Private Sector Participation in water supply and sanitation - WaterAid

WaterAid Ethiopia – Briefing note No. 7Tapping into the private sector?Private sector participation in water supply and sanitationIntroductionThe private sector is increasingly acknowledged as animportant development partner in the water andsanitation (watsan) sector, although there are somereservations about whether the private sector can meetthe needs of the poorest citizens. WaterAid Ethiopia(WAE) invited a private company, Metaferia ConsultingEngineers, to study the extent of private sectorinvolvement in the watsan sector in Ethiopia, theconstraints and challenges faced, and options for thefuture.This Briefing note will summarise the key findings andrecommendations arising from the research. The fulldetailed report will soon be available onwww.wateraidethiopia.org.Definition of private sector participationGenerally speaking, the term ‘private sector’ is used torefer to formal, profit-making enterprises, but can alsodenote any organisation that is not public, i.e.government owned or managed. The focus of privatesector participation in the water sector has traditionallybeen formal water companies, which are usually large,commercial and multinational. However, small-scaleand/ or informal operators are increasingly beingrecognised and described as private sector. Civilsociety organisations are also sometimes recognisedas part of the private sector when they engage in watersupply or sanitation provision.Case study:Hiwot Hand Pump Installation and Spring DevelopmentCooperative in Assosa, BGRS, (see photo above) is atypical example of grassroots private sectorinvolvement in the watsan sector. The 12 to 14members received training from the Ethiopian Socialand Rehabilitation Development Fund (ESRDF) andare now involved in excavating hand dug wells anddevelopment of springs for the government and nongovernmentalorganisations (NGOs). Since thecooperative started work, the cost of digging a well hascome down from 60,000 Birr to 33,000 Birr. If this typeof association were to be given appropriate training andsome funding, they could also bring about significantchanges in latrine construction.Employees of artisan’s association, Hiwot Cooperative,at work digging a well in a remote area of Benishangul-Gumuz Regional State (BGRS) – see case studybelowBackgroundMillions of people worldwide lack access to safe waterand sanitation facilities, in both urban and rural areas.In most cases, providing new services and significantlyimproving existing systems will require majorinvestment in new works, rehabilitation and extensionof supply systems and in efficient operation of waterutilities. In Ethiopia, the estimated investment requiredto meet the Millennium Development Goals in waterand sanitation is US $2,935.8 million. Private sectorparticipation in providing watsan services is seen bysome as one alternative in bridging the existing gap,through greater efficiency and increased financialresources. However, others believe that profit-makingenterprises will not take into account the needs ofthose least able to pay, leading to further exclusion ofthe poorest from these basic and essential services.WaterAid Ethiopia commissioned this study in order tohave a clearer picture of private sector involvement inthe watsan sector in Ethiopia as a basis for futureadvocacy work. The data collected aimed to addressthe following areas: the major activities of differentgovernment bodies involved in water supply andsanitation; areas of current private sector involvementin the sector and their range in study, design andconstruction; and possible areas of further privatesector involvement as well as constraints to enhancedinvolvement.1Photo credit: WaterAid/ 2004

MethodologyThe research consisted of a combination of desk-basedstudies and field research in the capital Addis Ababa, inAdama, Oromia Region, and in Assosa, Benishangul-Gumuz Region: all areas where WaterAid Ethiopia isactive. Telephone interviews were also conducted intwo additional regions.Information was collected from a range of levels mainlywithin the private sector but also including keygovernment personnel. Informants ranged from smallscaleartisans and government staff working atgrassroots level, to large national companies andgovernment policy makers. Approximately 30interviews were conducted in total.The intensive desk research consisted of a literaturereview of previous documents and studies related toprivate sector participation in the watsan sectorinternationally, and a review of the key relevant laws,strategies, policies, programmes and manuals in theEthiopian context.Key findingsInternational backgroundPreviously, the role of the private sector in the watsansector was seen as restricted to consultancy,construction and goods supply. Since the late 1990s,private sector participation has expanded to play alarger role, especially in industrialised countries suchas the UK, USA and France. Developing countries areincreasingly following their lead, after heavy promotionof the benefits of private sector involvement bygovernments and multilateral agencies. The WorldBank currently lists more than 100 countries in Asia,Africa and Latin America where private companies playa major