2005 - 2006 - Pinsent Masons Water Yearbook 2012

PART 4: APPENDIX 2: PRIVATE SECTOR PARTICIPATION
It is the absence of piped water that costs more both in financial and public health terms.
Popular support exists for adequate supplies of water and improved public health at an
affordable rate. Opposition is most visible amongst the better off households who oppose
paying an economic price for piped water supplies for gardens, swimming pools and other nonessential
household uses. Indeed, with the lack of metering or progressive tariff structures, they
are subsidised by poorer households. The fact that these are also the people with the most
political influence means that the political picture is often distorted.
The practicalities of delivering service extension
What can the private sector offer to the unserved urban poor? For multilateral institutions,
governments, municipalities and the private sector, when seeking to use PSP in service
extension; three questions need to be answered:
• Can these projects be delivered more cheaply?
• Can new sources of finance be mobilised?
• Can extant assets be operated more efficiently?
These questions apply to all water and sewerage PSP projects, but are particularly pertinent
here. UU’s water and sewerage contract in Manila (Philippines) involved a price cut of 65% in
1997, and is performing satisfactorily in terms of finances and service delivery (see company
entry). Finance has become problematic, with the project finance market currently running at
perhaps 25% of its peak capacity seen in the late 1990s. The private sector has two real
strengths, mobilising extant assets to optimise their efficiency and developing new assets so
that they provide a given level of performance at the lowest price.
The challenges in arranging finance stems from poor risk management and concerns about
foreign currency exposure. A mix of foreign and international debt can help to ameliorate this, as
is being used in Malaysia and China. Otherwise, it remains essential for multilateral institutions,
development banks, politicians and international aid agencies to create the right conditions to
encourage these capital flows. One of the most important issues here, is deciding if a
concession is to be supported by outright grants designed to lower the cost of service extension.
At the same time, cost recovery in the medium to longer term is essential. The key here has to
be getting the cost of service provision down to affordable levels, by using an appropriate and
upgradeable infrastructure.
Privatising water and sewerage services can reduce capital spending by 20-45% and through
economies of scale and efficiency measures, service provision costs by 10-25%. Capital
spending costs are reduced by shifting construction work away from technology for its own sake
to a performance-related basis, along with ordering through the contract holder’s parent
company. Cost reductions are driven by competitive tendering, whereby the competing bidders
are motivated to find the most cost effective ways of delivering a set of service criteria for a
satisfactory rate of return. This approach creates incentives for the bidders to identify areas
where they can drive operating costs down, while at the same time improving service quality.
Often the two will be linked. People are more willing to pay when they receive a reliable service,
with demonstrable improvements in water quality. Reducing distribution losses allows more
water to be provided to the customer without needing to mobilise new resources. Progressive
tariff policies, allied with effective billing and the removal of illegal connections, drive down the
overall cost of water provision for the less well off.
381 Pinsent Masons Water Yearbook 2005-2006