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EARLY OUTCOMES OF PUBLIC-PRIVATE PARTNERSHIPS ON PROVIDING WATER SUPPLY TO THE URBAN POOR: LESSONS FOR INDIA International Conference

on Sustainable Development of Water ResourcesSocio Economic, Institutional and Environmental Aspects, Organised by: Institute of Resource Management and Economic Development, 27-30 November, 2000
MARIE-HELENE ZERAH1
ABSTRACT

In the last few years, public-private partnerships have been increasingly promoted as an option to improve efficiency of public utilities in service provision and to bring in substantial investment in India. There has been increasing private sector participation in developing countries, particularly in Latin America and South East Asia in the water supply and sanitation sector in large urban settlements. India lags far behind and one of the reason is the perception that private sector participation would harm the poor. The aim of the paper is to look at how the private operator in three large concessions, namely Buenos Aires, La Paz and Manila has attempted to find innovative ways to provide drinking water to low-income households. The paper highlights the skill of the private sector to develop innovative solutions, its ability to consider low-income households as a good customer and evolve payment arrangements. It also suggests that the private sector can develop partnerships with the civil society, especially NGOs and micro-finance institutions to carry out successful social intermediation, a requirement for infrastructure schemes in low-income areas. However, the paper demonstrates that the impact on the poor is influenced by other factors like a clear and sound regulatory framework addressing issues such as property titles and land tenure, a good contractual arrangement and sound regulatory mechanisms. As a conclusion, lessons from the three case studies suggest that private sector could be part of the institutional framework to provide water supply services in Indian cities. But, this requires the implementation of clear political commitment to bring in reforms.

Research Engineer, ASTRAN (Asia-Pacific Technology and Research Network) 109, Anand Lok. 2nd Floor, Khelgaon Marg; New Delhi 110 049. India Tel : (91) (11) 625 8101; Fax : (91) (11) 625 8101; Email : mzerah@hotmail.com

EARLY OUTCOMES OF PUBLIC-PRIVATE PARTNERSHIPS ONNG WATER SUPPLY TO THE URBAN POOR: LESSONS FOR INDIA
INTRODUCTION

The inefficiency and unreliability of basic services in most cities of the developing world becomes a major concern as cities are clearly the engines of future economic growth (World Bank, 1994). Consequently, reforming urban services is part of the agenda to improve the management and the productivity of cities, and it has resulted in a trend towards public-private partnerships in infrastructure (Roger, 1999). Recently, the ablity of the private sector to deliver services to poor neighbourhoods has become an integral part of the debate on publicprivate partnerships and this is especially the case in the water supply sector. Considering the large share of poor households in India and the importance of civil society, the debate on public private partnerships that started since the beginning of the 1990s will have to look at the important question of service provision to the poor. The entry of large scale private companies in the management of urban water supply systems in developing cities is still a recent phenomena and even though it would be early to draw clear cut conclusions, there are already experiences in finding solutions to serve low-income areas, that need to be shared and that can provide scope for debate in India.

This paper is based on the analysis2 of three large water concessions in cities where the proportion of low-income households is quite significant (Buenos Aires in Argentina, La Paz-El Alto in Bolivia and Manila in the Philippines). The first section deals with the overall issue of public-private partnerships and their relevance to India. The second section is an attempt at describing some of the innovations of the private sector to respond to the specific demand of poor neighbourhoods and the last section rapidly highlights the role of the public sector in ensuring that public-private partnerships can actually reach the low-income households.

This research is a collaborative project between ASTRAN and the Water and Sanitation Program-South Asia. The research has been based on literature surveys, field visits and administration of questionnaires to the private operators and other stakeholders (regulatory agencies, microcredit institutions, World Bank and Asian Development Bank).