role in water supply and sanitation provision.However, there has been vehement oppositioninternationally by those who believe that the privatesector will ignore the needs of the poor because of theirobligation to make a profit.For and against private sector participationThose who advocate for the benefits of the privatesector as a supplier of basic services argue that thepublic sector is characterised by inefficiency,mismanagement and conflicting interests. They believethat the private sector would introduce technical andmanagerial efficiency, expertise and new technologies;improve economic efficiency in operationalperformance and capital investment; inject large scaleinvestment or gain access to private capital markets;reduce public subsidies or redirect them more directlyto the poor; insulate basic services from short termpolitical intervention and limit intervention by powerfulinterest groups; and make services more responsive toconsumer needs and preferences through theintroduction of business oriented principles. Others feelthat the involvement of the private sector in the watsansector will further disadvantage the poor. Many thinkthat private sector participation will increase tariffs, andtherefore favour high-income consumers to thedetriment of the poor and social development goals.Ethiopian contextUntil 1991, Ethiopia’s economy was heavily controlledby the state. Major reforms since then have seen manystate owned enterprises sold to private companies, withrestrictions on non-local investors in a number ofcases. Public infrastructure remains underdeveloped,even by sub-Saharan Africa standards, and thegovernment lacks the financial or skills resources toaddress the issue without some form of private sectorinvolvement. The most common form of private sectorparticipation in the watsan sector is through servicecontracts, or private firms competing for governmenttenders to render various services. This involvesminimum private sector responsibility; see table below.Table: Allocation of key responsibilities in different private sector participation optionsIncreasing private participationServicecontractManagementcontractAffermage Lease Concession Build-owntransfer(BOT) typeDivestureAsset ownership Public Public Public Public Public Private/publicCapital investment Public Public Public Public Private Private PrivatePrivateCommercial risk Private Public Shared Shared Private Private PrivateOperations/Private/ Private Private Private Private Private PrivatemaintenancepublicContract duration (years) 1-2 3-5 8-15 25-30 25-30 20-30 Indefinite2

Photo credit: WaterAid Ethiopia/ 2005Tap attendants play an important role in water provisionand hygiene education at grassroots level.Key players in the Ethiopian watsan sectorEthiopia is a federal state, with powers transferred toregional level, and further devolved to local woreda andkebele levels, with supervisory, policy making andtechnical assistance bodies at federal level. TheMinistry of Water Resources is responsible fordeveloping policies, rules, regulations and guidelines,and for setting standards and procedures. The WaterSector Development Programme states that watersupply and sanitation activities at regional level are theresponsibility of regional bureaux; therefore, regionalwater bureaux are the main implementers in thewatsan sector, with funds from federal government,NGOs and multilateral institutions. Zonal and woredalevel authorities work under regional authorities insmall-scale design, planning, implementation andmaintenance works. Recent reforms have given townwater supply services greater autonomy, in order toencourage business-oriented principles such as costrecovery.Private sector involvement in the watsan sector ismainly limited to contractors, consultants, suppliers,artisans and tap attendants (see picture above). Thereare restricted numbers of consultants and contractorsin the sector; for example, there are only 21 privateconsultants working in the watsan sector, with the vastmajority based in Addis Ababa. Very few of theregistered contractors in Ethiopia work in water supply,except for drilling companies, and suppliers andmanufacturers are also limited in number. Privatecompanies working in the sanitation sector are evenless, with only a handful of private firms involved invacuum cleaning septic tanks or solid waste collectionin major towns. Private maintenance and managementactors are not yet involved in providing any watsanservices in the country.Legal issuesWatsan sector analysts agree that an appropriate andclear legal and regulatory framework is crucial to thesuccess of private sector participation; therefore, it ispreferable for increased private sector involvement tobe preceded by a range of policy reform measures.In the watsan sector in Ethiopia, regions haveproduced their own policy frameworks, while theMinistry of Water Resources retains the overallresponsibility for water resource development andmanagement, including issuing permits forconstruction, maintenance or alteration of water works.While policies acknowledge the importance ofpartnership with the private sector in construction,consultancy and supply, there is no legal or institutionalframework for the private sector to be involved inmanagement