Learning to work together

Dr David Owen, Director of Research at Delphi International argues that while private sector participation in water provision remains an imperfect art it will play an increasingly pivotal role in global water and sewerage provision.

Fifteen years ago, with a few exceptions, telecommunications services were government monopolies, operated as cash cows with digital and mobile telephony regarded as costly distractions.

In terms of market development and liberalisation, the water and sewerage service sector today has reached a similar stage. Yet its universal availability continues to be taken for granted. For too many people, this is manifestly not the case.

The United Nations' Water Supply and Sanitation Decade was launched in 1980 with the aim to achieve universal supply by 1990. By 1998, access to safe water in developing countries had increased from 44% to 61%, with an even smaller increase for sanitation, from 46% to 56%.

The World Bank believes that US$600-800 billion needs to be spent over the next 10 years to ameliorate water and sanitation problems in the developing economies, yet actual investment in water supply and sanitation was $25 billion, some 36% of the desired total.

The identified funding needs for providing basic (driven by public health concerns) or enhanced (driven by environmental standards) water and sanitation services over the coming decade are as in Table: 1.

Table 1 - Funding needs for basic water and sanitation services.

US$ billion Basic services Enhanced services
     
Asia 220-300 10-30
Latin America 200-250 0
Africa 80-100 0
Middle East 45-65 0
Eastern Europe 30-50 0-20
N America & W Europe 25-35 300-450
     
Total 600-800 310-500

Growth Forecast
The World Water Vision for 2025 was launched at the Second World Water Forum at The Hague in March 2000. It represents a consensus as to the best ways to address water problems over the next 25 years. Previously the World Bank had assumed that the private sector would contribute 5-15% of funding needs in developing economies, some $4-12 billion pa.

World Water Vision forecasts capex needs rising from $80 billion to $180 billion pa, with a greater scope for private sector finance to at least $20-35 billion per annum. Such a financial commitment will not take place unless adequate investment conditions exist and these require private sector participation in the management of these services, see Table: 2.

Table 2 - World Water Vision forecasts for 2025.

Developing countries 2000 2025
     
Population (millions) 220-300 10-30
Lacking safe water (million) 200-250 0
Lacking sanitation (million) 80-100 0
Investment ($ billion pa) 70-80 180
Investment ($ billion pa) 2000 2025
     
Agriculture 30-50 30
Environment, energy & industry 10-15 0-20
Water supply and sanitation 30 75
     
Total 70-80 180

In terms of the extent of water and sewerage service privatisation, approximately 5% of the world's population is currently served by the private sector, a figure that is conservatively forecast to rise to 25-35% by 2015.

Excluding minor contract gains in countries with partially privatised services such as Italy, France, Spain and the USA, approximately 240 million people have had their water or sewerage services privatised since 1988.

In total, it is estimated that water or sewerage services for 350 million people are currently provided by the private sector (Table: 3).

Table 3 - Population serviced by privatisation awards per annum.

Number of people served by privatisation awards each year, 1988-2000 (million)
Year Concessions Flotations Total  
         
1988   0.6 0.0 0.6
1989   5.1 50.5 55.6
1990   2.9 1.7 4.6
1991   0.0 0.0 0.0
1992   0.8 0.0 0.8
1993   26.3 6.0 32.3
1994   3.6 0.0 3.6
1995   16.4 0.0 16.4
1996   5.2 17.4 22.6
1997   37.4 4.7 42.1
1998   15.6 0.4 16.0
1999   30.6 2.8 33.4
2000 (year to date)   23.5 0.3 23.8
         
Total, 1998-2000   168.1 83.8 251.9

Two notable strong years were 1993 and 1997 both in terms of the number of people addressed by privatisation contracts and the investment channelled into these projects. 1993 was marked by major contracts awards in Argentina and Mexico and the reduction in activity in 1994 can in part be attributed to the Mexican Peso crisis.

In 1997, water services for the capitals of Indonesia and the Philippines were privatised. The following year was affected by the Asian currency crisis. Current indications point towards a resurgent market for privatisation awards both for 1999 and the next two years.

Private sector potential
Not all markets are suitable for privatisation, even on a 25 to 50 year view. For example, with the exception of the most liberalised and economically developed markets, only people living in urban areas are likely to benefit from private sector service provision under current circumstances.

Table: 4 consists of a set of estimates for the current extent of private sector participation in water and sewerage services for the main markets, along with forecasts for the extent of private sector penetration by 2015.

Table 4 - Potential for private sector participation.

Market potential, 2000-2015
Million people Total population Addressable population Privatisation to date
       
Western Europe 390 85% 35%
Central & Eastern Europe 342 17% 4%
Middle East & Africa 980 14% 3%
Central & South Africa 1,549 9% 0%
South East Asia & Australasia 2,069 19% 5%
North America 306 75% 9%
Central & South America 524 70% 10%

The figures for privatisation to date demonstrate the variable progress the private sector has made. In Western Europe, private sector service provision is already becoming commonplace, which can be related to the global domination of international markets by a number of companies from this region. The forecasts for most other regions with the exception of the Americas are on the cautious side for the time being. What is notable is the gap between our estimation of the addressable populations in the Americas and the extent of privatisation to date.

The addressable population is the percentage of the current population that the author believes has a better than even chance of being served with privatised water and / or sewerage provision by 2015. The year 2015 may appear a long way off, but it does allow for current political, regulatory and market trends to be translated into realistic market developments, while allowing for five years of contract award and implementation slippage for political and economic changes.

'Media' or real markets
While South East Asia and Latin America have a high media profile, these estimates point to the USA and Western Europe as the largest markets, although the high private sector market penetration in the UK and France needs to be taken into account.

Private investment and management for water and wastewater contracts will only take place when it is attractive to the private sector. The Second World Water Summit represented a breakthrough in its realisation that the private sector will play a pivotal role in global water and sewerage service provision. At the same time, the number of international investors remains low when compared with independent power production.

Not all is plain sailing
If privatisation does take off to these levels, the greatest challenge will be managing all of these projects.

International companies will have to learn the art of delegating to locally trained engineers much earlier than is now the case. There have been set backs. For example, the termination of the water contract in Mendoza (Vivendi in Argentina) due to local political change, the revoking of the Cochabamba concession (International Water in Bolivia) after anti-privatisation riots, the handback of the Potsdam contract (Eurawasser in Germany) over price rises and that of Prime Utilities (Malaysia) because of price cuts. These are exceptions reflecting local concerns. Globally, contract risk is easing as the private and public sectors learn how to work with each other.

The crunch may come in terms of personnel - when the market does take off, do we have enough specialist water engineers and financiers with the skills to work in these new partnerships?

Delphi International Ltd specialises in sustainable finance. Dr Owen is the author of the Mason's Water Yearbook 1999-2000, which is available from Masons Solicitors Tel: +44 (0) 20 7490 4000.



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