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Toolkit: Approaches to Private Participation in Water Services Module 1 Considering Private Participation.

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Presentation on theme: "Toolkit: Approaches to Private Participation in Water Services Module 1 Considering Private Participation."— Presentation transcript:

1 Toolkit: Approaches to Private Participation in Water Services Module 1 Considering Private Participation

2 Introduction: Navigating through this E-Learning Module E-learning design: davidstiggers@comcast.net

3 Elements of the Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 5 Standards, Tariffs, Subsidy, Financials 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements

4 General Outline of Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements Module 1 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements Module 1 Considering Private Participation What can private particpation expect to Achieve?

5 Module 1 - What will we learn? What are the underlying POLICY PROBLEMS for provision of the water services in developing countries? What are the various MODELS OF PRIVATE PARTICIPATION that we can usefully consider? How do they address the problems What are the possible EFFECTS OF PRIVATE PARTICIPATION ? Management Contract for Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. How can we be sure of GETTING PRIVATIZATION TO WORK?

6 Module 1 - Considering Private Sector Participation Before introducing Private Participation, Governments need to: Document particular problems their water utilities face Diagnose the underlying cases of the problems Determine whether private participation can address the problems

7 UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work REVIEW: Underlying Policy Problems Module 1 - Considering Private Participation (PP) HOW?: Different PP Models In this Module we will look at four main areas…...

8 UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work HOW? Different PP Models REVIEW: Underlying Policy Problems REVIEW: Underlying Policy Problems In this section we REVIEW underlying policy problems related to provision of water services, including Customer Connections Supply (flow and quality) Sanitation service Money Assets and Investment Service providers In this section we REVIEW underlying policy problems related to provision of water services, including Customer Connections Supply (flow and quality) Sanitation service Money Assets and Investment Service providers

9 Underlying Policy Problems In many countries the provision of water services is unsatisfactory. A number of basic issues influence this………. Basic issues affecting water services include: Connection rates – Many households dont receive water or sanitation services from the utility, although they prepared to pay for service. Quality of service – Those few connected get water for only a few hours per day, with water not safe to drink, and little sewage treatment. Lack of money – Solutions would be easier if customers could pay more or governments could raise more tax. External benefits – Improved water services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay Assets – With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements Local, provincial and central government may have overlapping responsibilities

10 Underlying Policy 3 Other Factors ………. but three additional factors may create serious obstacles. Basic issues affecting water services include: Connection rates – Many households dont receive water or sanitation services from the utility, although they prepared to pay for service. Quality of service – Those few connected get water for only a few hours per day, with water not safe to drink, and little sewage treatment. Lack of money – Solutions would be easier if customers could pay more or governments could raise more tax. External benefits – Improved water services create benefits for others (e.g. reducing disease), but customers may be unwilling to pay Assets – With condition of underground assets hard to determine, private providers may be unable to make sensible bids for improvements Local, provincial and central government may have overlapping responsibilities Three other factors may create serious obstacles : These factors, alone or combined, may create obstacles to plans for water and sanitation service improvement: Water services are critical to all consumers Services are often provided under a natural monopoly; supply by one well run firm may be more effective than two or more firms Required investments are large, and cannot be reversed if returns prove to be less than estimated The combination of these factors potentially leads to trouble Three other factors may create serious obstacles : These factors, alone or combined, may create obstacles to plans for water and sanitation service improvement: Water services are critical to all consumers Services are often provided under a natural monopoly; supply by one well run firm may be more effective than two or more firms Required investments are large, and cannot be reversed if returns prove to be less than estimated The combination of these factors potentially leads to trouble The first two factors: Customers may doubt that they are getting a good deal, and resist price increases, even if revenue is lower than costs. As a result, Government faces strong pressure to keep prices below costs, causing problems for improving service. The first two factors: Customers may doubt that they are getting a good deal, and resist price increases, even if revenue is lower than costs. As a result, Government faces strong pressure to keep prices below costs, causing problems for improving service. The third factor - investment: Provided prices are above operating costs, governments can accede to consumer pressure to limit price rises without causing suppliers to cease services. Unless government makes up any difference between prices and costs, through subsidy, providers will not invest, if prices are too low to cover full costs including investment and repairs to infrastructure The third factor - investment: Provided prices are above operating costs, governments can accede to consumer pressure to limit price rises without causing suppliers to cease services. Unless government makes up any difference between prices and costs, through subsidy, providers will not invest, if prices are too low to cover full costs including investment and repairs to infrastructure

