2005 - 2006 - Pinsent Masons Water Yearbook 2012

Private Sector Participation
Types of privatisation
PART 4: APPENDIX 2: PRIVATE SECTOR PARTICIPATION
One of the difficulties currently facing the water sector’s internationalisation is the lack of a
common understanding as to the forms of private sector participation. One person’s lease
contract can, in extremis, be another’s concession, and so on. An internationally agreed set of
concession contract definitions is currently being developed by a number of concerned
companies and multilateral organisations.
Preludes – privatisation through evolution and revolution
Consulting and strategy development and implementation contracts are not regarded as full
private sector participation contracts as they are not involved in the management of the actual
assets. These contracts are increasingly being used as ways of developing the relationship
between a municipality and the private sector company, so as to decide on the framework for
bringing in private sector management. Privatisation contracts can be gained outright through a
bidding process, or they can evolve from contacts established through consulting, construction
or engineering activities. A world of opportunities beckons.
Markets can broadly be classified as being primary markets (first privatisations in a country),
secondary markets (initial privatisation contracts already awarded, but to less than 10% of the
population), tertiary markets (major private sector contracts in place, covering 10-50% of the
population) and mature markets (significant private sector participation, covering over 50% of
people). These market types also reflect the ideas of David Hosein and Paul Rathbone of
Andersen, who look at markets in terms of emotion, economic and ideology.
Each market offers a risk - opportunity payoff. Primary markets clearly offer more in terms of
opportunities, especially for a new entrant with no established presence in the country. Against
this, the privatisation process may be volatile, since there will be limited practical guidance as to
how to gauge political, regulatory, economic or operational risk. In mature markets, risk
management can be finely tuned, but this information will probably be shared with a broad
range of potential competitors, so that the bidding process will be appreciably more competitive.
In such a market, an established player will seek to benefit from economies of scale via its
extant operations, but may prove vulnerable if there is a desire for change for change's sake.
Primary markets (first wave)
Primary markets are those yet to experience their first wave of private sector contract awards.
These markets may also be split into those where private sector participation is actively under
consideration, such as in the Netherlands, South Korea, Nepal and Egypt and those countries
such as Switzerland, Iran and Japan that for various reasons have ruled out any material
changes for at least the short to medium term. Despite the progress made by the private sector
to date, a clear majority of countries remain as primary markets. Privatisation may be initiated
through four broad approaches.
Initial public offering of a corporatised utility. This approach was adopted in Brazil through
the partial flotation of SABESP (Sao Paulo). The state government still holds 72% of SABESP's
equity and has adopted a gradualist strategy towards selling more shares in the company. A
more extreme example was in the Czech Republic in 1993, where shares in a number of
regional utilities were offered to municipal, institutional and international investors.
Private sector concession award for one or more small contracts. A foot in the door
approach that concentrates on gaining experience of private sector participation through local
contract awards. This approach has been used in a number of European countries, without a
history of private sector participation such as Norway and Portugal.
Lease, management and O&M contracts. A gradualist approach, whereby municipalities and
the private sector get to know each other through the increasing delegation of responsibility to
the private sector. This approach can be seen at various stages of evolution in Mexico,
374 Pinsent Masons Water Yearbook 2005-2006