or service provision.Constraints to private sector involvementThe Water Sector Development Programmeacknowledges that the watsan sector in Ethiopiasuffers from a serious lack of capacity, especially in thegovernment but also in the private sector. Manyexperienced professionals have left for better-paid jobsin more affluent countries, leaving much of theEthiopian watsan sector to junior and inexperiencedstaff, many without adequate training. Private sectoractors strongly voiced their concerns, especially aroundissues of excessive bureaucracy and unnecessarydelays. The problem of failure to assume responsibilityfor decisions is another major drawback linked toissues of low capacity.Financial constraints are another major issue. Forcontractors and drillers, the absence of collateral is amajor impediment to obtaining loans, both short andlong term. Bidding or insurance bonds are notacceptable in most bid procedures, and in addition theslow bidding process ties up cash that could be usedproductively in the meantime. Lack of access to fundsis also a problem for artisan associations: financialinstitutions are mostly absent in rural or remote areas,and the restricted number of micro-credit organisationsdo not address the needs of construction companies,so artisan groups often have to pay high interest tolocal moneylenders.The government is by far the dominant actor in thewatsan sector, but the division of roles andresponsibilities between departments and bureaux isoften unclear. Furthermore, regional bureaux inparticular are often overstretched, but do not outsourcework to the private sector, even when a private firmwould be quicker and cheaper. Many privatecompanies in the watsan sector, such as the HiwotCooperative in Assosa (see front page case study), arein danger of going out of business, while governmentagencies are overloaded, delaying implementation.3

RecommendationsMeeting the Millennium Development Goals (MDGs) onwater and sanitation by 2015 will require a dramaticscaling up of efforts, both in terms of the extent ofaction required and the speed with which these actionsmust be undertaken. Investment in the sector is one ofthe prerequisites to meet the 2015 MDGs. Sustainableservice delivery is also of paramount importance, inaddition to constructing additional facilities. Thefollowing is a summary of recommendations arisingfrom the study on how the private sector can contributeto achieving the watsan goals in Ethiopia.• Introducing reform into any sector requirescomplex efforts in which multiple interests must bebalanced. Any reforms should enable communitiesto hold to account public officials, as well as publicand private service providers, for their policies,actions and use of funds.• Adequate monitoring, assessment, informationgathering and sharing systems for watsan servicesneed to be active and adequately resourced fromregional to federal levels.• The government should be a regulatory andpolicymaking body, rather than being involved indirect implementation. It should revise existingrules and regulations, as well as draft additionallaws relating to the involvement of the privatesector in service and management contracts. Thismay require revitalising existing structures orcreating a new institution with sufficient watsansector experience.• In order to encourage the development of a smallscaleprivate sector, artisan associations should betax exempt up to a certain threshold and supportshould be made available in other ways, such astraining.• Financial constraints faced by the private sectorcould be alleviated by the Ministry of Infrastructurechanging the requirements for bank guaranteesfrom requiring high liquidity in favour of insuranceor advance payment bonds.• Before embarking on reform, increasing capacity atregional and local levels should be a governmentpriority to overcome the problem of slow and nontransparenttender evaluation processes.• The roles of the Ministries of Health and WaterResources and of regional bureaux need to bemore clearly demarcated to avoid overlappingresponsibilities, especially in the sanitation sector.A committee should be formed to overseesanitation activities.• The Ministry of Water Resources should implementrealistic licensing requirements commensurate withthe available professional capacity in the country.• Government institutions currently have an unfairadvantage over the private sector in the watsansector. In order to level the playing field, the role ofgovernment owned institutions should be redefinedand incentives such as tax breaks extended toprivate associations.• A joint forum between public and privatestakeholders should be formed, for a process ofcontinuous consultation on division of roles andresponsibilities in the watsan sector.KeywordsPrivate sectorWater supplyFinanceEthiopiaContactsBriefing note: Sarah Howard, December 2005Full report: Anteneh Dagnachew, xxx, 2005WaterAid-water for lifeThe international NGOdedicated exclusively tothe provision of safedomestic water,sanitation and hygieneeducation to the world’spoorest peopleFor more information, please contact:WaterAid Ethiopia Tel: 251-114-654374Debrezeit Road Fax: 251-114-661679P.O.Box 4812 Email: info@wateraidet.orgAddis AbabaWebsite: www.wateraidethiopia.orgEthopia4