PUBLIC PRIVATE PARTNERSHIPS IN THE WATER SUPPLY SECTOR AND SERVICE PROVISION TO THE POOR We shall use the notion of public-private partnerships rather than privatization or private sector participation. In its strict sense, privatization implies that the assets are sold to the private operator, which is rare in the water supply sector3; and the term of private sector participation does not highlight the important role of the public authorities. Indeed, the actual ongoing debate4 on the ability or the unability of private sector to deliver urban services to the poor underlines the role of the public sector in preparing projects, designing contrat and ensuring good regulatory mechanisms to monitor the contract implementation (Komives, 1999; Estache, 2000).

Eighty two percent of the Indian urban population has access to safe drinking water and a lesser number (63%) to sanitation. In addition to a lack of infrastructure, many other problems hinder the development of the sector as underlined by Rakesh Mohan in the white paper of the Expert Group on the Commercialisation of Infrastructure: The fact that infrastructure services do not pay for themselves and the Governement does not have the financial capability to continue to subsidise the beneficiaries has resulted in low availability of funds. With increasing requirements, this has meant deficiencies in volumes as well as quality of service. A parallel-unorganized sector has developed for the provision of many of these services at high prices and often low quality. From a societal point of view, these are expensive solutions; it is high time that a commercial approach is adopted (NCAER, 1996, p. 27, vol.1).

This need for a more commercialized approach has led to some reforms, such as unbundling and corporatization of public utilities and to some extent to the recourse to private sector financing. However, most of these changes have occurred in the electricity, telecommunication and road sectors. Urban water supply lags behind despite various attempts at involving private sector. An analysis of urban water supply and sanitation projects planned with private sector conducted by Mehta (1999) underlines some of the main reasons for failure: high cost, insufficient project preparation, lack of transparency and the absence of a clear regulatory framework. Most of these projects aimed at increasing water resources available or at developing treatment capacity through BOT (Built Operate Transfer) types of contracts. 5

3 4

Only England and Chile have opted for full privatization. Various recents events debated this question: the World Water Forum in the Hague (March, 2000); the conference on Infrastructure for Development. Private Solution and the Poor organized by the World Bank (London 31st May 2nd June 2000). 5 For a description of the various types of contract, one can refer to the tool kit for private sector participation of the World Bank (1994).

The assumption of this paper is that the main challenges faced by Indian cities are to improve and rehabilitate their existing systems and to expand services to unserved areas. With this objective in mind, delegated management to private operators is more likely to be suitable through management contracts, lease and concessions rather than BOTs. Indian cities have learned from the failures of previous projects and are now focusing on network rehabilitation, improved management systems and service expansion. In a context of large urban poverty, the question of service expansion through public-private partnerships will be raised. The fact that poor households who are unable to pay would be priced out by the private sector is of major concern. There is a need to analyse whether private operators, who are expected to bring in a higher level of expertise and investments, can deliver services to the poor. Specific issues that have not been solved by public utilities are also new to large scale private operators and we shall focus on three main topics that are relevant to the Indian context: the provision of water supply and sanitation through suitable technological options; the need to make affordable the cost of access; and the requirement to respond to the demand of low-income households.

We will analyse three large concessions in cities where the proportion of poor households is significant, namely Buenos Aires (Argentina), Manila (Philippines) and La Paz-El Alto (Bolivia) (see table 1). In these three concessions, Lyonnaise des Eaux, a French water company, is one of the major shareholder in the concessionaires structure of capital. The three contracts were awarded through a transparent bidding process based on a tariff reduction for Buenos Aires and Manila. In La Paz-El Alto6, the contract was awarded on the number of connections to be made given a prespecified tariff. There are large investment requirements under the responsibility of the private operator and expansion mandates to increase coverage. According to the expansion mandates, by the end of the contract, all the population of Buenos Aires and La Paz-El Alto (and almost all the citizens of Manila) will receive safe drinking water. As the situation for sanitation is poorer, the objectives are lesser. However, respectively 66%, 95% and 85% of the inhabitants of Manila, La Paz and Buenos Aires will get access to sanitation (see table 1). Tariffs as well as connection fees are also determined in the contract. Tariffs in the case of Manila and La Paz are increasing block tariffs with a lifeline tariff below cost for the first block in order to subsidize low consumers7. In Buenos Aires, the tariff structure is more complex but also encompasses