11 Underlying Policy Problems – The Challenge Given that the provision of water services is unsatisfactory, and a number of issues influence this….. The biggest challenge for governments is to address these issues and thus to encourage investment, in order to: Improve quality Lower costs Extend access to services

12 UNDERSTAND Effects of Privatization ACHIEVE: Getting PP to work HOW? Different PP Models REVIEW: Underlying Policy Problems Possible Effects of Private Participation UNDERSTAND: Effects of Privatization In this section we show some of the possible effects of Private Participation in water services in developing countries. We look at three main areas: Operation Investment Policy & enforcement In this section we show some of the possible effects of Private Participation in water services in developing countries. We look at three main areas: Operation Investment Policy & enforcement

13 Possible Effects of Private Participation Private participation changes the water sector, with an operator being independent of government, and with incentive to be profitable. Private providers cannot be directed in the same way as a public provider, and the profit incentives can cause it to take actions not in the public interest. However independence and profit can help the government to achieve its objectives. Private participation may have effects in three areas: The Operating Performance of the utility The utilitys investment decisions Policy and its enforcement

14 Possible Effects of Private Participation Private participation changes the water sector, with an operator being independent of government, and with incentive to be profitable. Private providers cannot be directed in the same way as a public provider, and the profit incentives can cause it to take actions not in the public interest. However independence and profit can help the government to achieve its objectives. Private participation may have effects in three areas: The Operating Performance of the utility The utilitys investment decisions Policy and its enforcement Possible Effects of PP: Operating Performance Possible Effects of PP: Investment Decisions Possible Effects of PP:: Policy & Enforcement

15 UNDERSTAND: Effects of Privatization ACHEIVE Getting PP to work HOW? Different PP Models REVIEW: Underlying Policy Problems Getting Private Participation to Work ACHIEVE: Getting PP to work In this section we show some of the potential issues in getting Private Participation in water services to work. We look at three main challenges: Ability and incentives to invest Protecting operator from risk of change Achieving Fairness in PP Arrangements In this section we show some of the potential issues in getting Private Participation in water services to work. We look at three main challenges: Ability and incentives to invest Protecting operator from risk of change Achieving Fairness in PP Arrangements

16 TWO MAIN ISSUES: Getting Private Participation to Work The experience of the last decade shows how important it is to get two main issues right – but also how difficult Giving the provider the ability and the incentives to make good operating and investing decisions Protecting the Operator from risk of losing through Government changing ground rules Giving ability and incentives : This means giving the provider enough freedom to make decisions, and so to be expected to take relevant business risks The provider should be allowed to benefit when it improves business, but should bear any risk it has agreed to bear (and should not be automatically be allowed to renegotiate when things go wrong and if profits decline) Giving ability and incentives : This means giving the provider enough freedom to make decisions, and so to be expected to take relevant business risks The provider should be allowed to benefit when it improves business, but should bear any risk it has agreed to bear (and should not be automatically be allowed to renegotiate when things go wrong and if profits decline) Protecting the Operator from Government changes : This means protecting the operator from Government changes to the rules of the game, rather than from bad operating or investment decisions. This includes protecting the operator from the risk that the government will cut prices after the operator has invested, or other measures that wiill affect the investors profitability Protecting the Operator from Government changes : This means protecting the operator from Government changes to the rules of the game, rather than from bad operating or investment decisions. This includes protecting the operator from the risk that the government will cut prices after the operator has invested, or other measures that wiill affect the investors profitability

