2008 - 2009 - Pinsent Masons Water Yearbook 2012 - 2013

PART 1: THE WORLD OF WATER 2008-2009
By commoditising water, (treating it as an economic good and charging to recover the costs of
service provision) funding can be made available for improving water services and its prudent
use is encouraged. Private sector participation has been used by a number of countries in order
to support attaining these objectives. The reasoning behind this has been access to new
sources of funding along with the scope for improved efficiency of service delivery, linked to a
series of performance targets. Between 1995 and 2005, World Bank supported PSP and
Privatisation (in Chile) projects involved investment of USD12.8billion for water only contracts
and USD26.8billion for water and sewerage contracts (World Bank 2005). There are a number
of studies pointing towards efficiencies attained by the private sector, for example, research by
Europe Economics (Europe Economics 2003) for Ofwat the England & Wales’ water regulator
found that ‘privatised infrastructure companies have reduced unit operating expenditure by
some 1.25 to 3.5% per annum more than might have been expected in the absence of a
“privatisation effect” … greater efficiency following privatisation and the introduction of incentive
regulation.’ Indeed, the report identified a scope for 1.5-3.0% per annum real base operating
and capital maintenance expenditure and 2.0-4.0% per annum real base service operating
expenditure from 2003-13, 14-24 years after the companies were originally privatised.
PSP as a public health driver
Another factor favouring PSP can be its impact on public health Galiani et al (2005) found that
child mortality in Argentina fell by 5-7% during the 1990s in areas of Argentina where water
services were run by the private sector compared with those where services were still run by the
public sector, with a 24% fall in the poorest municipalities. It is evident that such an outcome will
only take place when suitable mechanisms exist to ensure affordability and prevent
disconnections for non-payment taking place.
As noted by Budds & McGranahan (2003) the 1992 Dublin principles were influential in
establishing a sympathetic climate towards PSP. Principle 4 states that ‘Managing water as an
economic good is an important way of achieving efficient and equitable use, and of encouraging
conservation and protection of water resources (WMO 1992).
Concessions and local capacity building
A number of cases have emerged where water concessions have been used to enable a
country to develop its water manage capabilities with the aim of becoming a regional centre. In
the Philippines, Manila Water having been listed on its local bourse is now being developed to
participate in bulk water projects in the Philippines and water O&M contracts in Asia (Manila
Water, 2006). Morocco’s ONEP seeks to develop the country’s experience with PSP so that the
country can in turn become a regional leader in O&M and technical support projects in Western
Africa (ONEP 2006). ONEP’s experience comes from its relationship with the LYDEC
concession serving Casablanca and a number of other concessions, with LYDEC again having
been listed on its local course.
The need for attractive contract exit routes
To date, four concessions which were awarded to international companies have seen a local
initial public offering (IPO): EMOS (Chile, 2002-04), LYDEC (Morocco, 2005), Tallinna Vesi
(2004) and Manila Water (Philippines, 2006), along with a mooted IPO for Maynilad Water
(Philippines, originally proposed for 2008). An IPO was envisaged for Aguas Argentinas, before
contract conditions deteriorated inexorably. A local IPO transfers at least part of the
shareholding in the contract from international to local hands and devolves corporate activities
towards the local level. They can also act as a material boost to local bourses because a well
managed water utility is typically regarded as an attractive, low risk investment.
Pro-poor policy implementation
There is a considerable debate about the applicability of rising block tariffs (Casablanca and
Malaysia,) versus the use of direct subsidies (Chile and Macao). Rising block tariffs work on the
principle of low water usage per account having a low fixed cost per unit of water, which rises as
the user consumes more. This is meant to mean that water for necessity is relatively cheap and
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Pinsent Masons Water Yearbook 2008-2009