For a more thorough description of the three concession contracts see Alcazar et alii (2000) for Buenos Aires; Komives (1999) for La Paz-El Alto and David (2000) for Manila. 7 This type of tariff regime is common in many Indian cities.

cross-subsidies (Alcazar et alii, 2000). In the three cases, a regulatory agency is responsible for monitoring the contract and for negotiating the tariff revisions.

TABLE 1. MAIN FEATURES OF THE BUENOS AIRES, LA PAZ-EL ALTO AND MANILA CONCESSIONS
Buenos Aires Duration of the concession Commencement Date Population with water supply at the beginning of the concession (%) Population to be covered with water at the end of the concession (%) Population with sewerage at the beginning of the concession (%) Population to be covered with sewerage at the end of the concession (%) (2) Total population of the concession area (in millions) Estimated number of low-income households (in millions) (3) Estimated percentage of poor population Number of poor people who got access to water since the beginning of the contract 30 1993 70 100 58 85 La Paz-El Alto 25 1997 87 100 48 95 (La Paz) 90 (El Alto) 8.6 2 23 1.2 million 1.4 0.8 57 Around 200,000 7.2 2.3 32 114,000 Manila (1) 30 1997 62 98.4 13 66

Notes: 1. The concession of Manila is divided in to two concessions. The paper considers the West zone of the Manila concession. 2. In the La Paz-El Alto concession, sewerage expansion mandates for La Paz and El Alto differ as El Alto is a less wealthy city. 3. The estimates on the number of poor households have been established by studies conducted in each city either by consultants or by the concessionnaire.

CAN PRIVATE OPERATORS BRING IN SOLUTIONS TO DELIVER WATER SUPPLY AND SANITATION TO THE URBAN POOR?

This section shall present various initiatives launched by the concessionaires in Buenos Aires, La Paz-El Alto and Manila to provide services in low-income areas.

How to develop innovative technical solutions to serve low-income households? In the case of La Paz-El Alto, according to national guidelines, all new connections have to be in-house connections. As the cost of providing connections was high (both for households and for the operator), the concessionnaire decided to take part in a pilot project co-funded with various partners8 to test low-cost solutions for sewerage systems. The pilot project Steering Committee opted for the implementation of condominial systems that have been successfully developed in Brazil for the last 20 years. In a conventional system, each lot

The El Alto pilot project was funded by the concessionaire, the Water and Sanitation Program-Andean Region, and the Swedish International Cooperation Agency. This pilot project was also supported by the Ministry of Public Housing (Mathys and Komives, 1999).

is considered an individual user and principal pipes are located in every street. In the condominial system, the user is now considered to be the whole block and every block has one connection to the main network (see figure 1). Condominial system brings down cost as it reduces the length of pipes required and sewers are not buried as deep as in conventional system. Households are also required to maintain their own section of the sewer, which contributes to cost reduction. In the specific case of El Alto, the cost of providing water in the pilot project was reduced by 7% for water to 47% per cent for sewerage.9

FIGURE 1. DESIGN OF CONDOMINIAL SYSTEMS


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Unlike most water concessions, the contract in Manila recognizes the possibility of supplying water through public standpipes. Typically, a caretaker (often someone from the neighbourhood) is in charge of the standpipe and is collecting bills from the inhabitants at a rate fixed by the operator. Often, however, the price charged by the caretaker is higher and/or there is a group of persons controlling access to the standpipe. A large number of poor households also have to rely on expensive vended water provided by tankers and poor households end up spending 10 to 20 times more than other households (David, 2000). There was therefore a strong demand for individual connections and the operator developed a low-cost solution, the Bayan Tubig (Water for the Community) scheme: an underground line is built up till the entrance of the neighbourhoods. The rest of the network is either above ground, on the ground, partially covered or attached to a wall. This line goes up to a battery of meters, from which each user makes its own plastic connection, above ground (see figure 2). With this