17 Getting PP to Work - Fairness In the last decade many PP arrangements have run into trouble or been cancelled. Lessons learnt show that the arrangement must be perceived to be fair and legitimate If the customers or operator feel that the arrangements havent been fairly implemented, then they can run into trouble Examples: Cochabamba and Manila To work well, the Government must create an arrangement that people perceive as being fair. If not: Customers & voters may pressure Government to override contractual protections The Operator may find his property rights or returns are less secure than expected Private providers may require a higher rate of return if the arrangement is not perceived as being fair

18 Getting PP to Work - Fairness In the last decade many PP arrangements have run into trouble or been cancelled. Lessons learnt show that the arrangement must be perceived to be fair and legitimate If the customers or operator feel that the arrangements havent been fairly implemented, then they can run into trouble Examples: Cochabamba and Manila To work well, the Government must create an arrangement that people perceive as being fair. If not: Customers & voters may pressure Government to override contractual protections The Operator may find his property rights or returns are less secure than expected Private providers may require a higher rate of return if the arrangement is not perceived as being fair Fairness Examples in Toolkit

19 Getting PP to Work: Fairness & Cost Rate of Return that must be promised Strength of legal protections Rules perceived as unfair Rules perceived as fair Additionally, perceived fairness allows a lower rate of return to be promised for a given legal protection – and possibly lower potential cost

20 UNDERSTAND Effects of Privatization ACHEIVE Getting PP to work HOW? Different PP Models REVIEW Underlying Policy Problems Models of Private Participation HOW? Different PP Models In this section we show the key Private Participation models: Management Contracts Affermage – Lease Concessions and Divestitures Joint Ownership In this section we show the key Private Participation models: Management Contracts Affermage – Lease Concessions and Divestitures Joint Ownership

21 Reviewing Module 1 Toolkit Approach to PP Models 1. Many issues arise in more than one PP model. Organizing the Toolkit by issue avoids repetition Example: The question of disputes arises in every model 2. Focusing on matters of substance avoids unproductive discussion of exact meaning of contract types: Example: Focussing on appropriate allocations of risks and responsibilities, and allowing this to determine contract type. 3. Many real world arrangements are in fact hybrids of the standard PP models The Toolkit focuses on choices faced when designing PP arrangements rather than describing specific PP models …. The reasons for this approach include: The use of standard PP models: However, whilst the Toolkit is structured around these design choices, we do refer to three main types of Private Participation Models, comparing and contrasting the importance of the issues under each model. The three delegated management models considered throughout the Toolkit are: Management Contracts Affermage-Leases Concessions The Toolkit does not discuss BOT arrangements, nor arrangements that do not involve private participation. The use of standard PP models: However, whilst the Toolkit is structured around these design choices, we do refer to three main types of Private Participation Models, comparing and contrasting the importance of the issues under each model. The three delegated management models considered throughout the Toolkit are: Management Contracts Affermage-Leases Concessions The Toolkit does not discuss BOT arrangements, nor arrangements that do not involve private participation.

22 Models of Private Participation It is useful to understand the nature of some key PP models, and implications for the Challenges of Private Participation. Management Contracts Management Contracts transfer responsibility for managing a utility to an operator – often for 3 to 5 years Affermage - Leases In Affermage-Leases the operator is responsible for operating and maintaining the business, but not financing investment - with a term often from 5 to 14 years Concessions and divestitures Concessions give the operator responsibility for financing investment, as well as operation and maintenance, with assets returned to government after 25 or 30 years. Divestiture gives the same responsibilities, but ownership of the assets stays with private investor Joint Ownership Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain advantages

23 Models of Private Participation It is useful to understand the nature of some key PP models, and implications for the Challenges of Private Participation. Management Contracts Management Contracts transfer responsibility for managing a utility to an operator – – often for 3 to 5 years Affermage - Leases In Affermage-Leases the operator is responsible for operating and maintaining the business, but not financing investment - with a term often from 5 to 14 years Concessions and Divestitures Concessions give the operator responsibility for financing investment, as well as operation and maintenance, with assets returned to government after 25 or 30 years. Divestiture gives the same responsibilities, but ownership of the assets stays with private investor Joint Ownership Joint Public / Private Ownership of the Operating Company is a possibility, and offers certain advantages Management ContractsAffermage - LeasesConcessions and DivestituresJoint Ownership PP Models Further Details

