2005 - 2006 - Pinsent Masons Water Yearbook 2012

Water and power contracts compared
PART 4: APPENDIX 2: PRIVATE SECTOR PARTICIPATION
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
Political risk
‘God’s gift’ ought to be free
Essential for life & health
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)
US$50–400 million capex
Technology import Low part of overall cost
Mainly local construction
At the national level
Essential for modern comforts
A new resource needs to be paid for
Medium (10-15%)
Many global and regional players
Highly competitive market
Medium to large
US$250–1,100 million 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
$ per m3 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)
380 Pinsent Masons Water Yearbook 2005-2006