Authors calculation based on cost data provided by the concessionaire in May 2000.

flexible technical option households benefit from individual connections. For the operator, it is also an interesting scheme: illegal connections can easily be seen; the cost of the system is not very high and is recovered within a year. Most of all, payment default is very rare as households are satisfied with the service. Poor families are indeed very reliable customers if the service they are provided with corresponds to their needs.

FIGURE 2. DESIGN OF THE BAYAN TUBIG SCHEME


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How to reduce and facilitate the cost of access to low-income households? The main constraint to water and sanitation access lies more in the cost to connect than in the price of water itself (Foster, 1998). Institutional and financial arrangements are being developped, in the three concessions, in order to facilitate access and to bring down the connection cost.

Institutional arrangements through partnerships with public authorities (Buenos Aires) In Buenos Aires, two main institutional arrangements have been implemented since 1994:

the Participatory Water Service is a collaboration between the operator, the Municipality and the

neighbourhoods. The principle is based upon bartering labour with a reduction of the cost of connection. The operator designs and supervises the works, trains the people and provides technical assistance. The municipality provides and pays for the construction material. The community is involved in the construction of the infrastructure and is trained for its maintenance.

The Employment Generation Unit is a collaboration between the Province, the concessionaire and the users.

A local contractor is in charge of the infrastructure construction under the supervision of the concessionaire. The Province finances the materials and pays for the manpower costs. The local company has to employ workers from the neighbourhoods themselves. The households in the neighbourhoods are paid for their work and can also reimburse their connection fees within 5 years.

Using microfinance (La Paz-El Alto) In the three cities, the private operator enabled the households to reimburse connections fees in installments without interest (5 years in La Paz-El Alto and 2 years in Manila and Buenos Aires). This solution has the advantage of rapidly adding new customers but is a financial burden for the operator and is not sustainable. In La Paz-El Alto, micro-credit institutions have been involved in providing loans to the households to pay for their connections but also to built internal installations (toilet, wash basins, etc.) and agreements have been signed with the concessionaire. From the concessionaires point of view, it accelerates the integration of new customers and from the point of view of the microcredit institution, it is a way of expanding their action while being sure to be reimbursed as bill payments are used as collateral.

Facilitating application process (Manila) In addition to the financial cost of connections, households have to suffer time-consuming procedures to apply for new connections and need to present legal papers, such as property titles that are not commonly held among slum dwellers. In Manila, the concessionnaire simplified the application process and does not request, as it was previously the case any property title. Such schemes are effective to integrate low-income households.

How to better understand and respond to the demand of low-income households? Another acknowleged fact in the water supply and sanitation sector is the need to have a demand responsive approach when planning, implementing and operating service delivery to the poor. However, there are two main difficulties: poor household are not easy to locate and difficult to reach; and large utilities, whether public or private are mostly engineering driven and not very concerned with developing solutions for the poor neighbourhoods. Working in partnerships with organizations familiar with low-income areas (such as NGOs non governmental organizations-, neighbourhoods associations, etc.) and enhancing skills among staff is key if large scale operators are to reach their expansion objectives in low-income areas. Being the oldest concession,

the experience in Buenos Aires is particularly interested as it highlights the evolution of the utility towards a systematic approach to work in low-income neighbourhoods.