24 Reviewing Module 1 The Module has looked at a whole range of issues for analysis and allocation of responsibilities & risks in PP design…………. UNDERSTAND: Effects of Privatization ACHIEVE: Getting PP to work REVIEW: Underlying Policy Problems HOW?: Different PP models

25 Checklist: Module 1 ……..and what to do before beginning this process is discussed in this Checklist

26 Module 1 More information: Considering Private Participation: Other References: Fundamental political-economy problems in the provision of water services and broad strategies for addressing them: Gómez-Ibáňez 2003, Nickson and Franceys 2003, Savedoff and Spiller 1999, and Smith 1997a Recent trends in private participation in water: World Bank 2003 Evidence and arguments about the effects of private participation, including case studies: Abdala 1996, Barlow and Clarke 2002,Bitran and Valenzuela 2003, Brocklehurst and Janssens 2004, Clarke and others 2004, Crampes and Estache 1996, Estache and Rossi 2002, Gray 2001, Harris 2003, Lobina and Hall 2003, Megginson and Netter 2001, Nickson and Vargas 2002, Palaniappan and others 1999, Plummer 2002, Public Citizen 2003, Rivera 1996, Saghir and others 1999, 200, Sirtaine and others 2005, Shirley 2002, Shirley and Walsh 2000, Sirtaine and others 2005 Concessions and management contracts in particular: World Bank 1997b

27 Supporting Material The Toolkit Financial Model Toolkit Case Study material Toolkit Website: http://rru.worldbank.org/Toolkits/WaterSanitation/ For comments or further details contact Cledan Mandri Perrott at cmandriperrott@worldbank.org cmandriperrott@worldbank.org

28 Toolkit: Module 1 End of Module

29 Toolkit: Module 1 Return to Start

30 Toolkit: Module 1 DO NOT MOVE or ERASE THE FOLLOWING SLIDES

31 Toolkit: Module 1

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33 Possible Effects: Operating Performance The profit incentive ( as well as expertise and professionalism) may cause the Private provider to operate more efficiently than a public provider The Operating Performance of the Utility : The profit incentive may drive efficiencies. For example, fewer staff but with better billing and payment collection Improvements will bring profits, that the private provider may retain. However, improvements can also allow lower tariffs, reduce subsidies or provide better service The details of the arrangements put in place by government will affect the efficiency of the private provider. For example: If the private provider can keep part of the increase in profits raised by improved billing and collection and can disconnect non- paying customers, billing and collection should improve However, if the rules are completely cost-plus, and the operator cannot disconnect for non-payment, billing and collection are unlikely to improve. The Operating Performance of the Utility : The profit incentive may drive efficiencies. For example, fewer staff but with better billing and payment collection Improvements will bring profits, that the private provider may retain. However, improvements can also allow lower tariffs, reduce subsidies or provide better service The details of the arrangements put in place by government will affect the efficiency of the private provider. For example: If the private provider can keep part of the increase in profits raised by improved billing and collection and can disconnect non- paying customers, billing and collection should improve However, if the rules are completely cost-plus, and the operator cannot disconnect for non-payment, billing and collection are unlikely to improve. Back to Module

