Private Sector Participation in WaterWastewater Companies

							      Private Sector Participation in Water/Wastewater Companies
        The AquaMundo Approach of Private Public Partnership


1        Private Sector Participation in Water and Wastewater Companies

Ensuring the sustainable supply of potable water and the environmentally acceptable disposal of
wastewater is already a key issue throughout the world. In order to solve this critical problem,
various organisational forms have been developed, all based on a structure in the public domain.
The present trend internationally is towards increasing private sector participation (PPP – Public
Private Partnership).

In industrial countries, experience with leasing models in the water sector has become prevalent,
together with concession models and outright sale (full privatisation) under a regulatory authority.
Leasing and concessions have found favour primarily in France. Full privatisation mostly occurred
in Great Britain. By contrast, there are not yet conclusive trends regarding private participation in
the water sector in developing countries or in emergent markets. Various projects have been
initiated with interim results ranging from bad to good. In emerging markets, as elsewhere,
experiences with the participation of private organisational structures in water supply are very
new.

In principle, private participation can be introduced into the water and wastewater sectors in form
of management contracts, incentive-based management contracts, concession contracts,
BOT/BOOT models, mergers and acquisitions (see Figure 1 “Range of PPP Models”). Increased
use of private investment increases both the necessity of statutory regulation and the efficiency of
the water supply utility.




Fig. 1: “Range of PPP Models” The figure shows the possibilities for introducing private participation into the water
sector. It is evident that increased use of private capital increases both the necessity of statutory regulation and
the efficiency of the water supply utility.

However, private participation is only opportune when both the operating costs and the financing
costs are covered and a reasonable profit can be expected. The most important parameter in any
case of private financing, the debt service coverage ratio, must remain sufficiently bigger than
one.
Successful private sector participation further depends on various of factors:
   - political factors, e.g. national political stability and/or the willingness of the government to
      admit or encourage private sector participation;
   - socio-economic conditions, including population and customer structures;
   - economic conditions, e.g. costs, demand, efficiency; and
   - technical constraints, e.g. the physical condition of existing infrastructure, supply capacity,
      planned development, rehabilitation, expansion.

Private businesses typically distinguish themselves from the public service in the
following characteristics:
    - efficient management;
    - efficient work processes;
    - training and development of staff;
    - investment; and
    - decision-making on the basis of financial or strategic, rather than political, criteria.

Water supply in many countries is aptly illustrated in the following Figure 2 “Spiral of Failure”.
Financial mismanagement necessarily leads to poor service. This, in turn, leads to unwillingness
to pay by customers. As a result of inadequate revenues, the company is unable to invest in order
to improve its infrastructure and service levels. Finally, technical and financial deterioration of the
company is inevitable. Private sector participation reverses the spiral.




Fig. 2: “Spiral of Failure” The figure illustrates the situation of water and wastewater utilities in many countries.
Private sector participation facilitates reversal of the spiral.

The most important interface between a private company and public control is the regulatory
authority. The regulatory authority is responsible for maintaining a balance between the financial
interests of the private sector and the supply obligation.

It is the aim, on the one hand, to guarantee a basic supply level at affordable prices for the
customers while, on the other hand, covering the operating and financing costs with reasonable
profit for the private operator.
Governments and development organisations seek close cooperation with the private sector in
order to jointly solve the problems of the water sector because private direct investment has risen
sharply while, simultaneously, public funds available for development purposes have decreased.

Close cooperation between governmental and private facilities in donor countries, e.g. in
the form of a public-private partnership, can exhibit the following opportunities and
limitations:

Opportunities of close cooperation:
   - PPP facilitates mobilisation of private capital and know-how.
   - A partnership between a private investor and, for example, a financing agency enhances
      political comfort for the private investor. This applies to improvement of the legal,
      economic and socio-economic boundary conditions.
   - Optimisation of the initiatives.

Limitations of cooperation:
   - insufficient experience;
   - mistrust;
   - different mentalities and work habits;
   - different priorities with regard to: profit, profitability, and financial viability, sustainable
        economic aid, support of minorities, focus on principles of economic aid.


2       The AquaMundo Approach of Private Public Partnership

In order to solve the problems of the water sector, AquaMundo has developed a concept that has
already been presented in several countries and recommended as a model to bilateral and
multilateral donors. The AquaMundo approach envisages PPP between German development
agencies, private companies and public utilities in the recipient country and regards this as the
German alternative to existing models in international competition. This approach has been
favourably received the German financial cooperation bank (KfW).

The aims of AquaMundo’s concept are:
   - to secure efficient and economically sustainable water supply and wastewater disposal in
       emerging markets;
   - to create a permanent and independent operating organisation;
   - to support and develop the strengths of the local public partner;
   - to use private sector participation to compensate and eliminate the weaknesses of local
       facilities; and
   - throughout the medium term, to successively eliminate government subsidies and to
       secure the equitable supply of water within the scope of socially acceptable tariffs.