Developing a demand responsive approach in poor urban settlements The Buenos Aires concession is the first large water concession in a developing country and the private operator faced the obligation of serving poor areas without having any expertise in this field. As a first phase, the concessionaire worked in collaboration with a large NGO, responsible for identifying and classifying the lowincome areas on the basis of various parameters (socio-economic characteristics of the population, demand for services, physical characteristics of the habitat and level of social organization). Based upon this preliminary research, the concessionaire could prioritized its service expansion in poor neighbourhoods and adapt its approach to local conditions. This helped the first phase of service expansion but after a few years, the company realized that geographical identification and knowledge of the neighbourhoods characteristics was not sufficient to ensure sustainability. The need to develop a systematic method for social intervention in the neighbourhoods was the second step and the company took the decision to recruit a professional specialized in water supply projects in poor areas. As a result, methodologies are being developped to make contact with leaders of neighbourhoods; to facilitate meetings; to develop communication tools to directly communicate with the communities; to provide technical assistance to househods and to conduct market studies and demand analysis.

Internal capacity building In order to consolidate the companys growing expertise in low-income areas, there are various ongoing activities in partnerships with NGOs and specialized consultants to develop capacity building modules for the company. These activities emcompass four important topics: the implementation of a training program for the company staff; the publication of an internal manual of daily management that will deal with the specific issue of serving the poor; guidelines on the social follow up of the expansion; and internal procedures to follow up actions conducted in neighbourhoods.

Conclusion The main expectation about private sector is that high investment pumped into the system will naturally lead to improvement and expansion of services. In poor neighbourhoods it does not suffice and there is a need for a specific approach that match the demand of poor households. The above examples underline that innovative technical and institutional options are able to facilitate access and to bring down costs both for the operator and

the users. In addition, to ensure sustainablity, expertise on poor neighbourhoods has to be strenghtned and this requires both training of the company staff as well as working in partnerships with specialists of poor settlements, such as NGOs or community associations.

THE ROLE OF PUBLIC AUTHORITIES IN PUBLIC PRIVATE PARTNERSHIPS IN SERVICE PROVISION TO THE POOR The relationship between the company and its clients, however, cannot be studied in isolation from the institutional set up and urban policies towards low-income settlements. In designing and enforcing and evolving land policies, public authorities continue to play a crucial role and can have a direct impact on the poor.

The tool of the contract In water concession contracts, expansion mandates and tariff regime are mostly put forward as the tools used to provide services to the poor. At first, expansion mandates (see table 1) are a very strong and effective instrument to reach the poor but some issues remain. Firstly, these mandates are spread all through the contract and there is a concern that the poor will be the last ones to get services. To counter this, some authors (Komives, 1999) suggest that contract should not contain exclusivity clauses for the concessionaire to operate. Other service provision options (small scale independent provider and / or individual private sources) should be allowed. They would provide a solution till the operator reaches an area. Secondly, expansion mandates can be difficult if they impose a high and costly level of service (as in La Paz-El Alto, for instance). The contract could therefore focus on the output requirements (type of service, number of connections, minimum service quality) rather than on the input requirements (technical and material standards, etc.) and allow flexibility in the choice of technical options10. Another important aspect of the contract is to build incentive so that the poor households are not priced out. The tariff regime applied in most water concessions (see section 1) is based upon cross-subsidies between domestic and industrial users, subsidized prices for lower level of domestic consumption and costly connections fees. These tariff regimes adversely affect poor households, especially when they are not connected or when they share connections (Boland and Whittington, 2000). In addition, cross-subsidies between type of users do not provide incentives for the operator to expand services to low-income areas as large domestic consumers and industrial and commercial clients are much more valuable.

10

For instance, non networked solutions could be more suitable to reach low-income households

When public authorities consider the introduction of private sector, these two questions of expansion mandates and tariff are crucial if the objective is to increase coverage for the poor. In particular, there are strong misconceptions about the impact of tariff subsidies that should be looked at.