34 Possible Effects: Investment Decisions The profit incentive may lead the private provider to make better investment decisions Investment Decisions : The profit incentive may drive better investment decisions. For example, fewer profitable opportunities to expand services may be missed, such as extending access to households that can afford to pay. Additionally, fewer projects with more costs than benefits will be built. The form of the arrangement will influence the investment decision For example: If the private provider has responsibility for investment and financing, if prices cover costs now and in the future, and profits can be retained, then the operator will invest in customer access. However, if extending access to poor households will cost more than the operator will gain in revenues, or avoids in contractual penalties, the operator cannot be expected to improve access. Investment Decisions : The profit incentive may drive better investment decisions. For example, fewer profitable opportunities to expand services may be missed, such as extending access to households that can afford to pay. Additionally, fewer projects with more costs than benefits will be built. The form of the arrangement will influence the investment decision For example: If the private provider has responsibility for investment and financing, if prices cover costs now and in the future, and profits can be retained, then the operator will invest in customer access. However, if extending access to poor households will cost more than the operator will gain in revenues, or avoids in contractual penalties, the operator cannot be expected to improve access. Back to Module

35 Possible Effects Policy & Enforcement The presence of an independent, profit motivated private provider influences government policy towards water services and the way it is enforced Policy and its enforcement : Like other stakeholders, a private provider will seek to shape policy. For example, the potential for lobbying and corruption may increase, but this increases the need for a good private participation arrangement Overall, private participation can improve policy and its enforcement. For example, if government enforces environmental standards with the private provider more rigidly than with the public authority, environmental benefits may occur, even if not a direct objective of the PP arrangement. Private participation also allows a way to alleviate the fundamental problems of providing water services For example: Politics often lead to water pricing being below costs, frustrating extension of access Private operators will care deeply about establishing clear and stable pricing rules and subsidies before investing Policy and its enforcement : Like other stakeholders, a private provider will seek to shape policy. For example, the potential for lobbying and corruption may increase, but this increases the need for a good private participation arrangement Overall, private participation can improve policy and its enforcement. For example, if government enforces environmental standards with the private provider more rigidly than with the public authority, environmental benefits may occur, even if not a direct objective of the PP arrangement. Private participation also allows a way to alleviate the fundamental problems of providing water services For example: Politics often lead to water pricing being below costs, frustrating extension of access Private operators will care deeply about establishing clear and stable pricing rules and subsidies before investing Private Investment – stable pricing policy: A private firm that finances investment cares deeply about the rules for setting prices and subsidies. The private provider will therefore insist, before investing, that the government will establish stable rules for setting prices and subsidies. The pricing rules will be part of any long term arrangement, and if achieved should help the government to achieve its investment objectives. The benefits come from good rules and enforcement, rather than directly from private participation alone. Private Investment – stable pricing policy: A private firm that finances investment cares deeply about the rules for setting prices and subsidies. The private provider will therefore insist, before investing, that the government will establish stable rules for setting prices and subsidies. The pricing rules will be part of any long term arrangement, and if achieved should help the government to achieve its investment objectives. The benefits come from good rules and enforcement, rather than directly from private participation alone. Back to Module

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37 Getting PP to Work - Fairness In the Toolkit we explore ways of structuring fairness into PP arrangements, and here are some examples…. ARRANGEMENT ISSUESMODULE Customer Involvement: Consider how private participation affects customers, and how to involve them in arrangement design. 3 Tariffs: Working out how tariffs might change under various scenarios, and considering whether the change would be acceptable 6 Disputes: Allowing disputes to be settled by trusted or independent experts or arbitration. 7 Monitoring Performance: Choosing and designing good institutions for monitoring operator performance or adjusting tariffs 7 Pricing Rules: Writing pricing rules that cannot be easily change without both Government and Operator agreement 8 Transparency: Ensuring that the contracts are published and the operator is selected in open process 9 Back to Module

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39 PP Models - Management Contracts Management Contracts transfer responsibility for managing a utility to an operator – – often for 3 to 5 years Back to Module

40 PP Models Affermage - Leases In Affermage-Leases the operator is responsible for operating and maintaining the business, but not financing investment - with a term often from 5 to 14 years Back to Module

41 PP Models Concessions & Divestitures Back to Module

42 PP Models - Joint Ownership Joint Public / Private ownership of the Operating Company is a possibility, and offers certain advantages Back to Module

43 PP Models More details Back to Module

44 Toolkit: Module 1 DO NOT MOVE or ERASE THE PREVIOUS SLIDES AFTER END OF MODULE


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