The role of economic aid is:
   - as a catalyst for securing sustainable infrastructure in accordance with the “German”
       partnership model;
   - to utilise existing PPP support facilities in order to secure the long-term commitment of
       German operators in this model; and
   - to make available further back-up facilities for institutional and financial support of the
       process (soft loans, grants)

In the AquaMundo approach private companies assume the following role:
    - meeting the requirements of PSP/PPP as a source of know-how with technical
        competence and financial resources;
    - basic principles: performance-based payment, gradually increasing financial commitment
        and assumption of risk, mutual cooperation with existing players; and
    - strengthening of existing players by maximum utilisation and development of existing
        competence and potential.
    In order to secure the water supply and wastewater disposal using private sector
    participation, the AquaMundo concept includes the components of operation, investment and
    special programmes that are explained in detailed in the following figure.

                  Long-term Sustainable Development of Water Supply and Wastewater Disposal
                                      Through Private Sector Participation
     Operating               Investment
                                                          Special Programmes (Complementary Measures)
    Components              Components
   A more efficient                              Potential alternatives
                          Create technical                                  Acceptance and       Operating staff is
  operation results.                             for adequate supply
                          prerequisites for                               customer behaviour      appropriately
   Coverage and                                        to socially
                             operational                                   support alternative    motivated and
 reliability of supply                              disadvantaged
                           improvements                                     operating models         trained
      increases                                   groups are tested
      Take over          Installation of water
 management of the         meters (bulk and         Pilot project in                               Training and
                                                                            Communication
    financial and         domestic), valves,      selected marginal                                development
                                                                              program
technical operation in        etc., pipes;              zones                                        program
   a supply sector           procurement


Fig. 3: Long-term Sustainable Development of Water Supply and Wastewater Disposal through Private Sector
Participation. The figure explains the three components in the AquaMundo concept.



The following Figure 4 lists the individual activities in the AquaMundo concept. Their
envisaged financing flows are shown in Figure 5.

      Operating          - Demand data
     Components          - Billing and collection
                         - Quality control / complaints management
     ACTIVITIES          - Completion and maintenance of customer data and the technical cadastre
                         - Maintenance and control (calibration) of meters
                         - Operation and maintenance of networks (water supply, incl. leak detection and
                         sewage)
                         - Repairs / emergency service
      Investment         - Installation of valves and bulk water meters to subdivide the network / optimise
     Components          operation
                         - Network cleaning / mechanical cleaning of the water supply system
     ACTIVITIES          - Network cleaning / cleaning of the sewerage system
                         - Installation / replacement of domestic water meters
                         - Replacement of defect pipe segments / expansion of network capacity
 Special Programmes Pilot Projects in Impoverished Areas:
   (Complementary   - Selection of project zone, concepts/planning, cooperation with local aid organisations
      Measures)     - Detailed planning and implementation of measures (construction / improvement of
                    water supply infrastructure, sewers) with active participation of the beneficiaries
     ACTIVITIES     - Testing of alternative operating models with local participation
                         Communication and Information Campaigns with regard to:
                         - Project aims and activities
                         - Advantages and expectations for customers (service, willingness to pay, illegal
                         connections)
                         - Water conservation measures, sewage/environmental protection, public health
                         Implementation of Training and Development Measures:
                         - Introduction to project or company strategy
                         - Metering, customer relations, customer data
                         - Network operation and maintenance, leak detection


Fig. 4: Activities to secure sustainable water supply and wastewater disposal through private sector participation.
The figure explains the activities in the AquaMundo concept.
Fig. 5: Financing Flows in the AquaMundo concept.

For more than a year, the AquaMundo concept has been successfully applied in the coastal
region of the Republic of Montenegro. The aim there is to secure the water supply for the 150,000
inhabitants in six municipalities, together with 250,000 tourists who frequent the region during the
summer months. Treatment of wastewater, which is currently discharged untreated into the sea,
is planned for a later phase of the project. Participants in this PPP project are AquaMundo GmbH
together with the Kreditanstalt für Wiederaufbau (KfW), the German Investment and Development
Organisation (Deutsche Investitions- und Entwicklungsgesellschaft, DEG) and the Organisation
for Technical Cooperation (Gesellschaft für Technische Zusammenarbeit, GTZ), as well as the
local water utility PEW.

Formation of a commercial venture, in which the PPP principle will be put into practice, is planned
for the middle of 2002. The public partner will comprise the municipal water supply companies
merged into a regional utility and augmented by the governmental PEW. The private investors are
AquaMundo, DEG and a local Montenegrin investor. The public and private partners comprise the
company MonteAqua. AquaMundo, who will also provide the largest equity contribution, will carry
out the strategic management of MonteAqua. This newly formed company MonteAqua will take
over the water supply and wastewater disposal in the coastal region of Montenegro for an
unlimited period. The Montenegro project serves as a good example for the joint realisation of the
public private partnership concept.


Dipl.-Ing. Marcel Salazar
Senior Project Manager
AquaMundo GmbH