kathmandu, Nepal 0.18 0.24 2.61
Bombay (Mumbai), India 0.07 0.07 0.50
Source: McIntosh, A & Yniguez, C. (1997)
It is the absence of piped water that costs more both in financial and public health terms. Popular
support exists for adequate supplies of water and improved public health at an affordable rate.
Opposition is most visible amongst the better off households who oppose paying an economic price
for piped water supplies for gardens, swimming pools and other non-essential household uses.
Indeed, with the lack of metering or progressive tariff structures, they are subsidised by poorer
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Pinsent Masons Water Yearbook 2008-2009