2005 - 2006 - Pinsent Masons Water Yearbook 2012

PART 4: APPENDIX 2: PRIVATE SECTOR PARTICIPATION
services such as meter installation. Santiago’s EMOS is the most notable example, having been
commercialised in 1989 and sold in 1999. Other examples include a number of German cities
(e.g. Hamburg), South Africa’s Umgeni Water and Thailand’s municipal and provincial water
authorities.
A hybrid privatisation has emerged from a number of these commercial entities where the
municipality floats some of the shares of the entity, while retaining majority ownership and
therefore management control. The best example is in Brazil, where Rio’s SABESP is actively
traded on the national Bourse, while the municipality for the time being retains 72% of the
company’s equity. 49% of Belgium’s Aquafin has been sold to a number of corporate and
institutional investors, with overall control being retained by MVW, the region’s sewerage
management agency.
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 project-oriented 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 and in
Chile. 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
376 Pinsent Masons Water Yearbook 2005-2006