The regulatory mechanisms Once the contract is awarded, regulatory mechanims become crucial to monitor the performance of private operators. In most water concessions an independent regulatory agency was created to regulate contracts. Independence and competence of the regulator are key to build confidence among the stakeholders that consumers interests will be protected and that the regulator will take informed decision at the time of contract revisions (Campes, 1996). In Buenos Aires, there is a consensus on the fact that the regulator is weak and is politically bound. The unability of the government to set up a competent and above suspicion regulatory office led numerous problems, especially when it came to renegotiate tariffs and connection fees which were unaffordable for poor households (Alcazar et alii, 2000). On the contrary, at first, in La Paz-El Alto, the regulator agreed to test condominial systems so that poor households could access services more rapidly. In addition, the regulator monitors closely the experiences developed in La Paz-El Alto to check that the innovative technology does not alter the contract conditions. Though the importance of regulation is highlighted by specialists of privatization processes, very little research has been conducted on finding ways to enable regulatory mechanisms to protect the poorest customers. Public authorities that contemplate public-private partnerships should think upfront on regulation. Solutions such as creation of a customer cell with specialists of issues regarding the poor or audits done by NGOs, associations on service satisfation in poor areas have never been attempted but could be tested in countries where the proportion of low-income households is high.

The role of public authorities in solving land tenure issues Private companies have to operate in a context where various tiers of government are involved in the city development and the overall urban policy. One of the major hurdle that can be faced by the private operator is the unability to expand services due to land and housing policies that do not recognize poor neighbourhoods or even plan to eradicate them. It can actually even lead to conflict with the contract clauses that require to increase coverage to allmost all the population.

In Buenos Aires, the concession area comprises various municipalities. The concessionaire has to prioritize its intervention in low-income areas and some areas will benefit more rapidly from better services. Consequently, municipal elected representatives have realized the political impact of coordinating with the private operator for expansion of water connections in their areas. However, in some areas, property rights are not clearly defined and this affects cost recovery for the concessionaire. In Manila, slum and squatter regularization is part of the housing policy of the metropolitan government and this is a major incentive for the operator to expand services. This last issue of land and housing policy is crucial for the success of public-private partnerships in serving lowincome households. It underlines the major role that remain within the scope of the public authorities.

CONCLUSION: SOME LESSONS FOR INDIA

Water concessions are usually established for 20 to 30 years. It is therefore early to measure the outcomes of such contracts on poor households. However, in the first few years in Buenos Aires, La Paz and Manila, the operator demonstrated that is possible to bring services by devising technical and institutional arrangements that facilitate access and bring down connection costs; by strengthening the ability of the company to understand this segment of its clientele; and by building social intermediation policies in partnerships with NGOs, microcredit institutions and community associations. This is as important as bringing in investment and if services provided fit users expectations poor households are very reliable customers. This is important for India, where cost of connections are unaffordable for poor families and where there is a widespread belief that poor households are not willing to pay for services. In fact, such schemes are certainly replicable in Indian cities where there is a strong demand for services and a solid network of community groups, NGOs, micro-credit institutions that could work in partnerships with the private sector. There are, however, many issues linked to contract design, regulation and urban policies revealed by international experiences from which Indian cities willing to introduce private sector could learn. Firstly, contracts should be designed in order to provide incentives to serve the poor. In India, where income levels are lower than in the Latin America and South East Asia, low-cost technical options (for instance non networked solutions), should be authorized and reasonable expansion mandates, especially for sanitation, should be set. Secondly, to enforce these expansion mandates, strong, competent and independent regulation mechanisms have to be implemented. Thirdly, the question of property rights for slum dwellers will have to be addressed. Fourthly, and this is crucial for Indian cities, tariff regime and levels need to be revised if one wants to devise solutions that will be financially sustainable and that can attract private sector operators.

Nevertheless, the question of the impact of serving the poor through private sector participation occur only if there are public-private partnerships. This is not the case yet in India and this will require strong and sustained political commitment. This political commitment is often undermined by the arguments that introduction of private sector would harm the poor. International experiences suggest that this is not the case and they could be used as examples to enrich the political debate.

References
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